News Exhibit Hall

Gulf Daily News vol XXX No. 106 July 4, 2007

Iran firms warned over raising prices

TEHRAN: Iran's president has ordered state firms not to raise the prices of their goods and threatened to punish violators, media reported yesterday, a move critics say will encourage corruption while failing to tackle inflation.

President Mahmoud Ahmadinejad, who came to power in 2005 vowing to share out Iran's oil wealth more fairly, has been criticised for populist policies, such as forcing down interest rates, that critics say are damaging the economy.

The president's pledges of largesse are still well received at regular provincial rallies but, mid-way into his four-year term, many Iranians increasingly grumble about the difficulties of finding work and voice frustation about surging prices.

Unemployment and inflation rates are both in double digits, and pressure is mounting on Iran over its atomic programme, which has so far led to two rounds of UN sanctions. Economists say the measures are deterring foreign and even local investors.

The president, whose government has in the past blamed businesses for falsely inflating prices, ordered state firms to keep prices at levels in March, the end of the last Iranian year, the economic daily Donya-ye Eqtesad reported.

"Those directors of government-affiliated companies who have raised prices without ratification of the (state) economic council should be seriously and legally confronted and results should be announced to the public," the daily quoted the order as saying.

State television, which also carried the order, said violators would be "punished" but did not say how.

Iranian newspapers in recent days have reported price rises in many staple foods, such as dairy products and fruit.

Economists say efforts to push down prices forcibly would probably backfire by creating illegal markets for goods at higher prices, which would in turn feed inflation.

"The president's order is harmful and will create corruption and black markets," said Saeed Laylaz, a former senior official in the previous administration.

Ahmadinejad's government has been accused of fuelling inflation by injecting windfall oil earnings into the economy in a move aimed at helping the poor but which economists say probably is hurting the less well off because of inflation of 17 per cent.

Instead of curbing price rises with higher interest rates, Ahmadinejad ordered a cut in lending rates in state-owned banks to 12pc and 13pc for private banks, another move criticised by economists.

"For two years, we have been saying macro-economic policies leave a lot to be desired which is why we downgraded the rating last year. It is not getting any better," said Richard Fox at Fitch Ratings. Iran was cut to B+ from BB- in April 2006.

Is Housing Too Expensive? Blame the Government
Maybe zoning laws are causing the real-estate bubble.
By Steven E. Landsburg
Posted Friday, July 29, 2005, at 3:40 AM PT

http://slate.msn.com/toolbar.aspx?action=read&id=2123590

Steven Landsburg - Economics Department - University of Rochester

Economics Department Faculty. Steven Landsburg. Adjunct Associate Professor Office: Harkness 225 Phone: (585) 275-4971 Email: steven@landsburg.com ...
www.econ.rochester.edu/Faculty/Landsburg.html - 6k - Jul 30, 2005 - Cached - Similar pages

Elementary economics tells you that in a competitive environment, the price of a new house should equal:

the price of land + construction costs + a reasonable profit for the developer

But in most cities, that sum is not even close to what buyers are paying.

Take Dallas, for example. If you live in central Dallas, and if you could magically add a quarter of an acre to your lot size, you'd add (on average) about $2,200 to the value of your house. (We know this from comparisons of similar houses on different-sized lots.) Do the same in central Philadelphia, and your house value increases by $8,400; in central Houston, it's more like $17,600. In that sense, central Dallas land is just about the cheapest urban land you can find in this country. Among large cities, only Atlanta, Boston, and St. Louis rank lower. In theory, that should be great news for Dallas housing prices. But it's not. A house that costs $100,000 to build typically sells for $140,000 in Dallas, maybe $120,000 in Houston, and under $90,000 in Philadelphia.

Aha! say the commentators. Housing prices must be driven by something other than fundamentals. Speculators, of either the rational or the irrational variety, are the obvious culprits.

