I don’t remember who caught the greed bug first. I’m sure somewhere there were businesspeople who were rather unscrupulous and would sell any product for profit, usually on late night television. The politicians weren’t far behind as it is difficult to be a politician without being ego-centric, which always seems to be one step away from unethical. I can still recall the first commercials I saw on television for lawyers offering their services to the recently injured. I remember when doctors and dentists became more interested in profits than patients. Everyone can name televangelists who were caught preaching the gospel more for profits than converts.

Of course, Wall Street has always been greedy. That is what they do. But, even on Wall Street things have deteriorated. Twenty years ago on Wall Street your word was your bond and the reputation of your firm was sacrosanct and to be protected at all times.You made money the old-fashioned way, by out-thinking and out-hustling your competitors and delivering a product or service to your clients that created real value for them.

Since then, trading and principal investing has turned Wall Street into a den of whores. There is no value in something other than what you can convince someone to pay for it. It is a reason to celebrate if you can mislead an investor and get him to pay more than what an asset or business is worth. If you can hide liabilities off the balance sheet and stick them with the customer, all the more reason for merriment.

But I don’t want to give the impression that this current crisis started or ended on Wall Street.Wall Street could never have pulled this off on its own. Remember, this all began with an unsustainable housing boom and eventual housing market collapse. Home realtors pushed their clients into ever-bigger homes based on phony high appraisals from non-independent appraisers with the money from mortgage brokers who fraudulently changed qualifying income amounts on mortgage applications, and all contributed to the dramatic boom in house prices. The commercial banks offered such aggressive terms for mortgages and knew full well they wouldn’t sit on their balance sheet for long. Then the investment banks packaged these mortgages and sold them to unsuspecting institutional investors, such as pension funds and sovereign wealth funds. It may not have been ethical, but they paid the rating agencies hundreds of millions of dollars to rate much of this junk AAA. Even the dupes who ended up buying this junk were not without fault. They sought out the greater yield these investments returned, but the extent of their due diligence and credit analysis was to ask only about its credit rating. It leaves a lot of hours in the day to go golfing if your entire job consists of just investing in AAA securities with no further homework being done on the credit front.

But the real reason why this disaster was allowed to occur was that the U.S. government had been co-opted. None of this could have been accomplished without significant deregulation of the financial industry and the avoidance of previous regulation and of required supervision in many cases. It was the mantra of the American government for 30 years that less government and less regulation would lead to lower taxes and a stronger economy. Well, today, the United States has higher spending, higher taxes, more government, but a lot less regulation of the largest companies and banks.

Listen to your congressperson today say how surprised they are about the current crisis. Nothing could be further from the truth.They have been warned time and time again about this impending crisis, not only in home prices and in the mortgage market, but also about the high debt leverage of Fannie Mae and Freddie Mac as well as the entire commercial banking and investment banking and hedge fund industry. This crisis was no accident. It was just a matter of time until this entire house of cards fell. Fannie Mae and Freddie Mac are the proper names of these large institutions that used to be abbreviations for their longer names, the Federal National Mortgage Association, for example, for Fannie Mae. They were put in business to buy existing mortgages from banks and to package them and to sell them as securities to investors, basically to turn mortgages into securities that looked more like traditional bonds.

So to understand the real reason why this occurred, you can’t just stop at deregulation as an explanation. You have to ask why the deregulation was allowed to occur by our Congress and our President. The simple answer is that they were paid to deregulate industry. Our Congress and our President take billions of dollars each year from business and banks and Wall Street in the form of campaign contributions. They are by far the largest contributors to our national elections. Do you think a for-profit business would make a donation to a congressman unless they were getting something in return? John McCain admits taking money from the telecommunications companies that his committee regulates, but his defense is that it does not influence his voting. If this were true, it would certainly make the for-profit businesses that are handing him the money look awfully stupid for wasting their assets. No, just the opposite is true. A recent study on www.publiccampaign.org showed that for every one dollar in campaign contributions a typical American business makes, it gets back more than $400 in tax benefits, tax deductions, and tax credits from the American government. Certainly a 400 to 1 return on your investment beats any of the alternative investments a company might have in its base operating business. And this does not measure the total benefit corporations receive from lobbying. In addition to tax benefits, generous lobbying corporations also receive help in protecting their domestic turf from foreign competitors, union busting with their workforces, price supports for their products, and taxpayer assistance in opening international markets.

