Friday, July 15, 2005

The Blame Game

One of the big questions is who is to blame for the housing bubble.

Here is my list:
  1. Greenspan & The Feds for the cheap money supply (low interest rates) for such a long time
  2. Parts of the Real Estate Industry for promoting the bubble and not inducing a does of reality
  3. Irresponsible Lenders for lending to people who really can't afford it.
  4. Fannie Mae & Freddie Mac for bundling up risky loans from
  5. Asian Central Banks & other for buying all these risky bundled loans
  6. Speculators & Flippers ( for being greedy and fueling this mania)
  7. Some HomeBuyers for buying beyond thier means and being ill informed.
  8. Parts of the Media for not informing the public about this issue sooner (finally they are commiunicating this)
  9. Others ( yet to be determined, please discuss)

24 comments:

  1. I would add George W. Bush, for tax policies that give the wealthiest people even more money to spend on 2nd homes, 3rd homes, apartments for their college-age children, 4th homes, 5th homes, etc. etc.

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  2. I don't think you can blame the buyers for being greedy as that is only human nature. I definately think Greenspan's Fed holds much of the blame. But then, I'd like to see us return to the gold standard so I disagree with the Fed on philosophical reasons. Anyway,...

    What I think is wrong with the system as a whole or what needs to be done is:
    1. Lenders need to reign in loans to under qualified folks. There needs to be enforced regulations.

    2. Lenders should be held accountable for their loans -- they should be rewarded for good loans (via earning the interest payment) and suffer the consequences for the bad loans (eat the cost of defaults). Doing so would take care of point 1, above. Currently all loans get sold to the GSEs from what I understand so if a loan goes bad the originating loan office does not get hurt.

    3. Flipping should be made illegal. I think saying a purchaser must occupy a residence for at least two years would be sufficient. As for vacation properties, same sort of deal except something like they must occupy the property some months out of every year for a period of say, five years. If a property is marked for investment purposes only, then I don't know. If it's for rental purposes, then maybe you must hold that property for five years minimum or something along those lines.

    4. We should go back to the gold standard and stop inflating our way out of our messes.

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  3. Interesting points.

    "We should go back to the gold standard and stop inflating our way out of our messes."

    I disagree about going back to the gold standard. Who says gold as opposed to some other commodity should be the standard?

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  4. That's fine with me. It doesn't have to be gold. Do you care to suggest something? But gold has always been something of great value and historically, currencies based on the gold standard did not inflate appreciably. In the US there was practically no inflation until after we left the gold standard (was that 1933 or there abouts?) and since then one US dollar has lost 95% of its purchasing power.

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  5. I think it has a lot to do with the big dot com market boom. You had a bunch of young entreprenurs (me spell bad) who had a LOT of money and woudl get into bidding wars on homes. They all the prices where shot to hell and there we go. Also, all the new home building. A lot of builder artificially inflate the price of their homes. I.e. for every 3 homes they sell in a new division, they increase the price. THis causes other homes that are already built, to also have increased value as a comparison. Hopefully it will not burst too soon though. We just bought. :-)

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  6. Definitely Clinton!

    Tax law change. Tech bubble. LTCM, Peso crisis.

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  7. Under the gold standard, the problem was the regular bank collapses, instead of inflation. Before the federal reserve, most currency (paper money) was issued by individual banks. The problem was that they still held fractional reserves for the money that they loaned out, and if there was a run on the bank, they didn't have sufficient assets to convert the money to specie. The reason that the government stopped exchanging money for currency 1933 was the fact that they only had a fraction of the amount of gold neccessary to convert outstanding currency into coin.

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  8. If we were to go back to some standard, I would prefer it be for a basket of commodities. ( I need to read more about the gold standard, currency based on commodities etc.)

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  9. My above comment does NOT mean that I favor a currency based on commodities. It just means that if we were to go back to some commodity based currency system, I would prefer it to be for a basket of commodities.

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  10. Davidm commodity based currency may have troubles if producer countries artificially inflat supply.

    How about having all national debt dominated in a basket of currencies (like Special Drawing Rights)?

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  11. anon 11:00,

    "commodity based currency may have troubles if producer countries artificially inflat supply."

