They Don't Buy in Dubai

Not even the Middle East is immune to the global economic rout. The two largest mortgage lenders in Dubai had to be taken over by a government owned bank. Seems they had a little real estate bubble of their own, and with oil now trading below $50 a barrel, that spigot has temporarily been turned off too. Indeed, their bubble makes ours look tiny; a fourfold increase in prices in five years. They seem to be just at the beginning of their bubble bursting, so this may take a while.

I guess ridiculous spending on ecologically disastorous man-made islands shaped like palm trees and on constructing the world's tallest building led to some large debts just a credit dried up. Not a good combination. Can't say I am shedding any tears over this one. The spending and construction activity there was obscene.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aaiN_27b33uU&refer=home

Build It and They Will Come (and get jobs)

I cannot say I am on board with all the economic decisions Obama has made, including his inclusion of some in his inner circle who are partly to blame for today's mess, but I do think the economic package he is trying to put together is the right way to attack the problem, which is from the ground up. Too many plans, including the $700 billion bailout, are trying to do it from the top down, but this ignores the fact that the top cannot survive without a strong base. The U.S. consumer needs help. And instead of giving them handouts, it is infinitely more beneficial to give them jobs doing something constructive, like improving our crumbling infrastructure or helping to lower our dependence on foreign oil. Let's face it, we need to spend this money whether we like it or not, so let's get some bang for our buck.

None of this is a quick fix but getting people employed doing infrastructure and altenative fuels achieves a lot more than throwing money at big banks. There are only a couple of ways for housing to reach a bottom. First, prices can fall until they get to where they need to go. There are obvious problems with this approach, as we are seeing. Moreover, with unemployment growing, the stock market down and employers cutting back hours, the median income will likely decrease, which means housing prices need to go down even further to revert to mean. The second altenative is that we use funds that we are going to have to spend anyway to support job growth and improve median income. That helps to make homes more affordable (i.e. they do not have to drop as far), slows foreclosures, aids consumer spending and supports all sorts of businesses. This helps the big banks better than giving them money as it lessens the defaults on all those derivatives on their books. In other words, the toxic waste becomes less toxic. It takes more time, but it is a better long term fix, in my opinion. Then again, what do I know. Any thoughts?

http://www.bloomberg.com/apps/news?pid=20601087&sid=aip_MC9nX0M0&refer=home