He is taking a very long term view of the market and history is on his side. However, history is not perfect as a guide. Marc Faber is among those who think conditions have changed because of the huge US debt and other factors. In a just posted item at http://www.Barreloworld.com, the notorious "Dr. Doom" talks of how Ben Bernanke is in a impossible position. Dr. Faber thinks the Fed should do nothing on rates and the Fed and Central Bank liquidity injections last week were a big whopper mistake because they will cause inflation- the market seems to agree, at least as a knee jerk response because gold jumped Friday after the Fed announcement. Dr. Faber has a very hot hand recently and what is happening now with the credit crunch is exactly as he has been saying. I am not as gloomy as "Dr. Doom" as I think he is missing some strengths in the current economic system that should cause the economy to be more reilient and give the Fed more flexibility than he sees. Those include the fact that there is some lowering of inflation pressure with declines in energy prices and strong ag production, great export growth and still rising productivity. Still, it has not been that easy to survive as a doomster given the strong bull market we have had and Marc Faber has endured with some brilliant market calls. I would read his article along with Ben Stein's views.

Michael, where do you buy your groceries, health care, construction products, and an incredibly long list of other necessities of life? The government's ridiculous inflation numbers are like the emporer's new clothes. They are convoluted and don't even remotely reflect how American wages have been beaten to death the last few years by inflation which, if calcualted honestly, would probably average about 8%.

So that's the real quandry the Fed faces now. How can they lower rates now to prevent the coming recession without blowing off the lid on inflation that would make the late seventies seem tame?

While I like Ben Stein, it appears to me that he is serving as a tout in his latest suggestion about the shallow nature of this credit bubble unwinding. When he estimates the total losses as being the sum of borrowers' defaults less the compensation the banks/investors receive from selling off REO assets, he's overlooking the real problem.

The mortgage backed securities market is bet on and bought and sold just like everything else on Wall Street -- on incredible margin. Subprime securities are rated WAY to high right now and so are lots of other mortgage bonds. If they were rated appropriately based on the default rates that we see today (and they are going to get WAY worse), then many investment funds from pensions to mutual funds would need to revalue their market value, and many would have to sell their MBS portfolio and acquire something else.

That pressure on mortgage backed securities -- that they were improperly rated as better debt than they really are -- will grow over time. The snow-ball effect that drove up real estate prices works in reverse too. Prices went up because cheap money begets reckless borrowers who will pay for a house whatever their maximum loan amount they qualify for. As news spreads of the easy money ("no, they loaned you $640,000 with zero down? But you only make $48,000 a year!"), more people get in line to get some. As more people pile in, prices rise and as prices rise, more people on the outside see them going up and get desperate to get in. This process continues until there isn't anyone else to get in. Now, in America, it's pretty much children and the presently incarcerated who do not own homes. There's no one else to bring in to the market.

On the way up, Wall Street and everyone else involved has an interest in creating the obviously untrue perception that because people aren't defaulting on their loans now (in the middle of a bubble market), that the risk of default has fallen. But the real reason defaults are lower is because homes were selling in 25 minutes two years ago and so a borrower could sell his house faster than the next month's payment would come due. Nobody defaults in that kind of market.

As this moves in reverse, the margin calls are going to kill people. If the average American can't get together a 5% down payment (Fannie Mae has been saying that such requirements are unreasonably "strict"), how will he pay the 6% real estate agent commissions when he sells?

I'm not sure if they can resuscitate this credit bubble and get it to float for another few years, but when it finally pops, it's going to be horrible. There are two ways out, inflation and deflation. These folks in charge tend to prefer inflation because it is less likely to promote riots. But in the end only stupid people feel wealthy when their incomes rise 10% and general prices rise 20%. And, unfortunately, that's about 95% of America right now who doesn't get it.