    Fair point.

    I have a very basic understanding of the implications "of having all national debt dominated in a basket of currencies" The idea sound quite reasonable, but I would need to do more research.

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  12. I didn't mean to cause this thread to get off topic.

    So when the blame game gets rolling, who do we blame?

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  13. right. I think there 8 main groups to blame as posted in my post.


    Who will take responsibility?
    Probably very few.

    Who deserves the most blame?
    Tough question. I think those with the most knowledge and most amount of power deserve the most blame. That would mean Feds & Greenspan, Lenders, Real Estate cheerleaders (liek David Lereah).

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  14. Oh for Heaven's sake, it's like the old saying, "We've met the enemy, and he is us."

    When it pops, there will be a hunt for villains. Someone, probably several people, will wind up in jail.

    But the bubble is our fault, collectively.

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  15. Apparently some are now blaming the hedge funds for the bubble; more specifically, the reason why long term rates are remaining so low:
    http://www.forbes.com/business/2005/06/20/bond-rates-mortgages-cx_lm_0620rates.html

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  16. This is the scam, and who to blame
    The real estate market is constantly reaching new highs. It seems new stories appear weekly attesting to the rising housing prices, marking 10, 20, and 25 percent jumps from the previous year. They are all saying, “Get in now, the market is only going to go higher!” Claiming that when interest rates rise, “the market will merely cool off and maybe slow down the appreciation of your home. Worst case scenario is that housing prices will just plateau.”

    The big question is, can the real estate bubble keep expanding? A look at recent history shows more than one so-called bubble bursting. Enron, Tech stocks, junk bond scandals, and the Federal Savings and Loan fiascos are a few of the recent nose-dives that have occurred suddenly. The state and local governments are going from surplus, to bust overnight. Will these terrible things happen to the housing market as well? What might provoke an enormous crash subsequent to a large booming collapse of the new high home values that we are seeing in the housing market?

    Looking at the recent busts that have appeared in the news, they all have had one thing in common: deception and misinformation. These aspects have contributed to the overnight downfall of the individual market sector. If the ever-expanding real estate market and their values accurately represented the market forces, there would be nothing to worry about and homes would continue to appreciate. However, if the real estate market is actually based in deception and misinformation, a lot of people in Southern California will be hurt financially. The downfall of the 80’s will soon reoccur if the market is feeding deception or misinformation to the public. Has anyone checked the validity of the elevated housing market or questioned its common economic principals?

    We have all heard over and over in the news that there is a shortage of houses for sale in Southern California. We have all heard of the bidding wars, 40 to 50 bids occurring within a few short days of a house being placed on the market. How about that house that sold the same day it was placed on the market? Has any one stopped to ask, “Is there really a shortage?” If there is a shortage, what is causing it? People need to examine these situations, question the validity of their arguments, and step back from the frenzied market. If we were to take a good look at the housing market would we find deception or outright misinformation? What can be done to help correct the deception and misinformation if there is any trickery going on? Lets look at the evidence and see what it really means.

    As we hear of this great housing shortage, we also hear that homes sold are reaching all time records. In fact, there are articles reporting skyrocketing home prices, backed by articles bragging of new records in home sales. Record home sales? How can there be record home sales if there are no homes for sale? It simply does not make sense that there are record sales of homes stemming from a lack of inventory. You cannot sell what you do not have. The realty business is tricking the public by fixing attention on an imaginary “housing shortage,” while sweeping the truth of their record sales under the carpet. This contradiction should at the very least raise your eyebrow.

    I hate to be the first to yell, “the emperor has no clothes,” but in all actuality, the emperor is in fact naked. The recent highs in the real estate market are based on a deception that has been spread by the realtors, which represent sellers and buyers, regarding the housing shortage.

    Let us take a look at the supply of houses on the market and see if there is indeed a scarcity of homes to purchase. As a buyer, the first step that you would usually take is to get some type of pre-qualification so that you will know how much you can afford to spend on a mortgage and how much money you can invest in a home. Once you set your monetary limitations, the big search is on and the help of a realtor is used. A realtor can help buyers find a home to purchase. To find out what homes are available or “on the market,” the realtor uses the MLS (Multiple Listing Service) system.

