A Time to Reflect

The Northeast portion of America is cold; most public concern traces back to the high price of fuel oil. The Southwest, however, is warm and more concerned with house prices and mortgages. This geographic split in attention will have a powerful effect on politicians in an election year. We can only hope they cancel each other out and restrain legislative action until it is more clear what the extent of the damage is. A central question is whether there are too many houses in California, or too few. For decades, Westward migration outpaced housing construction, so California house prices have long been too high, mortgage lending too "innovative". While it is natural for western builders to feel that there are now too many houses for sale in California, a case can be made that the present noises are merely squawks as house prices adjust to more reasonable levels. With luck, the West may just ride it out. But, after adjustment for the present flight of emigration an excessive number of housing units per capita might just warrant drastic political solutions. Empty houses usually breed slums.

Different sorts of people should be pondering where the long slow decline of banks is going to lead. It makes a difference whether regular banking and investment banking will merge or have a collision. Much will depend on how well the two industries manage their massive computer systems; the heavy reliance of commercial banks on software vendors is not an encouraging sign. Something is going to have to change in the way the Federal Reserve manages the money supply if commercial lending migrates toward non-bank sources and deprives the Fed of its most useful tools. Commercial banks, investment banks, and the Federal Reserve are at some risk. When the system is placed under heavy stress, it is the weakest link in the chain at the moment which is most likely to break.

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