Some people at a local church and I created a small real estate investment group. We wanted to get in on the whole "flip this house thing". It was a horror. We purchased pre and post foreclosure homes in poor black neighborhoods. Altruism at its best. Since we were all once poor and we are of various ethnic and racial makeups, it seemed like the opportunity to make an honest buck and help the community. The problem came when the reports of the "subprime" lending market were bottoming out and the prime were even having issues. People are loosing their jobs - period. In communities where the stereotypical average person is living check to check and has less than stellar credit... this has been very traumatic.

Here's the rub.... the poor people who we initially did the remodeling for could no long get the financing for the homes. In comes middle class blacks, whites, hispanics, etc and developers - taking the area toward gentrification. The local family MD, local middle class, can't afford the nice suburbs on 125 k a year. However, she can easily snag a home in an up and coming community for 200 -600k. The prices went up, the locals got squeezed out. People have to live somewhere, real estate will make money. However instead of selling a 100 k flip for 170 in 2 months, we had to hold on for 2 years and do upgrades as to what the newer miore upscale clientele demanded. On 20 properties we thought we would make 30 grand in profit in 2-3 months on each. Instead we made 150 grand in profit on each, after spending a great amount over our budgets and taxing both our nerves and our individual pocketbooks. It was a nice profit for the group. There is money to be made if you have it to spend and patience. The problem is now... 90 percent of the members of the investment group, now flush with maybe 30k in profits after taxes each... still cannot afford the 300k - 600k homes in the community they helped to build up.
Now, I have suggested, to everyone's chagrin, that we find a new community, buy some local homes, move into them ourselves and fix them up. If me and 72 of my close neighbors fix up our homes, become active in the community, suddenly its no longer a ghetto, it is urban revitalization. That is the real future of real estate. The middle high end is going to drop... Chicago has a glut of condo's downtown, hard traffic, but go west or south west and there is profit to be made, if one is patient.

I think ben is correct . iTS TIME TO JUM IN BEFORE NOVEMBER WHEN THE REAL SUPPORT ENTERS THE RING. bY THE WAY DOES ANYONE KNOW WHY COAL MINERS DO NOT HAVE GPS AS MASNATORY EQUIPMENT? iTS 2007 GUYS.

Dear Sir:

I have followed your articles in the NYTimes for years and this is probably one of the worst I have seen.As all economists do, you like to make assumptions to make your point. This entire article is based on the assumption that the market was fairly valued at approximately 14,000..If you look at average historical averages on P/E ratios and other factors the market was overvalued by approximately 10/15% so this was just a normal correction which tied into the subprime mess. A correction was long overdue anyway.Also on this subject you are like President Bush who seems to think that if the stock market is good then everything is ok. Nothing could be further from the truth.

If you really want to do something as an economist, which I would be very interested in you discussing or explaining, is the following

1. The true value of the Chinese Yuan. Everyone talks about it being undervalued ( figure commonly mentioned is 40%)yet not one person has ever explained by how much and how they determined it. I find it very,very interesting in that the Yuan and the Hong Kong dollar are about par yet no one has ever said the Hong Kong dollar is undervalued. Why is this?How would you explain this?

2. The current price of Oil at about $75.00 per barrel.On Jan 1,2002 the price of oil was $20 per barrel. This means the price of oil has increased at an annual rate of approximately 27% per year while worldwide demand has increased probably less than 7% per year including China and India.In my opinion it is due 100% to Wall Street manipulations,commodity traders and hedge funds not supply and demand.

3. The real unemployment numbers/figures. Wall Street makes a big deal out of the monthly unemployment figures yet these figures are way off the mark and the real unemployment is almost twice the reported figures. Read the NYTimes the week after the month ends on the hidden unemployment ( people who have given up and stopped looking,people in part time jobs that want full time jobs, people who say they are employed as consultants,real estate agents etc that have almost no work or income )which is a huge number.

Do us all a favor and analyze,review,discuss these issues.

Don Gonsalves DJGonsa@aol.com