    The MLS lists the availability of homes for purchase, lease, and rent, in some cases. Here is where the misrepresentation of the market begins. Real estate brokers maintain the MLS system and different agents are assigned to utilize it via in-house MLS portals. Realtors misinform clients about homes available to be purchased. If the MLS was not totally inclusive and was to showcase only select parts of the market, would that deceptive? Remember, a lie is not only intentionally providing incorrect information, but also a purposeful lack of accurate information. The deception is that the MLS is not all-inclusive, and, in fact, includes only a partial list of what is offered for sale. The reason this occurs is simple. If the listing agent sells to another agent within the same broker, the broker gets a “double dip” their commission from both agents, one for listing the home, and the other with the homebuyer. So when your agent goes to the office, looks up properties for sale, and shows you what their broker has listed, they are most likely hiding the availability of certain marketable real estate i.e. “what other brokers have listed.”

    Multiple brokers are showing only a small portion of the available market for sale thus giving the impression of no available inventory. Now this identical circumstance is occurring with several listing brokers is an area and each broker is, in fact, hiding or controlling their piece of the market. That is right. There are several large brokers and they are each only shown what is available through their MLS, thus not giving the buyers a true representation of what is truly available to be purchased. Also, since they are only showing a small percent of the market, they have, in fact, created a shortage by only allowing the buyers to see what they have control over. This is one of the reasons that there are record sales. At the same time you are shown the MLS there are only a few listings that you are told about, and you are told that the market has no inventory and there are no houses for sale. In reality, you have not seen what is truly for sale, thus overbidding occurs driving up housing prices due to distorted information which implies a housing shortage.

    The first time that I became suspicious is when I went to view a condominium. In the lobby I noticed several lockboxes containing keys to the condos. I asked to see the other condos that were for sale and was told that someone else listed them. Later, when my wife and I were out driving, we passed a house with a different realtor sign outside and called the agent we were working with to ask them about it. Turns out they could not find the listing for the house. I then called the number on the sign and was given a completely different set of addresses to check out.

    At this point, the trickery realtors pulled with customers was revealed to me, and I realized that the so-called shortage was just a big ruse. In short, the real estate market resembles a big shell game. Each shell that is controlled by some different MLS, reveals another hidden portion of the market. These hidden portions lead buyers to believe that there is a housing shortage. The big real estate brokers are not the only ones that hide parts of the market from prospective buyers. There are other culprits that are contributing to this sham. A few agents that are involved in this have created their own shell to hide their little parts of the market.

    The first group, composed of independent realtors, brags about this in plain sight. What do I mean by this, you ask? Many times we are standing too close to all the trees to see the forest, or we have been conditioned to perceive things in a certain manner. Standing at a different angle and looking at the house situation reveals a different perspective. How can independent realtors brag about a shortage in the market? How many large-lettered advertisements have you seen in the local newspaper drawing attention to “exclusive listings?” Here is a new, but accurate, translation of “exclusives listings.” The market is perceived to be in such short supply that only a few listings are available. If you think you are special, you obtain the pleasure of buying. You are not supposed to think about other realtors doing this or about what else is being hidden from you since you get these special listings. You will then pay a greatly over-inflated price, and be thankful for it. You will be thinking that you were the one that pulled the wool over their eyes in getting the “exclusive listings.”

    How many times have you heard a recent buyer refer their realtor claiming that they just helped them get a good deal? It is sad to say, but I would propose that the market has played on the population’s selfish tendencies. If you happen to be one of the many buyers that purchased a home in the last five or six years, you probably feel all right. However, once the buying market dries up and the dam of sellers can no longer be held back, prices are going to self-correct and your mortgage just might end up upside-down just as it was in mid and late 80’s. Let us take a look at the last way that realtors are shorting the market.

