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Weekly Column

Independence Day: Because we're so much more than just consumers.

Status: [CLOSED] comments (97)
By Robert X. Cringely
bob@cringely.com

My young and lovely wife, showing what might be overoptimism or maybe artful timing given the economy but more likely just general disappointment with me, has decided to embark on a career in real estate sales. She has taken classes and passed tests, joined one of the very best local firms, and hurled herself into the business of selling historic Charleston homes while they still have some value and the termites haven't finished their work. And along the way, while mastering the Multiple Listing Service, she learned an important fact that was news to us both: people no longer find houses for sale by looking in the local newspaper. They use the Internet, instead.

The irony here is that -- at least in these parts -- the local paper seems chock-full of real estate ads. But according to her teachers down at the MLS university, those listings are simply vestigial, like little toes we all have but probably don't need for balance or, indeed, for anything at all. Real estate brokers put ads in local newspapers because their customers expect them to do so, not because they actually help sell houses.

I'm sure there are exceptions to this rule, but if 80 percent of all houses for sale in the U.S. are eventually sold NOT because of any newspaper listing, tradition or professional pride aside, at some point we can expect real estate newspaper advertising to eventually disappear. Chock up more bad karma for the newspaper industry, where this fact has to have been long known, and which is apparently in even worse trouble than we thought.

But this column isn't about the newspaper industry or even about the real estate industry. It is about the lack of friction in our commercial lives brought about by the Internet and an emerging thought in my mind that maybe it is time we as a people took action to change some things.

Let me explain.

It's not that newspaper ads work so poorly for selling real estate, it's that Internet advertising works so well. You can put more words on a web ad than you could ever put in the newspaper for the same money. You can put more and bigger pictures, virtual tours, Google maps. You can put Zillow virtual appraisals and links to lenders, home inspectors, and the local Chamber of Commerce. Internet house listings can be searched in a zillion ways that newspaper listings cannot. In the time it takes to find a house -- any house, maybe even the wrong house -- in the newspaper and then go see it, well in that amount of time using the Internet you can find the house, order an inspection, get a loan, and make an offer on the darned thing. It's like crossing house-hunting with air hockey.

But is it all good?

Don't tell George W. Bush, but we are in a recession, which is making me look more critically at the Internet as a marketplace. There's a lot of good about the Internet market, of course. Auction sites like eBay help us get rid of our junk and then help us replace it with new junk. The web has made comparison-shopping for houses and cars and disposable diapers almost a contact sport. And we're sure as heck better equipped than we were before to claim all that money that's been waiting for us with some bank manager in Nigeria.

Just as an aside, I know a guy from Japan who actually went to Nigeria once to pick up some of that unclaimed money. It didn't exist and he felt lucky to get home at all.

The theme of disintermediation -- of eliminating middlemen -- has been a driving force in the Internet for as long as commerce has been allowed on the web. But what happens when the middleman you just eliminated had as one of his or her jobs the task of keeping us from being ripped off?

Tasks that are harder to accomplish are also less likely to be foolishly accomplished, which is why so few of us make trips to Nigeria.

That's not the way we are supposed to view things, of course. Ideally the Internet as a research tool is supposed to give us all the information we need in order to resist any allure the Internet has as a tool of fraud or misadventure. But this attitude ignores many of the fundamental forces at work in most sales situations where the simple fact is that we want to buy, the seller wants to sell, and so any countervailing forces are purely voluntary, which is to say often nonexistent.

Take our current national economic mess, the so-called sub-prime mortgage crisis. I like to think that I'm not a subprime kind of guy, but pretending to work as I do (my kids think I TYPE for a living) the world may not always see me the way I would like to be seen. So last year, in what we didn't know were the waning and idyllic pre-subprime days, I tried to get a new mortgage. Of course I used the Internet to get the loan because, as we all know, when banks compete I win. And within a few days, without having to actually meet with or even speak to another human, I found myself offered a $336,000 mortgage.

It was SO easy. Fill out a few online forms, make some choices, and there I was, about to close that loan. But then I did an odd thing. I carefully read the papers I was about to sign (I'm one of THOSE people). And in that residential loan application, right on line something or other, was a number that didn't make any sense to me at all. It was labeled "total household income" and was almost twice the pitiful amount I actually earn.

From where did that number come? It certainly never came from me. Since my signature would be at the bottom of this application I wanted to make sure everything was correct, so I called the mortgage broker. For the first time we spoke. She was a very nice lady, too, and explained that number was the variable required for all the ratios to be correct so I could qualify for the loan.

"But it isn't true," I said.

"Do you want the loan or not?" she asked.

Not.

I wasn't so principled as cowardly, but maybe that doesn't matter: I did what I knew was the right thing for me, which was to walk away from the loan. But evidently a lot of other people took the other course and today are having trouble paying for their houses, which is a big part of the reason why we are in this current economic mess.