Here is some evidence. Senator Charles Schumer, a Democrat from New York, has as his top 10 contributors the biggest financial institutions he is supposed to regulate on the Senate Banking Committee. The list of the top 10 campaign contributors to all of Congress include the National Association of Realtors, the Mortgage Bankers Association, the American Bankers Association, Fannie Mae and Freddie Mac, the investment banks and the hedge funds on Wall Street. It certainly sounds like every player in the current housing, mortgage, and banking crisis. In 2007 alone the securities and investment industry spent more than $86 million on lobbying and the real estate lobby spent $78 million. Tell me when the evidence becomes more than just simple coincidence.

Do you want further evidence? Name another problem facing America today and I can tell you the lobbying force that is preventing a commonsense solution that would benefit all Americans. Global warming? The coal lobby and the electric utility lobby. Gas prices? The oil and gas lobby. Pharmaceutical prices too high? The pharmaceutical industry lobby. Health care costs and coverage? The hospital corporation lobby and the HMO industry. War and defense spending? The defense industry lobby. Social Security and Medicare reform? The AARP. Education reform? The teachers union lobby.

Coincidence? I don’t think so. Look at the facts of the current crisis. Banks and nonbanks were completely unregulated and were allowed to leverage themselves up and extend mortgage financing in the craziest amounts on the craziest terms to home buyers. There was no supervision of real estate agents and appraisers or mortgage brokers. Fannie Mae and Freddie Mac’s supervision was so lax that they both utilized 120 to one debt to equity leverage to buy or guarantee half of all mortgages in the country, approximately $5.2 trillion worth. Is it a coincidence that Fannie Mae and Freddie Mac also spent hundreds of millions of dollars on lobbying and campaign donations to your Congress? Rating agencies’ and investment banks’ activities went completely unregulated as they packaged these mortgage securities and sold them worldwide. Hedge funds, some of the biggest contributors to your Congress and President, had no reporting requirements, no transparency, and no supervision as they helped grow the credit default swap market from a $140 billion market 10 years ago to a $65 trillion completely unregulated market today. AIG, a supposed insurance company, had $420 billion of exposure in the credit default swaps market, an exposure that ultimately was their undoing.

As certain as the sun rises, as sure as the rain falls, as predictable as the tide, this financial crisis was guaranteed to happen. Not only has the U.S. government allowed deregulation at home, it has exported the idea worldwide as a solution to the world’s economic problems. There is good regulation and bad regulation. In Peru and India, it can take six months and 850 bureaucratic steps for an entrepreneur to acquire a government license to start a new small business. Certainly this type of over-regulation is bad for an economy.

But what American advocates of deregulation failed to realize in promoting unregulated capitalism around the world is that you cannot have a free market without proper regulation. There can be no market without the rule of law. The reason capitalist free markets were slow to catch on in Africa and much of the rest of the developing world was not a problem of business, but one of government. The governments did not provide the essential rules and regulations and the rule of law necessary to conduct business effectively. Without the rule of law, contracts are not honored, fraudulent activity is not punished, and property rights are not protected. If you look at a map of the world, of the 160 countries on the planet with more than a million population, all are doing quite well economically, growing fairly well, with the exception of approximately 50 countries. All 50 of these countries share one attribute—bad government. The corruption endemic in many Third World countries’ governments means that individuals forming new businesses and building factories will face the constant fear that government representatives will someday steal their profits.

