Social epidemics are something to marvel at. You have bellbottoms in the 1970s and multicolored shorts in the 1980s. Sometimes you look back and wonder, “how in the world did I ever think that was a smart thing to do?” Things ebb and flow and hindsight has Lasik precession of showing us past mistakes with uncanny clarity. In this article, we are going to discuss an incident that occurred in the late 1930s that many of you are probably unaware of. The incident, if it weren’t so telling of how people think in moments of panic and hysteria, is rather humorous. Almost as funny as people giving out $720,000 loans to farm workers that make $14,000 a year or a 102 year old man being able to get a 25 year mortgage. During this fragile time, a feeling of insecurity and sense that the world was coming apart at the seams was taking hold of the American psyche. The collapse of the Coolidge prosperity and the subsequent Great Depression left many Americans skeptical about any so-called recoveries. These feeling hit a feverish pitch during the height of the depression during the early 1930s and slowly dissipated as the economy recovered. But as international conflict was taking the main stage and a subsequent recession brought out the demons of the depression, the attack on the American nerves was high. This feeling was not alleviated by the Munich crisis of September 1938 and the aggression sweeping Europe and Asia.

So clearly the country was sensitive at this point. It is not evident whether this singular incident was caused by the tension, innate fears of insecurity, or a combination of both. Here is what happened:

“On the evening of Sunday, October 30, 1938 – a month after the Munich – Orson Welles of the Mercury Theatre gave, over the Columbia Broadcasting System, a scheduled radio dramatization of an old fantasy by H.G. Wells, The War of the Worlds. To make it vivid, he arranged it to simulate a current news broadcast. After an announcer had clearly explained the nature of the program, a voice gave a prosaic weather forecast; then another voice said that the program would be continued from a hotel, with dance music; shortly this music was interrupted by a “flash” to the effect that a professor at “Mount Jennings Observatory,” Chicago, reported seeing explosions at regular intervals on the planted Mars; then the listeners were “returned” in orthodox fashion “to the music of Ramon Raquello…a tune that never loses favor, the popular ‘Star Dust’”; then came an interview with an imaginary Princeton professor, with more information about disturbances on Mars – whereupon a series of further “news bulletins” described the arrival of Martians in huge metal cylinders which landed in New Jersey. The broadcast gathered speed, bulleting following bulletin. More Martians landed – an army of them, which quickly defeated the New Jersey State Militia. Presently the Martina attack was vividly described as being general all over the United States, with the population of New York evacuating the city and Martian heat-rays and flame-throwers and other diabolical devices causing terrific destruction, till all was laid to waste.”

Most people using common sense and the faculties of reason would realize that this was merely a dramatic show (the announcer had already presented this caveat) and figure for themselves that it was for entertainment purposes. Again, I’m reminded of some talking head cable stations that fling semi-truths at their audiences and viewers gobble up the information as factual and translate it to actions in the real world. We have a media, that is funded through advertising, serving as a vehicle to deliver propaganda regarding certain companies and economical issues when in fact, they are not economist or have any qualifications to accurately discuss financial decisions that will impact your life. But they do and speak with authority over it. So what happened after the broadcast in the 1930s while “Martians” were devouring the Northeast of the United States?

“All over the country, people called up newspapers or police in wild panic to find out what to do. (The New York Times alone receieved 875 calls; the Associated Press had to send out an explanatory bulletin to its member papers.”) In many communities terror-striken people rushed out of their houses and milled about in the streets, not quite sure whether they were being attacked by Martians or by Germans, but sure that destruction was on the way and they must flee somewhere. In Newark, New Jersey, several families convinced that a “gas attack” had begun, put wet clothes on their faces and tried to pack all their belongings in a car; the traffic was jammed for blocks around. A woman in Pittsburgh prepared to take poison, crying, ‘I’d rather die this way than that!” A woman in Indianapolis rushed into a church screaming, “New York destroyed; it’s the end of the world. You might as well go home to die. I just heard it on the radio,” and the church service came to a hurried end. When a church service in New Jersey was similarly interrupted, the congregation prayed for deliverance from catastrophe. A man in the Bronx section of New York saw “the smoke from the bombs” drifting over the city. In a town in the State of Washington the electric-light service was interrupted during the broadcast, convincing listeners that the terror was close at hand, and women fainted.”

