When the willing buyer met the willing seller and consummated a deal at arms length on a house, it produced the failure of the credit markets. If “fair value” killed the credit markets and beached our banking system, it’s a good bet it doesn’t belong as the standard for financial reporting.

Endgame class risk for a vast upstream of investors and the US banking system was negligently concentrated in a single cash flow stream, ARMs. Dozens of engineered instruments were crafted to allow any kind of investor to participate in the gold rush. The savings-minded individual investor up to the sovereign wealth funds of global economic thoroughbreds were given access.

Every thread that is now unraveling over that entire spectrum of investors and the financial institutions underlying their investment, was beholden to that one cash flow stream performing over its 30 year lifespan (as previously blogged, no matter if the housing asset is expected to be sold in three years, it is rolled into another and 30 years is a good, general life of a mortgage cash flow stream per homeowner).

Bankers, policy makers such as the Senate Committee on Banking, Housing & Urban Affairs, endowments, pensions and hairdressers turned real estate moguls didn’t care to look at the one “tell” that would have let them know the whole thing was a house of cards. The annual growth rate of housing prices was 20% or more but the growth rate of the resource that paid for the houses (wages) was flat (2% or less).

If they wanted a supporting tell, they would have looked at the breakneck pace of private equity deals to let them know that debt was funding everything, including housing (generally, 95% of PE buyout prices are funded with syndicated debt ) . This made the “it ends badly” crystal ball all the more vivid because it confirmed real incomes were not underneath the price pressure on houses.

One cash flow stream became the counterparty to the whole US monetary system in about 2 to 3 years. Looking at it critically would have induced anyone with a financial or social interest to ask “how can the housing asset race higher at 10 to 20x the annual rate of the resource that funds it (wages)?”

Through that simple lens it was clear that we were going to get either a financial crisis or a social crisis (because housing had raced way past being affordable on the incomes of US households in a handful of years).

When I started asking it in ‘03 at business lunches, of colleagues and friends, I got many odd looks back but only one person even asked why I questioned the gold rush. He was a guitar player.