Here's what's wrong with that analysis: Housing prices have to make sense on both the demand side and the supply side. No matter what you do or don't believe about the ability of crazed demanders to bid up prices, you still have to explain why competitive suppliers don't bid those prices right back down. In other words, if the housing market is so tight that builders are making a fortune, they ought to be flooding the market with new houses—and driving down prices.

In fact, buyers' behavior is relatively easy to explain. Most of the recent explosion in housing prices has been in cities like San Francisco and Santa Barbara—in other words, in really nice places to live. It's not unreasonable to believe that, as Americans grow richer, and as technology makes us more mobile, more and more of us want to move to California. And it's not unreasonable to expect that this trend will continue, so that even a very expensive house in the Bay Area can look like a good investment.

The great mystery is on the supply side. Instead of the traditional formula "housing price equals land price + construction costs + reasonable profit," we seem to be seeing something more like "housing price equals land price + constructions costs plus reasonable profit + mystery component." And, most interestingly, the mystery component varies a lot from city to city.

Even in cities like San Francisco, where there's little room to build and land is consequently dear (on the order of $85,000 per quarter acre, compared with $2,200 for Dallas), you can't use land prices to explain away housing prices. The mystery component in San Francisco housing—that is, the amount left over when you subtract land prices and construction costs from house prices—is the highest in the country.

Edward Glaeser of Harvard and Joe Gyourko of the University of Pennsylvania have computed these mystery components for about two dozen American cities. They speculate that the mystery component is essentially a "zoning tax." That is, zoning and other restrictions put a brake on competitive forces and keep housing prices up. (Read one of their papers here.)

When you buy a house, you're not just paying for the land and construction costs; you're also paying for a building permit and other costs of compliance. You've got to get the permits, pass the zoning and historic preservation boards, ace the environmental impact statement, win over the neighborhood commission, etc. If Glaeser and Gyourko are right, that's the mystery component right there.

It's hard to test this theory directly, because it's hard to get good measures of compliance costs in various cities. But Glaeser and Gyourko did the next best thing: They measured a part of the compliance costs, namely the average length of time for a permit to be granted.

If the theory is correct, that length of time should be a good but imperfect predictor of the mystery component in housing prices. The data largely support this theory. About half of all cities are rated 2 (on a scale of 1 to 5) in terms of how long it takes to get a permit; these are, without exception, the cities with the lowest mystery component in housing prices. Cities rated 3, 4, and 5 all have higher mystery components. (A bit disconcertingly, so do the three cities—Minneapolis, Chicago, and Anaheim—that are rated 1. Peculiar as these exceptions are, there are at least only three of them, and we should expect some anomalies given that Glaeser and Gyourko's measure of zoning costs is rather crude.) You can talk all you want about crazed speculators and bubbles in housing prices, but you still have to explain why competitive forces don't bring prices right back down. According to Glaeser and Gyourko, it's ever-expanding zoning laws that get in the way. If you want to lower prices, that's the bubble you've got to burst.

Steven E. Landsburg is the author, most recently, of Fair Play: What Your Child Can Teach You About Economics, Values, and the Meaning of Life. You can e-mail him at armchair@troi.cc.rochester.edu.

Inflation scare drags U.S. Treasury debt lower

Wednesday 17 August 2005, 2:46pm EST

(Adds comments, updates prices)

NEW YORK, Aug 17 (Reuters) - U.S. Treasury debt prices retreated on Wednesday after a report showing July producer prices grew at double the rate forecast, suggesting the Federal Reserve will keep raising interest rates.

Price gains excluding food and energy, which the central bank monitors closely, grew at four times the rate estimated on Wall Street.

At the very least, the data dampened hopes that the Fed might take a break from tightening monetary policy at one of its next three meetings.

"It raises the probability that the Fed will not pause this year. They may play it safe and remain in play in 2006," said Anthony Chan, senior economist at J.P. Morgan Asset Management.

Reacting to that likelihood, benchmark 10-year notes fell 15/32 for a yield of 4.27 percent, up from 4.21 percent on Tuesday.

