Best Protection Against Another Housing Bubble May be a Generation's Painful Lessons

The market value of your house is down 20 to 30 percent from its peak and could have further still to go. Jobs are scarce and the idea that home values will rise again seems remote. But this, too, shall pass (yes, your home value will eventually recover). And I can tell you exactly why -- psychology.

The good news is that for all the economic pain and suffering, we've probably just bought ourselves, as a people, 50 years of immunity to economic depression. The bad news is that this immunity has nothing at all to do with house prices, public policy, Bernanke, Dodd, Geithner, or Obama, much less Paulson or Bush. It would have happened anyway.

I'm reminded of a story about Sid Richardson. Back in the 1950s, Richardson, a Texas oilman, was arguably the richest man in the world -- the bachelor uncle of today's ultra-rich Bass Brothers. (You though they made that money all by themselves?) Richardson made his fortune from West Texas crude and he owned a refinery in Midland, Texas. One day, a crane operator working on construction at the refinery swung the boom of his crane around and smashed into one of the catalytic cracking towers, knocking the tower clean over. There was a massive oil spill, the kind we'd really worry about today. But this was back in the days when DDT was good and oil spills didn't matter so much. Still, the accident did cause more than $1 million in damage, and since the refinery was self-insured, that million came straight from Sid Richardson's pocket. When the catalytic cracking tower was knocked over, everyone had to come have a look, including Richardson. And when they had all shaken their heads and pointed at the destruction, Richardson finally said it was time to get back to work and he sent the crane operator back up to the cab of his crane.

"You can't send him back to work on that crane!" the refinery manager shouted to Richardson. "The guy can't be trusted."

"Believe me," said Richardson, "he's not going to make that mistake again."

There is a lesson here for all of us, because -- just like that crane operator -- stressful experiences eventually teach the rest of us lessons, too. But unlike that crane operator, it usually takes us three times to figure things out.

That's what Professor Vernon L. Smith (now of George Mason University) learned decades ago in economics experiments conducted at the University of Arizona -- experiments that earned him the 2006 Nobel Prize in Economics. Smith conducted real money experiments with groups of students. In their buying and selling of assets, the students inevitably created asset bubbles that eventually collapsed. Given another try, the same group created a second bubble that also collapsed. But given a third try, the same group consistently showed it had learned its lesson and no more bubbles were created.

Third time is the charm, as my Grandma Pearl liked to say.

And so this three-strikes-and-you're-out (of danger) apparently works in real life. That explains why American savers and investors suffered through the Florida Land Bubble collapse of 1925 followed by the Wall Street stock bubble crash of 1929 and the consequent bank panic of 1933, before that same group assiduously avoided repeating any of those behaviors on a similar scale for the next 50+ years.

In that 50 years, we had bubbles and recessions, but we had no huge bubbles and no depressions.

The Great Depression turned Americans, who had not been savers in the 1920s, into savers for the rest of their lives. But what the Depression gave us, generational transitions and Reaganomics took away. Savings rates began to drop in the late 1980s just as the Gipper was on his way back to Santa Barbara.

What does this means for today? Well, our generation has experienced the 1990s dot-com bubble and its pop, the 2000's housing bubble and its pop, and now the Great Recession. We're in our third time and likely due our own bit of subsequent wisdom as a result.

The irony here, of course, is that while we credit the SEC and FDIC and maybe World War II for saving us from the Great Depression, it may have been that we were simply fed-up. Similarly, whatever Bernanke, Dodd, Geithner, and Obama finally do to reform the current U.S. financial system may matter less to our future prosperity than the painful lessons we've been learning as a people.

It's us, not them.

We'll make the pols look good for a few decades until enough time passes and the cycle of boom and bust starts all over again, as it inevitably will.

But until then, like Sid Richardson's crane operator, our generation -- and only our generation -- has probably learned our lesson: we aren't going to do that again.
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