The Economist has reported that the current house price drop is even nastier than what was seen in the Great Depression. (Now that’s nasty.)

The nuttiness of the housing bubble — and its still unfolding aftermath — has perhaps expressed itself best in California. (And really, could it have been any other state?)

The LA Times captures the new zeitgeist with news of an Escondido developer’s “two-for-one” offering. Buy One, Get One Free. Seriously.

Maybe this is just a publicity stunt… It doesn’t feel like it, though. Why would a builder want to embarrass himself like that for the sake of a laugh.

Where could this trend lead to, one wonders. Perhaps we’ll start to see real estate advertised on those little food signs above the gas pump.

Along with your 32-ounce drink and your jumbo hot dog, get an additional 10% off your next faux-Colonial McMansion with every 10 gallons of gas.

Or maybe we’ll see the builders adopt the “Crazy Eddie” electronics-and-mattresses personas of vintage ‘80s television. “Everything must go!”

The Starbucks Test

When the boom was ramping up a full head of steam, you could walk into a Starbucks and hear would-be players talking about real estate deals and happy couples going over renovation plans.

Now the inverse of that — which we aren’t quite seeing yet — is just around the corner. It’s only a matter of time before the corner Starbucks is filled with fuming ex-wheeler dealers. “Just get me out! I don’t care what the price is — just get me the $@#$@# out!”

In the stock market this is a process known as “capitulation.” We haven’t yet seen true capitulation in the housing market. Or at least not here in Nevada, home to one of the highest rates of foreclosures in the country. Sales signs are popping up everywhere, yet average prices have merely notched down from extremely insane to moderately insane. Prices are still far from cheap, even in relative terms. When sellers throw in the towel, that could change.

A Ways to Go

Because the pain of the housing bust isn’t done, nor is the Fed.

Thoughts that the Fed is done stimulating the economy — and that interest rates will soon be going up — are seriously premature.

The Fed won’t be done until the massive debt levels worked up in the housing bubble are worked off. The need to stimulate won’t go away until U.S. consumers have gotten back to some form of reasonable financial health. That’s a long, long ways off. Consumer pressures are increasing, not easing.

In light of this, thoughts that the dollar is going to get buoyed this year are far too optimistic. Pundits who expect a quick shift just don’t understand the logic of the bind we’re in.

The logic of the “Austrian endgame” (i.e., the cycle of unwind predicted long ago by Ludwig Von Mises) is this: We’ve loaded up on way too much debt, mainly as a result of the government’s efforts to massage the credit cycle and keep the party going. Piling on that debt was a Faustian bargain. The good times it created laid the groundwork for the bad.

Now the Fed will have to “destroy the economy or destroy the currency,” as Von Mises laid out the choice. It’s the overhang of debt that forces that choice… an overhang that is far from being worked off as of yet.

Talk is Cheap

The reality just described explains why things will have to get worse before they get better. The piper hasn’t been paid in full just yet, and the payments don’t come easy.

As consumers wrestle with $4 a gallon gasoline, mounting debts and shrinking discretionary income, the Fed will have no choice other than to keep running the printing press.

On television and in the newspapers, it’s a game of bait and switch. Bernanke and his governors can talk tough about inflation all they want — but behind the scenes, they have no real options. It’s easy to talk tough because talk is cheap. The hidden imperative is “inflate or die.”

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