Most forecasters agree that the Fed will raise interest rates for at least another two of its next three policy gatherings this year, and some foresee a continuation of tightening well into 2006.

The central bank raised its target federal funds rate for the tenth straight time last week, bringing it to 3.50 percent.

A retreat in oil prices below $64 a barrel also weighed on government debt and boosted stock , although most investors expected that trend to reverse.

The bond market's concern over the PPI surprise was alleviated somewhat by a contained reading on core consumer price data reported on Tuesday. The CPI data provided somewhat of a buffer, preventing heftier losses.

Two-year notes dropped 2/32 to yield 4.05 percent, up from 4.00 percent.

Five-year notes were down 8/32 to yield 4.14 percent, up from 4.08 percent, while the 30-year bond dropped 29/32 for a yield of 4.48 percent.

Treasury yields had spiked to four-month highs last week as signs that growth was picking up even as inflation stayed contained, sparking talk of a "Goldilocks" economic scenario.

But that picture has started to unravel in the last few sessions, with data from the retail sector falling short of expectations and many worrying that heavily indebted U.S. consumers might be starting to falter.

One major obstacle to solid economic growth is the oil sector, where new record highs have become an almost weekly occurrence.

The price of a barrel of crude touched $67 last week, and many analysts fear the economy cannot sustain such a drain on consumers' disposable income from energy costs.

WHAT DISCOUNTS?

Energy was certainly to blame for much of the out-sized increase in the PPI. Soaring oil costs pushed U.S. producer prices up 1.0 percent last month, when analysts had been looking for a 0.5 percent gain.

Excluding food and energy, core prices jumped 0.4 percent, much more than the muted 0.1 percent uptick investors had expected.

"It's not so much the inflation rate to date that is concerning the Fed, it's the underlying inflation pressures and what that might mean for future inflation," noted Josh Stiles, senior bond strategist at IDEAglobal.

But the big surprise came from the auto sector, where much-advertised employee discounts were expected to slash, not lift, prices.

Instead, the report showed a 1.5 percent increase in car prices and a 1.4 percent rise in prices for light trucks and SUVs. Stripping out car and light truck prices, core PPI rose just 0.2 percent last month.

"It may be that the actual discount was much less than what manufacturers were offering, with certain other incentives taken away," said Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co.

Adds closing market quotes, July producer price forecast, background)

By Glenn Somerville

WASHINGTON, Aug 16 (Reuters) - Surging energy costs drove U.S. consumer prices up 0.5 percent in July, the sharpest rise in three months, but aside from energy inflation pressures remained muted, the Labor Department reported on Tuesday.

There are signs that energy is pushing harder on household budgets, with the latest government survey showing average retail gasoline prices at a record $2.55 a gallon and a growing number of airlines raising their fares.

Stocks felt the chill of rising oil prices, giving ground as giant retailer Wal-Mart Stores Inc. noted that consumer spending power was being pinched at the gas pumps.

In a separate report on Tuesday, the Commerce Department said ground-breaking on new homes dipped slightly in July while the Federal Reserve said industrial output barely increased as hurricanes interrupted production at some mines.

The Consumer Price Index, the most widely used gauge of inflation pressures, climbed 0.5 percent last month after an unchanged reading in June.

It was the biggest monthly rise in consumer prices since a matching 0.5 percent jump in April. But so-called core inflation, which strips out volatile food and energy items, inched up just 0.1 percent for a third straight month -- less than the 0.2 percent climb economists had anticipated.

Over the past 12 months, this closely watched measure of consumer prices has risen a moderate 2.1 percent.

"There is still no inflation out there," said economist David Wyss of Standard and Poor's Ratings Service in New York.

"The only inflation out there is energy," he said, adding that this implied the Federal Reserve can stick with its strategy of small, measured interest-rate rises to keep prices in check and allow the economy to keep growing.