In one of the great ironies, rather than America exporting our model of good government to the world, it appears that America has imported some of the government corruption endemic to the Third World. As our government became more corrupt and more co-opted by corporate donations and lobbying, they regulated business less and business itself became threatened. Karl Marx said that the capitalists will manufacture the rope that hangs them. As Raghuram G. Rajan and Luigi Zingales said in their book of the same title (Rajan 2003), it’s a matter of “Saving Capitalism from the Capitalists.” It would be ideal if businesses operating in their own individual self-interest and profit-maximization does nothing but good for the planet. But this is not the case. Businesses pollute, cause global warming, cause conflicts over access to raw materials, rip off consumers, make false advertising claims, and put their workers in competition with the lowest wage workers around the world. Anyone who believes that corporations acting solely in their own self-interest to maximize profits in a world of no regulation will ensure a prosperous global economy, a healthy environment, and a stable world needs to go back to school and study externalities and collective action problems. Although governments should not do anything that the free market can do, there are enormous problems that cannot be solved by self-interested corporations in the free market and need government involvement. Perhaps one of the most important of these problems is the regulation of the market itself. Be wary every time a government official tells you that an industry has agreed to be regulated and that they have decided to regulate it themselves.

In this book I examine the evidence and try to gain a better understanding of how the United States got into this mess. I examine the housing price boom and collapse in detail because it was the primary cause of all of our current financial problems. But the primary focus of the book will be a look forward to try to describe how far-reaching this contagion might spread. The word contagion entered the lexicon of regulators of financial markets during the Asian meltdown in 1998, also known as the Asian flu in finance circles, and came to be popular in describing a crisis in one market that has the ability to mutate into others. I use a much broader definition of the term to not only include financial matters, but also government concerns such as corruption and societal problems such as greed. Although I will not be accurate in all of my predictions, it is helpful to investors and businesspeople and concerned citizens to take this look forward as they are much more interested in what might occur in the future than what has happened in the past.

A question facing many homeowners today is: When will the current housing price decline cease? Unfortunately, I show that the country as of the end of 2008 is only approximately halfway into what is already a record housing price correction. A recession is spreading now in the United States, but I argue that it will become one of the deepest and longest in our nation’s history. Already many European countries have entered recession and it will be some time yet until they return to positive economic growth. The United States and Europe drive global consumer demand for goods and products and so the other economies of the world, especially the emerging growth economies that specialize in manufacturing products for these markets and providing raw materials and commodities to them, will suffer. I cannot think of a single country on Earth that will be exempt from this economic downturn.

I describe what is happening on Wall Street and spend some time talking about the credit default swap market, that $65 trillion completely unregulated market in which people can make bets on which company bankrupts next. I then turn around and demonstrate how problems on Wall Street and the freezing of credit worldwide can lead to serious problems on Main Street, in our own communities and in our own state and local governments.

An important question for investors is whether this is a temporary problem for the United States and the world or whether this is more permanent. The losses that have occurred in the housing market are permanent because no bank in the foreseeable future will be lending home buyers 10 times their annual income to buy a house as they have done in the past. If bank lending declines, the home prices have to follow. But it is also true that the problem extends further than just the housing price crash. The demographics of the United States are such that the baby boomers are just now starting to retire and this will represent a significant hit to our productive capacity and to our economic output. Just when the country starts to get over the housing collapse and the ensuing recession, demographically speaking, Americans will run into the baby boomer retirement, which will harm economic growth in the United States for decades.

In such a difficult crisis and terrible economic environment you can quickly see why cash is king. It is hard to come up with a list of good investment alternatives, but I do find a couple of interesting candidates. Similarly, there is not a long list of countries that I would recommend investing in, but there is at least one large one.

This analysis would not be complete without an understanding of the administration’s plans to solve this crisis and a critique of their approach. Even after you stop the immediate bleeding of the financial institutions, you have to ask the question: What required reforms are necessary to the banking industry in general and to our government specifically? It makes no sense to talk about health care reform or global warming or high pharmaceutical prices until big business is thrown out of our government. Until effective lobbying reform is enacted, this country is not going to be able to address any of the problems that Americans face. Remember, when these corrupt politicians were asked to come up with a plan to help the economy, they wanted to give $700 billion of your money to the guys on Wall Street who caused the mess to begin with. The fact that many congresspeople and senators voted for this proposal even though their constituency e-mails and phone calls were 95 percent against the proposal makes you realize who they are really working for. I have some bad news for you, it isn’t the American worker.