*Source: Since Yesterday: The 1930s in America published in 1939

Even if 1 person out of 20 took what was said at face value, it created enough reverberations throughout the country to serve as an example of mass hysteria. What has occurred in the housing bubble is a low-grade mass hysteria. When media outlets are packaged as financial experts, it can easily be assumed that a certain percentage of people will swallow the blue pill and never ask questions of what the pill will do once it is digested. Many people sunk into loans they had no idea about. In March of 2007 a survey conducted by GFK Roper found that 34 percent of homeowners with a mortgage had no idea what kind of mortgage it was. When adjustable mortgages were only a small niche market, they now compose 1 out of every 4 mortgages. What do you expect when a large percent of the population doesn’t even know what kind of mortgage they have? We might as well argue that the Martians are destroying the credit markets and run a poll and we will find double-digit percents of people thinking it is true.

War of the Housing Worlds

This case study is an example of not asking the right questions. If anything this housing market has as much to do with human nature and mass psychology as it does with actual economics and market fundamentals. There is now an economic war in the housing industry. What can be done to ameliorate a decade long binge on credit and living beyond our means? Any good debt counselor will tell you that the first thing you need to do is cut up all your credit cards. Well we are at the point in the housing road where we have to decide if products such as sub-prime loans need to be “cut up” and never allowed in the market ever again. Those in the housing complex would argue that sub-prime has a niche and most folks will use them for financially prudent ends. Well as the case in mass hysteria shows, not everyone is going to use certain information in a logical way. In fact, a large percentage will not especially when you have lenders pushing people into riskier loans that have higher kickbacks. This is another way to fix the industry; legislation is now trying to stop brokers from steering people into certain loans. This is a good start. If anything, before this mess is over we will return to localized lending in a few years and doing things as they were once done. Local lenders having a piece of the action and understanding the market dynamics of their respective areas and having a piece of their own financial skin in the game. How is a foreign lender going to know what is happening in Santa Ana California, Fort Meyers Florida, or Portland Oregon?

Orson Welles

Orson Welles as many of you know is an Academy-Award winning actor and as such, is a very convincing person. In fact, what transpired with this incident at CBS should go on his resume “ability to convince a large percentage of people that Martians with ray guns are invading the United States.” Another major issue that occurred is we have media outlets not disclosing their financial backers. We will never have complete transparency but when you have certain acclaimed news stations passing on wrong economic advise as dogma, it is inevitable that you will create a culture that believes what you are saying in a cult like fashion. Television is a form of education for the large part of society. The Census Bureau estimates that only 25 percent of the American population carries a bachelor’s degree. Is it a requisite to have a college degree to be successful? Absolutely not. Look at pro-sports and you’ll see that this isn’t the case. However, the statistics paint a different picture. There is a study showing that 80 percent of millionaires in the United States do hold a college degree. But the importance of having an eclectic educational background is that you have the ability to question authority and think for yourself. I have friends that have English and Science backgrounds asking me even years ago, “it doesn’t make sense what is happening in housing but why are financial professionals saying this is a new housing era?” There gut instinct was right and many stayed out and fortunately for them they didn’t jump into a banana republic loan for $600,000 so they can have a 1,000 square foot home. These were not financial experts.

Mass Media

I’m not big on government regulating our entire lives. However, looking at the rampant greed and corruption that occurred in the housing market I’m convinced that we need to axe certain products. What we will be hearing about in the next year, I am convinced, is talk about Fannie Mae and Freddie Mac. These government sponsored entities have the implicit blessing of a government bailout if all things go south. This has never been tested but we may get our trial by fire soon. Just so you are aware, there is still another $350 to $400 billion of loan resets hitting in 2008. In fact, March of 2008 is going to be the peak month but again all we hear from mainstream media outlets is “it may get worse” or “this is the bottom.” How useful is that information? If the public had an idea of the money, corruption, and greed that has occurred in the vast part of the housing industry over the past few years they’d be fuming and they would get out their ray guns. With all the cases now pending and the housing market heading to its inevitable climax, we will finally open the books of what really occurred in this housing sector and I can assure you, some of the things we will find will look like they came from Mars.

 

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