But energy costs are pressing. Leading U.S. carrier American Airlines announced on Tuesday that it had raised its surcharges by $10 each way on most international flights to offset record jet fuel prices.

The Labor Department is scheduled to issue its July Producer Price Index, which measures wholesale prices, on Wednesday morning at 8:30 a.m. EDT (1230 GMT). The median estimate of economists are that it too will pop up by 0.5 percent after being flat in June. However, aside from energy, the gain should be a restrained 0.1 percent.

The Fed has nudged interest rates up in 10 successive quarter percentage point stages since June 2004, lifting the official federal funds rate to a four-year high 3.5 percent.

Still, although the housing starts reports showed a slip in overall starts last month, it was not enough to imply any significant softening in the vital housing sector.

July housing starts eased 0.1 percent to a 2.042 million unit annual rate, down from June's revised 2.045 million unit pace. But single-family home starts rose 0.5 percent to a 1.711 million unit pace, partly offsetting a 3.2 percent decline in multifamily housing starts, which held a 331,000 unit clip.

In a third report, the Fed said industrial production increased a moderate 0.1 percent in July after a much stronger 0.8 percent rise in June. Bad weather played a role, helping to push mining output down by 1.3 percent.

Financial markets participants struggled to reconcile all the data. Stocks suffered as oil prices topped $66 a barrel and political tensions over Iran's nuclear program heightened.

The Dow Jones industrial average fell 120.93 points, or 1.14 percent, to end at 10,513.45 while the tech-laced Nasdaq Composite Index dropped 29.98 points, or 1.38 percent, to close at 2,137.06.

But prices for U.S. Treasury debt securities were broadly higher on the indication that core inflation was steady and the dollar's value climbed against the euro.

The 30-year bond added 31/32s of a point while its yield, which moves in the opposite direction to prices, fell 4.42 percent from 4.48 percent on Monday. Five-year Treasury notes climbed 12/32s to yield 4.08 percent from 4.17 percent.

Most economists said the reports would add to the Fed's determination to keep raising interest rates in hopes of keeping inflation bottled up and possibly letting some air out of a sizzling housing market, where some fear that prices may be at "bubble" levels.

"Add the housing market to the list of reasons that makes it likely the Fed will raise interest rates the rest of this year," predicted Joel Naroff of Naroff Economic Advisors in Holland, Pa.

Energy prices rose 3.8 percent in July, a sharp reversal from declines of 0.5 percent in June and 2 percent in May. Gasoline prices jumped 6.1 percent. Oil and gas prices have been plumbing uncharted territory in recent weeks and show little sign of letting up.

Food prices edged up 0.2 percent after a 0.1 percent gain in June.

Apparel costs and new motor vehicle prices both logged big declines, with clothing's 0.9 percent drop the biggest since April 2001 and the 1.0 percent slide in new motor vehicle prices the largest since January 1975. Automotive costs have been driven lower by manufacturer price deals.

Separate industry reports showed a softening in sales at retailers and constituted a potentially worrying sign about the important back-to-school shopping season.

Expert Marin Boat-Namer Instantly Becomes Multi-Billionaire

June 27 - Tiburon

If you've spent much time on the Sausalito side of the Bay, at Ayala Cove, or the dock at Sam's Anchor Cafe in Tiburon on Sundays, you've no doubt seen a loud and obnoxiously-operated red cigarette-type boat roaring around, often with topless women. Although we've often been embarrassed to admit it, we're good friends with the owner, Richard 'Rick' Parasol of Tiburon, because we've belonged to the same swim club for 25 years. In addition, we've often talked boats, because in the '90s he bought a ketch and cruised her - with topless women - round the Caribbean. She was ultimately lost in a hurricane.

When we asked Rick how he came to name his boat Rude, he laughed. "I showed it to my daughter Ruth one day, and she said, 'Dad, that's so disgusting, it's rude.'" Far from being insulted - Rick loves attention, no matter if it's good or bad - that's what he named his boat. And Rick operated the thing true to her name.

