Economics and untested assumptions

Plenty of crow is being eaten over hyperbolic statements made about the real estate market. Unfortunately, that crow is being served up to the taxpayers of the US, and people who own US dollars – the companies who stole the money are keeping it. But that is all water under the bridge, of course, because it was all just a big misunderstanding, right? They didn't mean to commit endless fraud. They were just doing their jobs.

Yes, the conventional wisdom of 2005 sounds screwy when we look at it in retrospect. But what other whoppers are we swallowing for no good reason? Compare and contrast these two statements:

“An invaluable book . . . Today’s real estate markets are booming and Lereah makes a convincing case for why the real estate expansion will continue into the next decade. This book should prove to be a truly practical guide for any household looking to create wealth in real estate.” —DEWEY DAANE, FORMER GOVERNOR OF THE FEDERAL RESERVE BOARD OF GOVERNORS

Review for Why the Real Estate Boom Will Not Bust - And How You Can Profit from It: How to Build Wealth in Today's Expanding Real Estate Market, by David Lereah (Chief Economist for the National Association of Realtors), published 2006-02-21

"Suddenly those US government treasury bonds, still near the historic lows of one and two percent, are beautifully attractive because they are safe: they will never blow up like sub-prime CDOs did."

This American Life #355: The Giant Pool of Money, 2008-05-09 (mp3)

Just as nobody could conceive of the US housing market imploding like a cheap lightbulb, nobody can conceive of the US treasury doing the same. After all, it has never crashed, the US has never become insolvent, and therefore it cannot happen.

Except it can.

Foreign investors had simply not appeared, the demand for Uncle Sam's offering--so often a sure-fire thing--had fallen flat. Unlike anytime previously, the world's treasury buyers had suddenly decided to keep their hands in their pockets, invest their oil dollars elsewhere; some in the new-kid-on-the-block euro treasuries, others in their own local currencies.

The great US treasury bond sale: but nobody showed up The Middle East December 2004, by Milan Vesely

All it takes is a crisis of confidence. It doesn't even really require that the US screw up its fiscal situation so badly that the current accounts deficit gets permanently out of whack and stays that way for a generation (oh, never mind, it already has). All it takes is for the Chinese treasury to decide that it no longer wants to finance hip replacements or another US military adventure, and the whole thing could come apart like a piñata.

So, when somebody says with great certitude that an investment is completely safe, hold on to your wallet. That goes double for any government, and twice over again for corporate or state-sponsored media.