    Within the last few years, there has been a phenomenon of flip houses. A flip house is where contractors, or in some cases a self-employed handyman, buy a run-down house and turn it out to the market in a matter of months after a quick renovation. Now don’t get me wrong here, I am grateful that lot of homes in disrepair have been renovated, and thereby turning around some questionable neighborhoods. However, why were these homes not placed on the market? The reason is simple, just about every realtor has a list of these investors that pay a finder fee to get first dibs on these “fixer upper” homes, also realtors were buying these homes for themselves without placing them on the market. The unfortunate young couples that are waiting to buy have lost out on the opportunity to buy and fix up their own home, and thus, ruining the classic American Dream. These are the people that have lost hope in southern California and have moved to other states or further into desert locations, such as Phoenix and Las Vegas. Do we really need to be reminded that there is a mass exodus of the middle-class tax base leaving California?

    The last group of homes that are left unlisted is made up of new housing developments. There are still new tract homes being built in the Long Beach and Signal Hill area. Hundreds, if not thousands, of new homes have been built in the last six years or so. But not once have I seen this new inventory listed on any MLS. I was first alerted to this and did not even realize that there were still new homes to buy until someone already wanted to cash out a home they purchased only a few months ago. These people did not even move in to the new tract home, and they were listing the price higher than the development was selling them for. To my disbelief they were able to sell the home even with the one right next to it still for sale by the tract. Yet to a buyer, it seemed that this was the only available home for sale in the new tract. If there were only an inclusive MLS, that buyer would have been alerted to this. Once again, the truth was hidden under the layers in the shell.

    This is how, and why, the prices have jumped so high in the southern Californian and other metropolitan areas. At first glance, some will state that I am some type of socialist. I can assure you that I am a very strong advocate for capitalism. I am all for FAIR competition. What I do not like are scams that rip off the public when, if left alone, the market can self-correct. As I started this paper, I mentioned several scams and failed deals that caused a lot of harm to a lot of people. They all had one thing in common: the misleading and, in some cases, outright lies to the public.

    I am not sure if there is a corporate-level scam in the real-estate industry, but I do believe that very poor business practices are being put in place that will soon hurt the industry. Anyone that purchased property during the beginning of the so-called housing bubble, starting in the late 1990s, will also be negatively affected.

    I believe that I have made my case regarding the shortage in the market. Anyone who has experienced a home search, or even chatted around the water cooler, can relate to the several simple examples I have provided. Past experiences reveal that the truth is always simple, and that when you hear underhanded statements or promises, it most likely means you are not hearing the truth. I would like to share what has really occurred to the real estate market, what damage it has caused, and how far reaching I believe this will be once market forces take effect and self-correct the situation.

    The first and most personal change will be falling home prices. Some say that the bubble will burst and simply level off, but I disagree. It will be more like a downward spiral, slowly, and consistently sinking. The idea of interest-only loans is a popular trend. Oh how painful it must be to know that financially, you are on a never-ending rat wheel. Your only hope is to sell at your cost. It is understandable to do this for a couple of years, hoping to walk away with thousands in your pocket. What will most likely occur will be the realization of pending doom. It will creep over the seller’s heads and settle as they realize they will not be able to move without a major loss. The loss might be a devastating divorce, resulting from financial stress. It could be a career loss, or poor relocation. I don’t wish these situations on anyone, and am very empathetic towards those to whom it becomes a reality, but it is bound to happen to some getting involved in interest-only loans.

    Will the correction that needs to take place have an effect on inflation? Most of the loans in the last ten years have been overrated, leveraged out or upside-down with the loss of imaginary equity. Will this spin out of control and lead to another Savings and Loan crisis? If this plays out as far as I believe it could, it will take ten to fifteen years and the devaluation of our money to bring back the balance of the true market forces, along with the economic infrastructure that maintains the local economy in the southern Californian area. This spin could have an impact on the economic heath of the nation. If the market were in fact strong, you would think that a busted bubble would bring down the national economy. Even knowing this, the effects of this falsely created market are far more devastating and far-reaching than most realize. Both personal and social damages will occur.