The name Ruth Parasol may ring a bell, because today she became the wealthiest working woman in the world, as PartyGaming PLC, the company she owns 40% of with her husband, just went public on the London Stock Exchange for $8.48 billion. Yes, billion!

Thirty-eight-year-old Ruth and her husband's share of that IPO was $3.3 billion - before the stock jumped 10% in early trading. To give you an idea of the money we're talking about, PartyGaming is now worth more than British Airways. As for Ruth Parasol, she's the wealthiest working woman in the world. Number two is Doris Fisher of The Gap - who at 1.5 billion is worth less than half of Parasol. As for Oprah Winfrey, you may see her face everywhere, and she may give cars to her entire audience, but she's small change at somewhere under a billion.

What makes it all very interesting is that the U.S. government had said that PartyGaming PLC is in violation of three federal statutes: the Interstate Wire Act, the Illegal Gambling Business Act, and the Travel Act - because online gambling is illegal in the U.S., and because 90% of PartyGaming's revenue comes from U.S. residents. As such, all the principles are subject to arrest and imprisonment. That's why the company isn't traded on any of the exchanges in New York, and one of the reasons Ruth is living in Gibraltar. Another is that taxes are low. This threat from the U.S. government made estimates of PartyGaming's IPO as low as $5 billion just two weeks ago, but investors obviously didn't ultimately care.

As for 'Rick Rude', as he's known to us, he apparently doesn't have any stock in the company. His daughter had worked for and with him for several years, then they had a bitter falling out over business. Rick told us they reconciled, but perhaps not to the point of being business partners again.

According to the newspapers in the U.S. and England, Rick made all his money in massage parlors in San Francisco, and later on Internet sex sites. But that's not true. Rick says he just owns a building in which there is a massage parlor, and that his and Ruth's company didn't do the sex sites, they just did the billing for them. But in the 20 or more years that we've known Rick, he's always been affluent. We know he started out making a lot of money developing apartment houses for HUD, and still owns at least one big one.

In fact, while Rick can be rude and crude, he does have a heart of gold. He was uncharacteristically down in the dumps one day at the pool, so we asked him why. He explained that he has a 200-unit or so apartment house in the South Bay with working class tenants. He said he was upset because the other person in the deal wanted to raise the rents just because they could. "We've got all these tenants busting their asses in low wage jobs just trying to pay their rent," he moaned, "and this other person wants us to squeeze another $250,000 a year out of them. It makes me sick." This was about five years ago.

Parasol spent last summer in the Med, cruising around on a 90-ft motoryacht he'd just bought - with topless women, of course - and on a jet he'd also just bought. In addition to loving women and boats, Rick's always loved and owned planes.

We haven't seen Rick in about a month, and at that time he was recovering from an infection contracted during a knee operation. The infection had nearly killed him. As for Rude, she's no longer berthed at Schoonmaker - much to the delight of many of her more quiet neighbors.

John M. Berry is a columnist for Bloomberg News. The opinions expressed are his own.

It's Time to Drop the Home Mortgage Deduction: John M. Berry

May 19 (Bloomberg) -- With the federal government strapped for revenue, household saving from current income at a record low and too much money flowing into housing rather than productive business investments, it's time to scrap the personal income tax deduction for home mortgage-interest payments.

Yes, homeownership is widely regarded as the centerpiece of the American Dream, as those full-page ads from Fannie Mae constantly remind us. The reality is that being able to deduct mortgage interest payments has far more to do with driving up the price of large, expensive homes than with promoting home ownership.

For instance, almost 70 percent of U.S. households now own their homes and less than 30 percent of taxpayers claim the mortgage-interest deduction. In other words, a substantial majority of homeowners don't claim it.

Low mortgage interest rates are far more important than the deduction in making housing affordable. And while those rates undoubtedly will rise from their current very low level, the vast increase in competition among lenders in the mortgage market and the Federal Reserve's determination to keep inflation low should prevent mortgage rates from increasing to the high levels of the 1980s and early '90s.

