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George Soros always starts his annual lunch at Davos by reminding his guests that while is he is primarily known as a hedge fund manager and philanthropist, his real profession is Philosopher. His contribution to that field, which academic philosophers do not yet fully appreciate, is what he calls his Theory of Reflexivity. Not to be confused with the spa treatment where they rub your feet and you feel in your back, this is the concept that, as Soros explains, perceptions influence reality, which influence perceptions, which in turn influence....you get the idea. Applied to financial markets, this means that investing in bubbles is not irrational. "As I participant, when I see a bubble I rush out and buy," Soros said. The trick, of course, is knowing when to head for the exits. Since it is rational for investors to keep dancing as long as the music is playing, in the now infamous formulation of former Citigroup CEO Chuck Prince, Soros argues that it's up to financial regulators to prick market bubbles before they get too out of hand. He strongly faults former Fed Chairman Alan Greenspan for his position that it is impossible to know when a bubble is forming or to do anything about it. But if Greenspan is wrong, how can you recognize a bubble when you're in one? This was the topic at another very good panel I attended this morning, which included Britain's chief financial regulator Lord Turner and the Yale economist Robert Shiller, who himself called the last housing bubble clearly and precisely. That session was off the record, so suffice it say that the participants were of many minds about how to distinguish bubbles and about what bubbles might or might not be forming now. Soros' answer to the question of how you identify a bubble amounts to "you can just tell." Or, at least, "I can just tell." Keep up with this story and more by subscribing now Of couse, everyone at the lunch wanted to know what bubbles the billionaire might be investing in at the moment, given his theory. Soros dodged the question when I asked him, but subsequently noted, "the ultimate asset bubble is gold." I'm not sure if he meant that gold has been a bubble since the beginning of recorded history, or just a bubble over the past couple of years. He never shows too much of his hand. Asked about Obama's proposed "responsibility tax," Soros responded that the Administration's various proposals were both "not enough" and "coming too soon." Responding to a financial crisis, he says, is like dealing with a skid when you're driving--you have to steer into it to regain control of the car before you turn back the other way (Washingtondrivers, take note). Soros thinks it's too soon to start taxing banks, while they are still trying to earn their way out of the hole they dug themselves into. He thinks lenders will remain cautious for some time to come, and so is more worried about the risk of putting the economy back into a slump than he is about leaving markets under-regulated a bit longer. He also argues a global approach, coordinated through the G20, is the only kind of financial regulation that has a chance of working. |
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Before the unemployment rate hit double digits and banking giants such as Lehman Brothers collapsed, the financial crisis arguably began with houses, condominiums, and gated communities in cities such as Stockton, Calif. There, Francisco Fortes worried that he would forever be priced out of a housing market in which prices would continue to soar. So, despite the salesman's self-admitted questionable credit, he took out an interest-only loan in 2006 and purchased a $398,000 three-bedroom house with a two-car garage and a landscaped backyard with bushes and trees in the tidy shape of a half-moon. Fortes put his $80,000 inheritance toward the down payment with the assumption that he would recoup that cash by refinancing in a few years. Only now, his home is worth $180,000. Two of his neighbors recently abandoned their properties after values dropped by more than half. "There are a lot of FOR SALE or FOR RENT signs in my neighborhood," Fortes says. "It makes me wonder why I should pay for this house." Roughly two years after the Great Recession began and one year after President Obama signed the $787 billion economic-stimulus bill, the U.S. housing market remains sickly. Foreclosures that initially afflicted subprime borrowers, are now hitting the jobless middle class. It's hard for new home buyers to secure mortgages unless they have excellent credit, a sizeable down payment, and a stable job history. Entire residential neighborhoods in states such as Ohio have been reduced to empty, boarded-up homes that scavengers comb through for electrical wiring, siding, pipes, or stained glass. "We don't think we've found the bottom of the housing market yet," says Julia Gordon, senior policy counsel for the Center for Responsible Lending (CRL). "Most economic recoveries don't become robust until the housing market is involved, and most recoveries are housing led." It's not as if the federal government has held the housing market at arms length. Within the last two years, according to the Congressional Budget Office, Washington has injected $300 billion into the housing and mortgage markets from taking over Fannie Mae and Freddie Mac to creating loan-modification programs for distressed homeowners to offering $8,000 tax credits for first-time home buyers. While economists say the housing crisis could have been much worse had the government not intervened, reviews of government-sponsored programs remain mixed and the future of the government's involvement in this sector is unclear. "The federal government is the entire mortgage market right now," says Karl Case, professor of economics at Wellesley College. "Whatever they decide to do will determine who will end up keeping their homes. It's as simple as that. It's going to be a political hot potato." Keep up with this story and more by subscribing now For many Americans, the fate of their homes seems up in the air. In Stockton, 33-year-old Fortes can no longer afford to pay his mortgage, which has ballooned to $2,600 per month from $2,100. His fiancée lost her job in September 2009, and Fortes spends his days wondering where his family, including this children, ages 2 and 10, will live. Despite his repeated attempts to apply for a loan modification, he has been told that he does not qualify. "It's just so stressful," he says. "I'm trying to work with my loan people, but I've been talking to them for over a year." This sense of limbo in the housing market is not expected to subside in 2010. Foreclosures are on track to set another record as the unemployment rate remains high and as homeowners with primary loans continue to default, says Rick Sharga, RealtyTrac's senior vice president. This high rate of foreclosures, in turn, will pull down the values of home prices; already, about 25 percent of homes are underwater, meaning they're worth less than their mortgages. "There's a tremendous amount of clean-up, especially in minority neighborhoods," says the CRL's Gordon. "Some people have described the foreclosure crisis as the 50-state Katrina." This ongoing onslaught most likely will result in less homeownership for years to come and, in turn, less stable neighborhoods. With the mortgage market so tight, it's becoming increasingly difficult for people to secure home loans. According to the U.S. Census Bureau, home ownership has dropped from a high of 69.1 percent in 2005 to 67.2 percent. More and more people are opting (or being forced) to rent. Worse, housing counselors across the country anecodotally say they're hearing stories of families moving in with friends or relatives, living in cars, or finding themselves homeless. "Many of these people had every expectation of having an upper- or middle-class lifestyle, and it's collapsed," says Dianne Cantor, executive director of Centro Campesino, a nonprofit in Miami-Dade County. You can most clearly see the aftermath of the housing bubble and its weak recovery on the streets of cities such as Stockton, New York, Las Vegas, or Miami. An abandoned house on West 83rd Street in Cleveland recently exploded because the gas was not turned off, and neighborhoods such as Fortes's are gradually emptying out as homeowners face foreclosure, or as they abandon their homes in favor of cheaper rent. "Nobody is accountable," says Darren Hamm, housing specialist at Neighborhood Housing Services of Greater Cleveland. "What you are left with are houses that are completely dead assets." It's an ironic end for properties that once held such hope for the American middle class—and for those who aspired to join them. 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