I conclude the book with a philosophical note as to what people in this country may have learned from this crisis. If the citizens survive it, it will make them stronger because everyone needs to do some serious introspection to determine if this country and this government and the their own lives are headed in the right direction. In a strange sense, it is good this crisis has happened. Americans never would have seen the error in their ways unless they were subjected to great pain and inconvenience. Now that they are feeling real pain with their jobs and homes threatened, only one final question remains:

Will they change?

Even this analysis is not completely accurate, because you can’t have a good crash without a preceding boom. For home prices to have declined dramatically over a period of years there had to have been a necessary boom preceding it, during which home prices grew beyond reason, and in the United States this is exactly what happened. To understand why a housing crash in the United States was inevitable and to have an idea of how much more pain there might be on the housing front, it is important to look back and determine exactly how housing had become so overpriced over the past 30 to 40 years.

As Americans are well aware, nominal housing prices increased in the United States for nearly 50 years, from 1955 to 2005. In 1968 a typical home in the United States could be purchased for $20,000 and by 2006, that average median home sold for close to $220,000. This appreciation was not limited to any one geographic area of the country as all four regions—Northeast, Midwest, South and West—all showed remarkable appreciation during the period.

But it is not enough to say that nominal home prices increased every year over the past 50 years. Inflation also increased every year during the period, but rather how much did home prices appreciate more than general inflation. In other words, after accounting for the lower purchasing power of the dollar, did the average home in the United States still show significant real price appreciation?

The answer, of course, is yes, after accounting for general inflation, the real price of a typical home in the United States doubled from 1968 until 2005. And this is a median price of the average home for all the United States. There are a few cities in the United States, such as Phoenix, San Francisco, Las Vegas, New York, Boston, and Miami, that showed real appreciation in their homes of more than 500 percent during the period. In general the areas of highest appreciation were on both coasts and in Las Vegas and Arizona.

It is not enough to say that because housing prices went up during that period that they were overpriced.The reasonableness of prices, by definition, is always relative. With regard to houses, the appropriate relative measures seem to be how the market price of the home compares relative to its replacement value if you had to rebuild it; what is the home’s value relative to its affordability, that is relative to one’s income; and finally, what is the house’s value relative to alternative living arrangements, namely renting.

By 2006 it should have been apparent to homeowners that the prices of homes in many American cities had become out of whack relative to their replacement values; that is, the cost of buying a piece of property, acquiring a building permit, and constructing a home. Homes in California by 2006 were selling at three to five times what it would cost to build a similar home from scratch. Even if you included the high cost for the underlying land, it is difficult to justify the high prices paid for homes in many cities across America relative to the cost of new construction.

This inequality can be seen most readily by looking at the profits of American homebuilders during the housing boom. In effect, homebuilders are sellers of homes.They do best when homes are overvalued because they step in and act as arbitrageurs, taking raw materials like nails and wood and dirt and turning them into homes for sale. Their profits increase if homes are overvalued. And boy did their profits increase. The homebuilders in America saw their profits increase more than 20 percent per year every year for 10 years running. In the Midwest, it is common for the cost of building a new home to run from $70 to $120 per square foot. In California and New York, this cost of construction can approach $200 to $300 per square foot because labor prices are higher, materials prices can be higher, the work area can be more congested, and the quality of the final house can be higher with more amenities (such as nicer cabinets or fancier kitchens). But, even these high costs of construction cannot justify homes in California and New York and elsewhere that sold at their peak price of more than $1,000 to $2,000 per square foot. There are many condominium apartments in New York City that sell between $1,000 and $3,000 per square foot, and yet the cost of new construction in New York, even in the most congested areas, is less than $500 per square foot at most, especially if all you are doing is adding an extra floor to an already planned new high-rise.