Increasing Federal Revenue

As for the impact on the federal budget, just limiting the size of a mortgage on which interest can be deducted to $500,000 instead of the current $1 million cap would raise $48 billion over the next 10 years, according to a Congressional Budget Office estimate.

If the total deduction were eliminated, federal revenue would increase by hundreds of billions of dollars over a decade. If Congress and the president could restrain themselves from spending the extra revenue, the budget deficit would fall and national saving would rise. That in turn would smooth the inevitable reduction in the huge U.S. current account deficit, which has reached an unsustainable 6 percent of GDP.

Without the deduction, some homeowners likely would be less apt to take out home equity loans to support their spending habits. Just this week federal banking regulators cautioned financial institutions that they were encouraging excessive borrowing -- and taking on too much risk themselves -- by extending credit without adequate attention to whether such loans could be repaid.

Furthermore, economists have argued for years that, as a nation, we over-invest in housing and under-invest in business structures, equipment and software. While growth of productivity has been exceptionally high in recent years, more business investment could help keep that growth high in the long term.

Housing Subsidies

The over-investment is made worse, of course, by all the government subsidies for housing. Aside from the mortgage interest deduction, which reduced federal revenue by $61.5 billion last year, according to the Office of Management and Budget, that much or more was lost due to the deduction for state and local property taxes, capital gains tax exclusions when homes are sold and other income tax provisions.

Eliminating the mortgage-interest deduction wouldn't boost revenue by the entire $61.5 billion because of interaction with other parts of the tax code. For example, some taxpayers who now itemize the deductions would instead claim the standard deduction, which this year is $10,000 for a couple filing a joint return. At the same time, the availability of the standard deduction would limit the amount of additional tax many lower-income households would have to pay if the mortgage-interest deduction were eliminated.

Closing Tax Shelter

Economist William Gale of the Brookings Institution is all in favor of eliminating the mortgage-interest deduction, which he said in an interview is a very ineffective way of supporting home ownership.

Repeal of the deduction, Gale said, would ``adjust part of the government's fiscal problem, adjust part of the capital misallocation problem and close a tax shelter.''

For many higher-income taxpayers, the deduction is indeed a tax shelter. So are the deduction for property taxes, the break on capital gains and the untaxed income -- in the form of housing services -- that a homeowner receives on his equity investment. A landlord, with a similar investment, has to pay tax on rental income minus expenses.

Altogether, the benefits from those tax breaks are wildly skewed according to income levels and where taxpayers live. In general, higher-income households that can easily afford to own a house without such subsidies get the bulk of the benefits.

Last year the National Bureau of Economic Research published a paper by two Wharton School economists, Todd Sinai and Joseph Gyourko, who used data for the U.S. 2000 Census and other sources to compute the subsidy per owner-occupied unit in each state in 1999.

Unevenness Soars

That subsidy ranged from a low of $2,240 in North Dakota to $12,759 in Hawaii. Among metropolitan areas the disparity was much greater: $26,385 in San Francisco-San Mateo-Redwood City, California, and a scant $1,541 in McAllen-Edinburg-Pharr along Texas's Mexican border. Some East Coast areas also had huge subsidies and many in states such as Tennessee, Ohio and Louisiana got little benefit.

Given what has happened to home prices on the two coasts since 1999, the unevenness of the value of the combined tax breaks has soared.

It's clear from the Wharton economists' study that the extremely rapid rise in home prices in some high-income markets and the subsidies, including the mortgage-interest deduction, feed on one another. Certainly the existence of the deduction encourages purchase of larger, more expensive homes.

Eliminating the deduction probably would help cool off the overheated housing markets in some parts of the country, and in some areas home values could well decline. While that would lower the net worth of some households, it undoubtedly would also encourage them to save more out of current income. That would represent another increment to national saving and take another bite out of the current-account deficit.

Moreover, there is no reason that home prices would not continue to rise over time as personal incomes gradually grow.

