From what I understand, it all hinges on Allen Greenspan's prediction that the housing market is hitting bottom and will pick up again in a few months. Now if you love Greenspan and feel he can do no wrong, fine, great. But there are those who claim the whole mess is Greenspan's fault to begin with.

My question is this, which I haven't heard answered yet, what happens if the housing market does not hit bottom and rebound in a few months? The general idea is that just as the glut of houses on the market has brought down houses it has also slowed new housing starts. Up until now this was seen as bad since it was a drag on the economy, less builders were buying Ford F150's for instance. But now the idea was, as new housing starts slowed, eventually we'd work through the glut, and by sometime before the end of the fourth quarter this year, depending on where you were in the country and the relative strength of your sector's boom and bust, we start to see a bottom to house prices and a rebound.

Everything hinges on this. I know Greenspan obviously knows more than I do, as do Bernanke and Paulson, hell even Bush probably knows more than people give him credit for and I give him very little indeed most of the time. I don't want to see America collapse like Rome. But it seems like an awful big bet. For all I know it is a total sure thing and I'm clueless.

But I'd still like to hear what happens, a worst case scenario, if for some unforeseen reason, say China selling off their stockpile of US debt causing fluctuation in bond yields which forces the fed to tighten money supply in response to inflationary pressure, all of which negates the ease of credit to new home buyers causing a ripple effect in home prices. And they continue to decline. Or some other scenario I'm not smart enough to think of. Point being, what happens?

Because from my simple understanding, the market which is always right isn't sure if the correct price for marking down these collateralized debt obligation bundles of subprimes should be 60 cents or closer to 20 cents. And if the medium price of a new home continues to fall, they have no way to mark the true value and we get free fall.

The assumption, which I'm hoping for, is that yes, sure, home prices stabilize, the fed is able to lower rates without fear of inflation, the economy picks back up and people don't lose their jobs or their homes and they are able to pay off their debts and as a result everyone wins and we make money, whether at 60 cents on the dollar or even more.

But this nonsense that we've already made money on AIG is beyond the pale, with no one knowing what the effect of the freeze on short selling will be when we eventually have to let the bears back in.

Whatever you do, don't click this link (studies show you're more likely if you shouldn't)

by tiggerporn on 09/22/2008 01:22:49 AM EST