To determine whether houses are overpriced on an affordability measure, it is best to look at housing prices relative to income. What first alerted me to the unsustainable nature of the increase in U.S. house prices was that most wages in America have been stagnant for 30 years. There are disagreements as to why workers wages have not increased as U.S. productivity has expanded, but it is probably some combination of increased globalization in which American workers are forced to compete with low-wage countries such as Mexico, China, India, and Vietnam, and increased technology. Increased technology has dumbed down many jobs in America so that these jobs now require few skills. I met a woman in Kentucky who surprised me by telling me that she got a job as a welder at a car assembly plant. I was surprised because I knew she had no welding experience and no welding training. It turns out, as she proudly told me, that she was able to accomplish 140 complex welds per hour.The total effort required on her part was pushing a red button on the wall 140 times each hour. Technology did the rest. In a world where employees only require the skill necessary to push a red button on the wall, it is hard to argue that they deserve a premium wage.

Finally, there is a growing school of thought that what really happened to the American worker was a great power shift from workers rights to management and shareholders. Because of the Reagan revolution, and because of globalization and technology, it has been more difficult to organize workers, and unions have seen a dramatic decline in their membership. In the private sector, union membership peaked in the 1950s at 35 percent, but have declined to just over 9 percent today. Regardless of what you think about unions, it is rather apparent from their demise that workers do less well relative to shareholders and management in their absence. According to the Institute for Policy Studies (2008), because of the weakening role of unions and the increased difficulty of workers to organize, management at our biggest companies has been able to pay themselves 334 times what the typical worker makes. If workers make $2 an hour less today than they otherwise would have, this translates into a $4 trillion wealth shift from workers to shareholders, just about exactly what the stock market has increased over the period in real terms. By this argument, there has been little real growth in business profitability over the recent past, just a shift in wealth from workers to owners and management.

So regardless of the exact reason for wage stagnation, the flat wages mean that any real increase in home prices make them less affordable to the typical American. Home prices have doubled from 1968 to 2006 with little increase in real wages, which means it is twice as hard for the typical American to afford a home.There was a commensurate nominal interest rate decline from 1981 on, and it is important to this analysis, but I will hold that discussion for later in this chapter.

When you think about it, it’s almost impossible for housing prices to double in real terms because wages never move that rapidly. If housing prices from an affordability standpoint stay constant relative to wages, then housing prices shouldn’t be able to increase each year more than wages, and real wages typically increase less than 1 percent or 2 percent per year, if at all.

The data is quite conclusive. In 1968, the typical house in America sold for approximately 2.6 times household incomes and by 2006 this ratio was approaching five times, almost double. This is important because housing costs dominate the average household’s annual expenses. For example, in 2000, according to the U.S. Bureau of Labor Statistics, housing costs were $12,000 per year for the typical American, and this dominated other annual household costs such as transportation costs of $6,700, taxes of $6,200, food at $4,600, and health care costs at $2,100.

Since 1960, the percentage of women working in America has dramatically increased from approximately 32 percent to more than 62 percent. So the price of a home relative to a household income doubled since, and this was during a period in which many married American women went to work. Given that 50 percent of American marriages end in divorce, it may be helpful to express these house price ratios as a multiple of the average worker’s income rather than a two-wage household income. Here again, the increase during the period has been dramatic, with housing prices as a multiple of the average worker’s income increasing from 5.3 times to more than 9.0 times annual income.

Even this large number does not tell the full story because this average worker has a number of nondiscretionary expenses he must make each year. In other words, it is more accurate to examine housing prices as a multiple of the average worker’s free cash flow after his nondiscretionary expenses such as taxes, food, and utilities. This final calculation shows that home prices had increased dramatically over the period, increasing from 10.7 times the typical worker’s free cash flow to more than 19 times by 2006.