In Britain

That certainly has been the case in Britain, which dropped its deduction about five years ago. Over the past two or three years, home prices have skyrocketed there even without the deduction.

Australia has also enjoyed a housing boom without the benefit of a mortgage-interest deduction. In Canada, which also has no mortgage-interest deduction, residential construction rose 14 percent last year, the sixth record year in a row, even though home prices rose a moderate 5 percent or so.

So there's plenty of evidence that you can have a healthy housing sector without a mortgage-interest deduction and that you can get rid of such a deduction without disaster striking.

President George W. Bush's tax-reform commission ought to think hard about that as they decide what to recommend later this year. Bush's charge to the commission ruled out taking away the deduction.

Nevertheless, former Republican Senator Connie Mack said it is being considered as one of the ways to offset revenue lost if the alternative minimum tax were repealed, according to USA Today.

To contact
                           the writer of this column:
                           John M. Berry in Washington at  jberry5@bloomberg.net.

Last Updated: May 19, 2005 00:09 EDT

(http://www.howestreet.com/story.php?ArticleId=1176)

May 3 2005

The Oracle of Omaha

The Daily Reckoning

London, England

Tuesday, May 03, 2005

Serious consequences for those involved in the real estate mania... coast-to-coast, the real asset-price bubble looms overhead... Eventually, no one will be able to afford the house they live in... what makes a nation rich is saving - not spending... When all is said and done, China's going to come out ahead... where's the beef?... and more!

Residential real estate is in a bubble. Warren Buffett said so.

"A lot of the psychological well-being of the American public comes from how well they've done with their house over the years," said the Sage of the Plains this weekend.

"Certainly, at the high end of the real estate market in some areas, you've seen extraordinary movement... People go crazy in economics periodically, in all kinds of ways. Residential housing has different behavioral characteristics, simply because people live there. But when you get prices increasing faster than the underlying costs, sometimes there can be pretty serious consequences."

"I recently sold a house in Laguna for $3.5 million. It was on about 2,000 square feet of land, maybe a twentieth of an acre, and the house might cost about $500,000 if you wanted to replace it. So the land sold for something like $60 million an acre."

"You have a real asset-price bubble in parts of California and the suburbs of Washington, D.C.," added Charlie Munger.

"I know someone who lives next door to what you would actually call a fairly modest house that just sold for $17 million. There are some very extreme housing price bubbles going on."

Our old friend, Scott Burns, describes California as the "tulip state," where people live in "working stiff houses with fat-cat price tags." He described one modest bungalow that looked like it might be worth $150,000. Nope. Try $900,000, said a neighbor.

Few people in the state can afford to buy the houses they live in, says Scott.

But if they can't, who could? The answer: no one. One of four houses is bought as an "investment." Of course, it's not an investment at all. It's a pure speculation, a gamble that a greater fool will come along with even more money and an even bigger imagination. And maybe he will.

Even the houses bought to live in are often more than the new owners can really afford. They're gambling too...expecting that they can sell whenever they want at a profit. Hardly anyone buys a house expecting to pay for it and pass it on to his heirs. Instead, the house is actively managed - as if it were a stock portfolio...or a sailboat. When interest rates dip, new credit is unfurled...the house is refinanced at a lower rate, often "taking out" a little cash to spend. If rates seem to be going down, even more sailcloth is hoisted...an adjustable rate is selected to catch the favorable wind.

What if rates rise? What if the weather turns bad? We don't know what will happen...but we urge readers to watch from dry land.

Bill Bonner, with more opinions on various matters:

*** The price of gold fell $5.60 yesterday, to $430.50. The ratio of gold, to gold mining stock prices is unusually high. We assume it is mean reverting, like everything else on the planet. Either the price of gold will fall, or the price of gold mining stocks will go up. Our guess - for what it's worth - is that the mining stocks will move up.