    One of the great things about southern California is the racial and social diversity. Earlier I explained the big shell game hiding the market. I have a strong suspicion that this has also occurred with the segregation of neighborhoods, and parts of certain cities. Early in my housing hunt, before I came to realize the true state of the housing market, my wife and I were looking into what would be considered a Latino and Asian neighborhood. We were interested in the housing prices and the older Craftsmen style homes. Over the phone with our realtor, we were told outright that this was a Latino neighborhood and none of the realtors that we were working with would ever have a listing of it. It is no wonder that there are neighborhoods that are predominated by one race. What happens is, one family moves in and gives a reference to others of the same race. Before you know it, the only ones listing that neighborhood happen to be that same race. If there was a true housing shortage, and if the market was fair and accessible to everyone, the interaction of neighborhoods would happen naturally. What a waste, after such a great and long economic upswing, to still see such secluded neighborhoods that did not make the turnaround. These area are still an affliction to the LA basin and should have been restored to their glory days of years past. Buyers who would have jumped at the chance to buy a fixer-upper would have rejuvenated these places and brought pride back to the neighborhood. Instead, people just move further out to Riverside and the desert. The social gridlock creates horrible congestion on the freeways. The quality of California life has given way to long commutes and smog.

    With these longer commutes there is an increase of gas consumption. Is the current fuel crisis related? Due to false information, buyers buy houses at a great distance from their workplace, forcing them to commute. It would appear that there is a direct cause and effect. These longer commutes create an environmental impact. The manipulated market shortage causes many other bad side-effects as well. If the manipulation of the market is intentional, you will reap what you sow ten-fold. Only you can decide if that is a curse or a blessing.

    Being the strong capitalist that I am, the solution to the bad side effects of the crumbling morals of the market is simple, to have full disclosure on the market with a public access MLS. The correction will happen the best way possible: naturally. A home is usually the biggest monetary purchase of one’s life. Shouldn’t the standards of the market accommodate this with honesty and care? A car dealer cannot do certain advertising without having the car available at the time of the ad, the price of the car, and the VIN number. The same minimal standards should at least apply to the housing market as well. The listing date, the asking price, and the correct address, along with a few other details should be provided to a buyer without question. A county record or a link to the seller with more details of the property should be made available. With buyers more educated than ever before, the market should be expectant to keep up with informed and motivated buyers. If the car market can keep abreast of their buyers, the housing market should as well. Such a big purchase should not be riddled with uncertainty and doubt.

    The only opposition to this would be would be a homeowner that knows what has occurred and realizes what is going to happen to their home values once the curtain of the Wizard of Oz has been removed. Of course the realtors and the industry itself would be opposed to my ideas for obvious, self-serving reasons. In fact, any rebuttal to this simple progressive idea would reveal the relevance of the facts.

    Who could be trusted to administrate a database assessed by both realtors and public alike? Every county has a “County Assessor” office that already assesses taxes and keeps track of sales and property transfers. A selling realtor would simply fill out an on-line form with hopefully more than less information, and pay a small fee to self-support this now mandatory service. Mandatory processes of filing with the “County Assessor” shows some responsibility, but could cause a few slight objections.

    How can such a system be enforced? A penalty amounting to half the assessed value of the property would easily enforce it. What this would do is create one more step after a title search: a value assessment of taxes. This would be a self-imposed step by a lender and mortgage broker. After the big collapse and devaluation of properties values, they will be screaming and demanding for this simple reform. This market is built with smoke and mirrors and that has created gargantuan false values.

    The group that will most vocally oppose this idea will be the realtors themselves. The reason for this is that it will remove their commissions that they are used to receiving. By hiding different aspects of the market and creating false values, they make money. Ironically, these same people readily label me as a socialist or communist. In reality, a simple progression of the market will occur. Buying and selling real estate will become a streamlined process, exhibiting an ideal portrait of capitalism.

    An old saying advises people not to complain about a problem, but to define it and provide a solution instead. This, being very well-stated, proves that there can be a simple solution. It may be painful to some, but it is a process that must happen. This needed progress will be demanded from the industry by buyers and lenders alike. High commissions at the expense of the public and the quality of life in the southern California area must end. Falsely over-inflated property values cannot last forever, once the truth of how many have been misled by the creation of a shortage in the market you will hear the loud and painful busting of the real-estate bubble busting.
    drew144k@yahoo.com

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  17. My list:

    1. Greenspan & The Fed for allowing fed supplied $ to banks to be used for interest only loans

    2. Most recent value appraisals that can allow speculators to bid up the value "over night"

    3. Greed within the Real Estate Industry that knows it makes more the more they promote high prices

    4. Lenders who've created 207 different types of home loans that allow little to no equity down.

    5. Fannie Mae & Freddie Mac for ... a multitude of sins ... that continue today

    6. Real Estate lawyers, speculators, morgage brokers, etc for being greedy and leading the "sheep to the shear"

    7. Home Buyers for buying beyond thier means and allowing market mania to influence their decisions

    8 Republicans who, under Bush have sttod by and watched a market that went up 60% from 1970 to 2000 to go up over 60% in just 4 years ... shameful

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  18. thanks for all your insightful comments. Thats why I enjoy this blog. I learn much from the posters.

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  19. I believe that a lot of the blame must be placed with the mortgage lenders(1). All of these esoteric loans designed to allow people to spend far more than they can truly afford, can only lead to trouble. I heard that something like $2 TRILLION dollars worth of variable rate loans were scheduled to come due in 2007. A lot of people are going to get hurt, some badly.

    Hopefully it will put an end to these idiot speculators (2). If I see one more 'I will buy your house now!' sign on the side of the road I will puke.

    I live in Central Florida, and unfortunately for us, we also get the refugees from New England (3) driving up prices. 'Yo,you call that a house? I had an apartment in the city that was like 180 Jillion dollars.' I swear it's like New York flushed, and the deritus ended up here.

    The discrepancy in the cost of living makes it difficult for us native Floridiots to compete. I am sure that eventually salaries will close the gap, but not nearly as fast as I would like.

    I also think that greedy developers (4) have a large role to play. Higher prices means more markup for them, and hey that new yacht burns a lot of gas. So what if your kids are packed in like sardines.

    Continuing in that thread are short sighted politicians (5). Increasingly powerful builders are using lawsuits, lobbyists, and advertising to thwart small town politicians and have their way with the zoning regulations. Those who do play along use these sweetheart deals to expand their tax base and further their own political ambitions.

    You might also consider emerging economies like China (6). You can thank Wal-Mart for this. More people in China are making more money, and thus want their own little slice of the pie. This has created a construction boom. All of the wood, shingles, concrete, nails, etc. has to come from somewhere, and that increased demand drives up prices.

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  20. Sold On ContractJuly 18, 2005 2:10 PM

    The bubble will keep growing, for political reasons....the administration capitalizes on the fact that there are more homeowners now than ever in the history of the US. These homeowners will join the ranks of low-income-renters or worse...people in cash positions will be able to pick up keys from the banks at a lot more reasoble price...The current losers won't be able to pick up even the lower priced RE because their credit would be ruined, the banruptcy law won't allow them to wipe their credit card slate clean and the mortgage lenders will not touch them with a ten foot pole!

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  21. I live in northern VA and I personally blame home buyers. Realtors and banks are only giving people what the want, what they are demanding. I do not beileve it is just motived by greed though. People around here seem to get real puffed up with pride when they tell you the latest assesment on their home, or how much they just sold their home for, or how much they just paid for their new home.

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  22. My list:

    1. Greenspan & The Fed for allowing fed supplied $ to banks to be used for interest only loans

    2. Most recent value appraisals that can allow speculators to bid up the value "over night"

    3. Greed within the Real Estate Industry that knows it makes more the more they promote high prices

    4. Lenders who've created 207 different types of home loans that allow little to no equity down.

    5. Fannie Mae & Freddie Mac for ... a multitude of sins ... that continue today

    6. Real Estate lawyers, speculators, morgage brokers, etc for being greedy and leading the "sheep to the shear"

    7. Home Buyers for buying beyond thier means and allowing market mania to influence their decisions

    8 Republicans who, under Bush have sttod by and watched a market that went up 60% from 1970 to 2000 to go up over 60% in just 4 years ... shameful

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  23. Definitely Clinton!

    Tax law change. Tech bubble. LTCM, Peso crisis.

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  24. That's fine with me. It doesn't have to be gold. Do you care to suggest something? But gold has always been something of great value and historically, currencies based on the gold standard did not inflate appreciably. In the US there was practically no inflation until after we left the gold standard (was that 1933 or there abouts?) and since then one US dollar has lost 95% of its purchasing power.

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