Most homes during the housing boom were financed primarily with mortgage debt, so it is safe to say that these multiples of free cash flow are extraordinary. People familiar with the leveraged buyout industry, in which debt is employed to finance the purchase of entire companies, will quickly realize that healthy, conservatively financed leveraged buyouts involve debt structures with five to seven times free cash flow of the business, while the leveraged buyout industry gets into enormous trouble when it tries to finance deals north of 10 times cash flow. The reason is simple. There just isn’t enough cash flow at these price levels to pay off the interest on the loan. Similarly, when you buy a house at 19 times a person’s free cash flow it makes it all but impossible for the loan to be repaid. I will speak in depth why the banks were willing to extend such large amounts of money to homeowners during the boom, but obviously part of the problem was qualifying potential buyers for an adjustable-rate mortgage at an initial teaser rate of 3 percent, knowing full well but ignoring that the rate would double or triple in three to five years.

From an economic perspective, the most pure form of determining the reasonableness of housing prices is to compare it to an alternative means of achieving a similar mode of shelter. Although certainly not a perfect comparison, the alternative to owning a house is to rent a similar house in the same neighborhood. The cost of renting a similar home in 2006 in Las Vegas, Phoenix, Los Angeles, or New York was from 20 percent to 50 percent of the total cost of owning a home.This fact alone should have set off warning bells to potential buyers in these markets. The first rule of economics and pricing is that similar assets in similar locations that serve similar functions should have similar prices. Buyers, trying to justify the higher costs of ownership, did so by arguing that they were capturing the potential price appreciation through ownership that the renter never would enjoy. But, as any economist should have told them, when you buy an asset it is just as likely to go down in price as go up.

When you look at the increase in house prices over time, what is most striking is that it is a relatively new phenomenon. Robert Shiller in his book, Irrational Exuberance, Second Edition (2005), plots real home prices over time, over a very long period of time. His data starts in 1890 and shows that until the mid- 1990s, home prices really showed no meaningful appreciation. In essence, real home prices in America were relatively flat for more than a hundred years. Shiller then shows real home prices more than doubling by 2006, but this is not a complete analysis.

When you purchase a home you are really purchasing two distinct assets, the physical house and a fairly significant tax shield, the deductibility of mortgage interest for tax purposes. It turns out that the second asset, the value of the tax shield you are buying, has declined since 1981, because inflation has eased in the economy. In effect, the mortgage interest deduction is more valuable to a homeowner during periods of high inflation, the homeowner gets to deduct for tax purposes the nominal levels of interest that don’t turn out to be real. So, what this means, is that since 1981 the second asset, the tax shield you purchase, has been declining in value, which means the primary asset, the physical house you purchased has been increasing in value even faster than you thought. Although this is a complicated point, the essential takeaway from this analysis is that the dramatic increase in home prices did not begin in the mid-1990s as posited by Shiller but rather in 1981, if you ignore the decline in value in the associated tax shield.

So if figuring out what was unique about the year 1981, what changed dramatically in 1981, then what caused housing prices to begin their rapid and unsustainable growth might be revealed.

As Americans well remember, 1981 was the first year of the Ronald Reagan presidency. Ronald Reagan came into office with the prime rate at 21½ percent and some tax-free municipal bonds yielding were more than 16 percent. He ignored conventional economic wisdom in his attempts to control inflation by slowing dramatically the fed’s printing of new money and instead borrowed the government’s deficits in the debt capital markets. Economists argued that such government borrowing would crowd out private companies from the debt markets and cause interest rates to increase. Economist Milton Friedman and other monetarists proved correct, that inflation was primarily caused by the printing of money by the Federal Reserve and that if this new printing of money could be ceased, inflation would come down and so would interest rates. Stated in its most simple form, you cannot have price inflation of all goods unless there is more money chasing the same goods, unless somebody is printing more money each night. President Reagan realized this, slowed the printing of money dramatically, and inflation and interest rates came down every year for the next 20 years.

Thirty-year fixed-rate mortgage interest rates declined from a high of 16.5 percent in 1981 to just more than 5 percent by 2006. At first blush, this appears to be the explanation for the run-up in housing prices since 1981. If interest rates declined by more than 70 percent, then it would be natural to think that housing prices should more than double because housing is primarily financed mostly with debt. All other things being equal, such a large decline in interest rates would mean that the first-year payment for the home buyer on a fixed-rate 30-year mortgage would be dramatically lower and the potential home buyer could afford to pay much more for his house.