*** In the United States, household consumption is 71% of GDP. People think they are getting richer because they have money to spend - borrowed money. But what makes a person (or a nation) rich is not spending - it's NOT spending. We wouldn't think it necessary to say so except that so many people still seem to believe the opposite. They see the GDP numbers as signs of a "healthy, growing" economy. But what is growing in the United States is the very thing that makes the economy unhealthy - consumption. For every dollar of product that the U.S. sells abroad, it buys $1.60 worth of imported items, almost all of it consumer goods.

China, as we all know, is on the opposite side of the planet. Over there, people make the things that we buy and don't buy the things we make. American households are rich and buy a lot. Chinese households are poor and buy little. Americans save little; the Chinese save a lot. Only 42% of Chinese GDP is domestic consumption. Another 35% is devoted to exports. And nearly half of all the money spent in China, according to Stephen Roach, is for fixed investment. (This number seems impossibly large...)

Both economies are preposterously imbalanced. Both will probably fall down and break apart. But when the pieces are picked up, the Chinese will find themselves with the ability to produce wealth - things that people are willing to buy. America will find itself with less money to buy them with...and fewer people willing to provide credit.

Inquiry on School Attack May Include 20 Students

By MONICA DAVEY

Published: April 3, 2005

As many as 20 young people may have known something in advance about plans for the deadly shootings inside a Minnesota high school last month, a police officer from the Red Lake Indian Reservation has told school officials.

The officer, Capt. Dewayne Dow of the tribal police, made the comments during a school board meeting on Friday, as he argued that school officials should delay sending students back to class, Sherri May, the secretary for the school board, said in an interview yesterday.

"He said that the investigation was continuing, but that there might be the possibility that as many as 20 kids knew something," Ms. May said. Newspapers including The Washington Post and The Pioneer Press of St. Paul reported Captain Dow's comments yesterday. Telephone calls to Captain Dow were not immediately returned yesterday.

So far, only one person has been arrested in the March 21 rampage at Red Lake High School, the nation's deadliest school shooting since the one at Columbine High School in Colorado in 1999.

The authorities say Jeff Weise, 16, shot and killed his grandfather and his grandfather's companion at their home before driving to the high school and fatally shooting a security guard, a teacher, five students and finally himself.

Last weekend, law enforcement officers arrested Louis Jourdain, the 16-year-old son of the Red Lake's tribal chairman and a friend of Mr. Weise, accusing him of conspiracy in the plan. Officials are still trying to determine whether Mr. Jourdain should face charges as a juvenile or an adult.

Since Mr. Jourdain's arrest, agents from the Federal Bureau of Investigation have been considering the possibility that others might have been involved in the plan or might have, at a minimum, heard about Mr. Weise's plan before the shooting began. Last week, agents interviewed friends and acquaintances of Mr. Weise at length, and examined the records stored inside numerous computers on the reservation, including e-mail messages to and from Mr. Weise.

But Chris Dunshee, the principal of Red Lake High School, said he had doubts that the number of students aware of Mr. Weise's plan could actually reach as high as 20 once the investigation is finished.

"There's no doubt that's the rumor, but I really don't think that's going to be substantiated," Mr. Dunshee said, adding, "Let's put it this way: I would be very surprised if that many knew."

He said, "I think that the concern is that closer to five or six people may have known something."

A government official who has been briefed on the investigation but has asked not to be identified discussing a juvenile case said the F.B.I. believed that "several" students were aware of at least some aspects of the plan before the shootings took place. But, the official said, investigators and prosecutors were still trying to determine whether any of them knew enough to be charged with crimes in connection to the shootings. The official said it was unclear how many might ultimately be determined to have had some knowledge.

Yesterday, as Red Lake held its 10th funeral, for the last victim - Dwayne Lewis, 15 - parents and students still were not certain when school would resume. Some parents have argued that school should start again as soon as possible so their children can begin to feel normal again. Others, though, say their children will be too afraid to return.

http://www.nytimes.com/2005/04/03/national/03shoot.html

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