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May 8, 2010

Curse of the Flat Learning Curve

By Stephen Pizzo

The most depressing thing about getting older is loss of innocence. I can no longer find comfort in the belief that "those in-charge" must be smarter than the average bear. Not true. Not even close. Where's my proof?


The most depressing thing about getting older is loss of innocence. I can no longer find comfort in the belief that "those in-charge" must be smarter than the average bear.

Not true. Not even close.

Where's my proof? Where's isn't it, is more to the point. But let me point out just one example.

Smart people learn from their mistakes and the mistakes of others. Now read the two paragraphs that follow. One is from the past and one is from the present. I have deleted identifiers from each:

Quote No. 1

"The condominiums stretched as far as the camera could see, in two and three floor clusters, maybe 15 units per building. They were separated by stretches of arid, fiat land. Many were only half-finished shells. Most were abandoned, left to the ravages of the hot sun. ... the camera zoomed in on building materials stacked rotting in the desert dust. Loose wiring and shreds of insulation swayed in the warm, dead, quiet air. Siding had warped, concrete cracked, windows broken. In many cases only the concrete slab foundations remained dubbed by locals, "Martian landing pads."

Quote No. 2

"Hundreds of miles inland from the booming real estate markets of ".... and ". an unlikely property fever is gripping this middling industrial outpost...Rows of half-completed apartment buildings rise over former farmland, each crowned with yellow construction cranes that seem to outnumber trees in parts of this dusty city of 5 million residents."

Give up? The first quote is from a book I co-authored a quarter century ago Inside Job: The Looting of America's Savings and Loans. The quote describes hundreds of Texas condominium units built with easy S&L money, most of which was never repaid, fueled by Reagan-era thrift deregulation. That money spawned America's first real housing bubble. Many of the condo's described were later simply bulldozed as there never was any real demand for them. That was until now the biggest US banking bust, housing bust since the Great Depression.

Not to beat a dead horse, but clearly American leaders who went on to create the housing bust of 2008 learned nothing from the 1980's S&L debacle.

But wait. You might be thinking that the second quote is about that America's current housing bust. No. I wish it were that simple.

The second quote is from today's Los Angeles Times describing China's now-overheated housing market.

"Taxi drivers (in China) boast of owning multiple flats for investment. Billboards hawk developments with names such as Villa Glorious and Rich Country. Frenzied crowds pack sales events with bags of cash, buying units that exist only on blueprints. Average home values in Hefei soared 50% last year...China's real estate rush, once confined to a handful of leading cities, has spilled into the hinterlands with a ferocity reminiscent of American expansion into exurbs like the Inland Empire.

In a country that economists say is treading dangerously close to a full-blown property bubble, Hefei represents more evidence of China's headlong embrace of housing to power economic growth."Everyone in Hefei lives with the real estate industry," said Guo Hongbing, a marketing consultant for several developers. "You can't escape it."

"The situation in Hefei is a symbol of the craziness in China's real estate market," said Cao Jianhai, a professor of economics at the Chinese Academy of Social Sciences, a government think tank. "Prices in second- and third-tier cities are increasing more dramatically than in the first tier. It's very dangerous, and it puts local banks at risk."

Well! So much for the whole myth of thoughtful, sage-like Mandarin wisdom. And there's nothing "inscrutable" about any of this either. The Chinese failed or just refused to learn from our two disastrous easy-lending bubbles. Instead they did exactly what Reagan and Bush Jr. did throw open the lending window to any Tom, Dick and Hoo clutching a roll of blueprints. Like the first dose of crack cocaine, the rush all that easy money created in the form of business activity and jobs encouraged officials to keep that window wide open in the hope the rush would go on and on and on forever.

Not to beat an analogy to death, but easy money, like easy crack, never creates the hoped-for sustainable "rush." It only creates dependence on more more lending, and more debt.

It also eventually results in a death spiral. Easy lending contains the seed of its own destruction, because it creates surpluses. Surplus housing inevitably, drives prices lower, and lower. As developers find it hard to sell existing units at a profit their lenders, now on the hook for millions in loans, are forced to prop up their loan-addicts with increasingly larger doses of dough. Over time those developers have to devote larger and larger portions of those new loans to service earlier loans on projects developers can't sell because of excess supply -- even as they create more supply.

We know how it ends. And, one would think the once capitalism-shy Chinese would know how it ends too by now. How else to explain such self-destructive policies than to conclude that leaders.. ours, theirs, the ones in Greece and elsewhere, are not smarter than the average bears. All that separates them from the rest of us is that they decided running countries would be fun oh, and almost always profitable, at least for them personally, at some point either then or later.

They come and they go our fearless leaders. And when they go they always... not sometimes, but always... leave messes behind the rest of us have to clean up. Sometimes the clean up requires we open our wallets. Sometimes it means washing crude oil off dying sea birds. In Ukraine it's a few thousand square miles of uninhabitable land, farms and cities that for the next few thousand years will glow in the dark.

I call it the flat learning curve. And someday it could be the death of us all.

Authors Bio:

Stephen Pizzo has been published everywhere from The New York Times to Mother Jones magazine. His book, Inside Job: The Looting of America's Savings and Loans, was nominated for a Pulitzer.