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That’s a phrase often used to justify why any type of extraordinary public delusion or madness of crowd behavior will continue forever. It is also a red flag for experienced “Bubble Sitters”. Bubble Sitters, people sitting on the sideline waiting to profit after a bubble has popped, know that when that phrase gets pulled out of storage, the countdown has begun However, from my point of view, I do believe that, this time it IS different. Because the type of money used to fuel the housing mania is in fact, different from money used to finance previous manias. To explore this thought, let’s jump back in time to the last speculative mania, the Nasdaq/Internet/Technology bubble. Recall the 1990s, when the speculators and the general public were busy purchasing any technology stock or any hot IPO from any company that placed a dot com at the end of their name. Everyone was going to be rich, remember? But consider this question, what was the public using to purchase the stocks? Savings. A person had to have money before they could to purchase stocks. Remember that concept? Most of the public can only buy stocks with money that they have, money that they have saved. Even though, some more astute individuals do know how to use margin to buy stocks, they’re always forced to sell their holdings if the price of the stock drops below a certain point. Consequently, margin investors are forced to take their losses immediately. Everyone, including the public, knew immediately how much money they had lost if the price declined. Even if the public’s retirement money was used to make the investments, they knew that they had lost their savings within each quarter by the statements they would receive in the mail. While it was painful when the end came, everyone knew that they had lost their savings. Now, jump back to present day and what do we find in the current speculative mania. Everyone is participating in the housing/credit bubble, not with their savings, but with borrowed money. That is what makes this mania different. Using borrowed money, instead of savings to participate in the housing/credit bubble makes the coming bust exponentially worse. Even during the height of the Nasdaq/Internet/Technology bubble, very few individuals had $250,000 of their savings invested in technology stocks. However, millions of individuals DO have that much money borrowed for their house purchases. While losing ten, twenty or thirty thousand dollars in the Nasdaq/Internet/Technology bubble may have given the public heart burn, losing $250,000 of borrowed money would have caused complete physical and mental breakdowns, the kind that cause people to jump out of windows. While the public may think that this is ultimately the bank’s problem, the reality of the situation is that the new bankruptcy law in fact makes this the public’s problem. Recall that the new law will force most people who file bankruptcy into Chapter 13 instead of Chapter 7. Another reason I believe that this time is different, is the fact that the public may not realize immediately that they have lost the borrowed money. House prices may decline slowly or people may feel that as long as they can make their mortgage payment each month there is no real crises. They may believe that they can simply refinance or some may still think that they can simply sell the house if they lose their jobs, get a divorce or cannot make the payments. Add to this the psychological characteristic of denial and we find that it could be years before it dawns on the public that they actually have to pay back the borrowed money they have lost. Unfortunately, for millions of people, by that time it will be too late to do anything but get a second job and spend the next 20 years paying back the bank. When the public realizes that they will not be allowed to simply throw the house keys at the bank and walk away, a deep silence will overtake them. “What does this mean?” the public will ask. “It means that you must repay.” the banks will say. “But the house is no longer worth $250,000.” the public will say. “You still must repay.” the banks will say. Another deep silence will overtake them. This time it IS different.
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