So why the hell are we in this financial crisis anyway?

The root of the present crisis is pretty simple: The price of housing has reached the preposterous point where every common middle-class home is totally unaffordable by every common middle-class buyer. Housing has been overbought, over-speculated, and overpriced for some time now.

Call me foolish. Call me irresponsible. Call me a dreamer, but I think you have a serious structural problem when every common home is unfordable by every common buyer. I remember when my Dad told me I had to jump in the housing market back in 2005. He insisted that housing had appreciated at the rate of 7% compound per year for the longest time. It was only going to get more expensive. I needed to jump in.

"Where is the growth in real wages to cover this 7% increase in housing prices?" I scoffed.

"Real wages, adjusted for inflation, have been increasing at pretty close to 0.0% for the past 20 years. It might even be negative, according to some reports. Prices cannot continue to increase like this. Houses are already unfordable. Who will buy this houses in a few years?"

My Dad didn't like that at all. He had just refinanced his house, through Country Wide, at something like $350,000. He harvested a ton of 'equity' to open a restaurant, which is now closed for business. The notion of being locked at debt level, or being underwater, did not appeal to him at all. He hated that notion. Still, he grimaced in pain, understanding that there was a problem.

The problem is that markets like to get even. The market is getting even right now. The real value of homes dropped more than 10% from historic highs by the month of September. This created systemic failure in the credit and finance industries. Speculators who were underwater, stopped paying their mortgages. Many abandoned investments, looking forward to foreclosure as a way to get out of a risky gamble. As the losses mounted Country Wide, Fannie Mae, and Freddie Mac all exploded. LIBOR shot through the roof. AIG was swimming in red ink due to "Mortgage Default Swaps", a type of insurance we don't call insurance.

How can the mortgage industry drag the entire system down like this? How can a single burst blood vessel in your brain kill you? How can a little blood clot in your heart give you a fatal heart attack? How can one crushed vertebrae in your back paralyze you? All it takes is one serious point of failure to bring the whole system down into a collective crisis.

But I digress... The real subject of this crisis is the outrageous price of housing. The credit crisis is a side effect not the cause of problem. The boss of BB&T bank, John Allison, says that all the chaos of September 2008 was created by a 10% drop in that price. The good news is that housing has to drop another 30% in order to reach a point of moderate affordability across much of our country. The bad news is that housing has to drop another 30% in order to reach a point of moderate affordability across much of our country.

If most of this chaos and crisis was fomented by a 10% drop, what will 30% more look like? There have to be a lot of losers over a significant period of time for the average price of a home to decline another 30%. A lot of ordinary home owners will have to take losses when selling. A lot of real estate investors and developers will have to take losses. A lot of banks will have to take losses. A number of insurance companies have to take losses.

This is going to be a long, tough, grinding deflation.