Bear Stearns & The Real Estate Implosion

Bear Stearns proves that the real estate crisis in the United States continues. As was predicted by The Economist some time ago, the relaxed lending by American banks has lead to a crisis of confidence. Now that Bearn Stearns has been rescued, there is mass speculation on who is next.

The near failure of Bear Stearns (actually it did fail as it lost market confidence) points to a myth that we hear a lot of these days. It's the myth that "the worst is over". Like all myths, it is based on some truth - things are worse than they were. But the navel-gazing and talk of last year's values will return is simple twaddle. Many real estate investors are privately turning their nose up at the current market. In some areas it doesn't pay to take it for free - it costs too much to maintain and rents are falling.

The intervention of the US Federal Reserve was unavoidable. The collapse of Bear Stearns point to the rotten undersides of the American financial sector. Essentially, they are doubtful of each other's ability to pay up if necessary. Indeed, their doubt is based on the likely assessment that they couldn't pay up if they had to. Scary stuff. It would appear the emporers have no clothes once again.

For those who may be tempted to the optimistic call for a return to "normal" markets, beware. We have been in an abnormal market for a while. We are living through the correction. Bear Stearns is a shining example of that - not a sign that it is over.