The flood of borrowing in the U.S. is eventually going to force us to pay the piper, with some arguing that the bill may come sooner than later. Others have argued for continued deflation over the next 12-18 months (see previous post). Fortunately, or unfortunately, depending on your perspective, the move from deflation to inflation might not be as sharp as expected (see Bloomberg article). As it turns out, rising home vacancies across the U.S. are depressing rents, the largest item in the consumer price index released by the labor department. Home and apartment rents, as well as owners' equivalent rent, make up 30 percent of the CPI. As of the third quarter of 2008, the number of empty homes stood at 19 million, signaling that deflation may be here to stay for a while - or at least worries of inflation can wait until 2010, at the earliest. While not a perfect scenario, an environment with lower inflation will allow the Fed some extra time before it needs to start raising rates, thereby giving lower rates more time to do their magic without the threat of stagflation.

As a result of both decreasing home values and increasing legal fees, some banks are deciding to not take possession of properties in foreclosure (see New York Times article). In addition to legal fees, homes in foreclosure are seeing increasing maintenance fees, due in part of vandalism and neglect. The problem is that once the bank walks away, the name of the homeowner is still on the title, making them responsible for maintaining the home. Even if the home is to the point of being demolished, the homeowner may be responsible for the cost of demolition and clean-up. It looks like the banks are indeed getting some of their problem loans off the balance sheet, but this may not be the way the Fed and Treasury had in mind.

There is an interesting commentary by Michael Lewis (see the recent Bloomberg article). In the article, Lewis highlights how the hysteria over AIG is obscuring the real problems at the core of the current crisis, one of which are homeowners defaulting on homes they could not afford, and the government instead throwing money at opaque institutions, the workings of which no one really understands or can challenge. With one line, Lewis captures the problem and current situation:

"The guy who defaulted on mortgages on his six spec houses in the Nevada desert has turned himself into the citizen enraged by the bonuses paid to the AIG employees trying to sort out the mess caused by his defaults."

Here is hoping we can head Lewis's call for getting to the root of the problem, and quickly. It is not that we should turn a blind eye and forgive the guilty and the negligence on Wall Street, but instead should focus more of our energy on the solutions to our problems, beginning with identifying and admitting its root causes. As uncomfortable as it may be, for many of us the problem and solution begins with us.