But looks can be deceiving. Remember, these rates are nominal interest rates. Previously I said that inflation was declining dramatically during this period. As a matter of fact, real interest rates during this period hardly changed at all. Real interest rates have always been constant in the 2 percent to 3 percent range for decades in the past. And if real interest rates don’t change, there is no reason why an asset value like a house or a home should change. Nominal interest rates at 10 percent are what you see in the paper. These rates include expected inflation, say 7 percent, and the underlying real rate of, say 3 percent. The nominal rate is not the real rate because an investor is losing the rate of inflation each year in his purchasing power. The investor’s real return, after accounting for inflation, is only 3 percent in this example. Much more on this later in the chapter.

So from 1981 to 2006 home prices in the United States more than doubled and specific cities in the United States, primarily on the coasts, saw home-price appreciation of more than 400 percent to 500 percent. This appreciation could not be explained by increasing incomes, increasing rents, or increasing construction costs. Similarly, just because nominal interest rates came down, real interest rates changed little during the period so interest rates alone cannot justify the boom in housing prices. Before I describe the real reasons behind the housing boom in prices let’s take a few minutes and debunk some popular theories about what supposedly caused the boom. There were many theories expounded during the boom that were utilized to try to justify the high prices of homes. The chief economist of the National Association of Realtors never saw a house that he thought was overpriced and was proficient at coming up with reasons why the housing boom would continue ad infinitum into the future.

One often-repeated argument as to why high home prices were justified, especially on our coasts, was that there was a scarcity of land in United States. Anybody who has flown in an airplane over the United States would have to laugh at such a proposition. The country is enormous and the great majority of its population lives in metropolitan areas that represent less than 10 percent of the total land mass of America. Experts tried to justify the high prices paid for homes during the boom, so they made two distinct arguments. One argument is that America’s premier cities are unique and cannot be duplicated elsewhere and the second argument says that waterfront properties are unique and scarce and, by definition, cannot be duplicated inland.

There is something certainly unique about living in San Francisco or New York City, but when the housing prices in those cities become tremendously high relative to the national average, people will live elsewhere. And great new cities will grow, sometimes even from the desert. Las Vegas, Miami, Phoenix, and Seattle are all examples of wonderful cities that have grown up almost from nothing in the past 20 years and now rival New York and San Francisco and all the great cities of the world as far as the lifestyle desirability and quality. Although New York is unique, there is no reason the amenities available there cannot be duplicated in other newly formed and rapidly growing metropolises.

The argument that waterfront properties, especially on our coasts, are unique and not reproducible can be summarized in the argument that a coastline is only so long, it cannot be lengthened and once filled with homes, the number of oceanfront properties cannot increase. At first blush, it appears to be a solid argument. But there are two countervailing arguments against it.

First, if the number of homes on the coastline is fixed, how could there be significant price appreciation of those homes over the past 10 years? Didn’t homeowners on the coast 10 years ago know that the coastline was fixed in length? Because the coastline didn’t grow, and the number of properties on the coast didn’t grow, either the price for the homes on that coast were properly fixed 10 years ago by their homeowners or are properly fixed today at a significantly higher level. Both prices can’t be right.

And a stronger argument against the fixed coastline debate can be found in San Diego. In San Diego people realize that development on the coast had reached its maximum, and rather than stopping development, builders decided to build up, rather than out. By building literally hundreds of multistory condominium buildings in and around San Diego, developers demonstrated that there was little difference in value between a 30th-floor condominium overlooking the ocean and a prime property sitting on the beachfront. In San Diego, at the height of the boom, it was typical for a penthouse in some of these multistory condominium buildings to sell for more than $3 to $4 million each—about the same cost to live on the beach in a stand-alone house. It turns out that a good view of the ocean is not restricted to people who happen to have a home directly on the beach.