@Google

I happened to stumble across @Google today. It appears that Google regularly hosts famous authors at their headquarters to give talks about their books or whatever is on their mind. And even better, they videotape these discussions and post them on YouTube for everyone to view. You can search through the list here, and there are a lot of notable authors and academics, i.e.

George Soros
Michael Lewis
Paul Krugman
Joseph Stiglitz
Michael Bloomberg
Phillip Zimbardo

There is also Candidates@Google, with discussions from many of the presidential candidates, such as Obama, Ron Paul, McCain, Edwards, and more. This, along with TED.com, has given me a large backlog of informative and interesting videos to watch.

I watched the Authors@Google on Paul Krugman, a respected economist, and took notes on what he had to say. This is my shortened summary of a slightly over one hour discussion.

How we got to our current credit crisis? We had this amazing bubble in housing, which had its origins from the technology bubble before it. Back then the Fed cut rates to 1%, and at the same time money was pouring into the US from outside. Long term rates went down and house prices started to pick up. Afterwards, it was just classic bubble experience, as the price rises attracted more and more speculators. The price-to-rent ratio went up about 50% above historic averages. The housing bubble led to more construction jobs and higher consumer spending.

But, you have to remember Stein's law: if something cannot go on forever, it will stop. The national averages underscored the true regional imbalances in places like California and Florida. There is now huge havoc in the system, yet interestingly financing from abroad still hasn't stopped.

What really happened was lenders were giving loans to people with little or no cushion in the collateral. The Fed has found the rate of change of home prices is the best determinant of foreclosures. If house prices fall 20%, we will have 13 million houses with negative equity. If a 30% fall occurs, 20 million houses with negative equity. That's 40% of U.S. households.

Financial institutions are taking these losses and we don't know where it is. Fed tried to step in August like it was business as usual, similar to previous crisises. This time, it didn't work. We are facing today a solvency problem, not a liquidity problem. The Fed's policies are meant to step in and provide short term lending to prevent an unnecessary loss of confidence and a run on a bank. But this time we have a lot of loans not worth their full value. The question is if this will lead to a recession, and I don't know.

Assume we don't have a complete financial meltdown. It is hard to see what policy or financial engineering we could do. I think it is plausible that financial markets will remain crippled until house prices fall enough, enough loans and bad institutions get cleansed, and then we can continue.

What strikes me is during the tech bubble, we had a new technology with lots of possibilities and no one really knew how to correctly value this potential. But this time, it is just houses...