Good, Hardworking People and Over-inflated Assets

On Real Money yesterday Jim Cramer called for the Fed to cut interest rates so that "the good hardworking people" could afford homes.

The current problem is that real interest rates were too low--they were below inflation. And if you can borrow and low rates and plough that money into an asset class--real estate--that was appreciating 10-15% annually, you'd almost be a fool not to do it. (Call me a fool). I wish that some number cruncher would produce a price to earnings ratio-- price of homes to the earnings of mortgage holders--pre, during and post the real estate boom.

The problem is that in many places, this cheap money has driven up the prices of homes beyond the p/e ratio that existed. Accordingly, the good and hardworking people were priced out of homes. Now, good hardworking people are still going to be in need of homes, so the good, greedy banks came up with any number of schemes to shoe horn these folks into a mortgage.

In my view, and you've heard me say this before, is not that there is a subprime mortgage problem, but that there is an asset over-inflation problem for which the mortgage companies accommodated. The "sub-prime" label then is almost a misnomer. People who under normal conditions were once fillet mignon now have been relegated to skirt steak. When that happens something is wrong. The sub-prime label is merely a label for the stupid funding schemes produced by the financial markets to stay in the game and make a buck to finance an out of control asset class.

Ken Fisher's new book is out, and I've not obtained it, but I heard him on J. Puplova's show and enjoyed it very much. Ken's book, The Only Three Questions That Count: Investing by Knowing What Others Don't (Hardcover) rests on these questions:

1. What Do you Believe That is Actually False?
2. What Can You Fathom That Others Find Unfathomable?
3. What the Heck is My Brain Doing to Blindside Me Now?

I make no claims to have any special knowledge, but I'm positing this:
It is not a subprime issue, but an asset pricing issue: asset prices have increase beyond the reach of good, hardworking people. Changing the lending standards will be deleterious to home sales. I'm actually okay with that. New home sales will stagnate and ......drum roll.....asset prices will (thankfully) decline improving affordability. Dropping rates increases inflationary pressures and weakens the dollar. Been there. Done that. If we want to help the people trapped in these horrible mortgages, let's provide specific help to them rather than doing a wholesale drop in interest rates that starts all manner of ill again.

So what I believe that many others don't is the above. And I think that you will see some material write-downs in loan loss reserves for the prime banks for their "sub-prime" mortgages. Please feel free to call me on this by second quarter. Trust me, I would be thrilled to be wrong on this.