This little drama of mine explains the credit crunch better than Federal Reserve chairman Ben Bernanke ever would. Securitization of mortgages works just fine unless the mortgages are based on lies. Lenders turned a blind eye to bad loans and bad loan candidates because another company assumed the risk by bundling these loans and reselling them on a global market.

What has caused the credit problems to extend beyond subprime borrowers to just about everyone is the simple fact that lenders can't act so sloppily now, but having turned that blind eye for so many years they have no idea who is telling the truth anymore. So they don't trust anyone.

And that brings me back to transparency and disintermediation and why the heck the Internet, which was very involved in enabling a lot of this bad behavior, didn't do even the smallest thing to help save us from ourselves?

I suppose it was because there is no money in virtue, no easily measurable value in NOT having those banks compete so I could win only to eventually lose.

Do these loan referral outfits like LendingTree and LowerMyBills and the many, many others EVER say, "Wait a minute, pardner, there's no way you can qualify for any loan, much less that no-doc super-jumbo you have your eye on?"

No.

In their defense, these companies are never actually faced with that question, which is ultimately asked not of them but of their customers, the lenders, and we know how much self-restraint those people have: almost none.

Here's why I bring this up. It is clear to me that government (ANY government, not just the U.S. federal government) and Wall Street have no idea whatsoever how to handle the current crisis. They are just trying to look busy while protecting their own interests and allowing those affected to muddle our way through this mess to some kind of solution. It's not that they don't want to be helpful (if the cost of being helpful is low enough) but that they simply don't know HOW to be helpful. They can't be educated and they can't be changed. Certainly they wouldn't consider any course that would curtail government authority or commercial opportunity.

So I figure we're on our own. And if we are really, truly on our own, we shouldn't pretend that we're not, that some agency that doesn't know its IP address from a hole in the ground will take care of us and make this all better. If we're on our own we should solve our own problems using the tools at our disposal. Which brings me back to the Internet, where it ought to be possible for a change to use all that transparency and economic friction reduction to actually do something FOR us, rather than something TO us.

So where is the next wave of financial start-ups that view ME, not Citibank, as the customer?

Another favorite word from the 1990s was "disruptive." Your start-up needed a disruptive technology or a disruptive business model -- anything to throw the market on its ear and allow your start-up to accumulate market share before the incumbents figured out how to compete. But nearly all such disruption, at least the disruption that survived the Internet meltdown of 2001 and therefore was based on real -- rather than voodoo - economics, was on the sell side. It was companies finding new ways to take our money.

There are few really disruptive technologies or business models on the buy side, but one that stands out is Craigslist, which is close to unique in its efficacy, impact, and the fear it has put into an entire industry (newspapers, bringing us full-circle, see?).

I'm not asking for a revolution, just 2-3 more Craigslist-type successes that actually put consumers first and don't just say they do while selling our identities out the back door to some marketing mafiosi.

Where the Super Bowl-advertising dot-coms of the 1990s didn't know and didn't care where their profits were coming from, the dot-coms of today are obsessed with profitability and the easiest way to make a profit is from saps like me. I'd like that to change, please.

But not all news in this area is bad. Sometimes unscrupulous behavior gets what it deserves. In Australia, for example, eBay just tried to make PayPal not just its preferred payment system for auctions, but the ONLY payment system eBay Australia would accept. That's seeing eBay customers not as customers but as sheep to be sheared. Fortunately the results of this bullying were disastrous for eBay Australia, which is swooning as customers bail for other auction sites that are less greedy or maybe just see themselves as less powerful. It's a powerful lesson for eBay that may cost them Australia and hopefully will teach them a lesson about REAL customer service.

It's a sign of the times, or maybe I just hope it will become one.

We're mad as Hell and we aren't going to take this anymore!

Comments from the Tribe

Status: [CLOSED] read all comments (97)

The folks arguing that we're not in a recession remind me of the arguments about 'prescriptive' vs 'descriptive' dictionaries. Prescriptionists think words mean what is written someplace; not what the person speaking actually intends to say. They are always behind the curve.

How was a recession defined before this most recent one? I don't know but I do know it was different. As someone pointed out, defining the start of a recession is a lot like defining the start of a drought. It isn't unitl it doesn't rain for a long time that you even begin to realize it hasn't rained in a long time--the drought started after the last time it rained. Definition 1. Then you realize it didn't actually start until the ground was a certain dryness. Definition 2. Then you realize a drought is actually getting less water than you anticipate; that it isn't getting no water at all. Definition 3.

The US participates in a world economy. If every other country advances three steps and we only advance one step, then we have receded in the economy even as we "advance." This latest recession (the one we actually are in) won't be correctly defined for at least 3 or 4 years, because it requires a more inclusive definition than just the USA's GDP.

The problem with "presciptive-oriented" people talking economics is that economics--like language--is the sum of people's choices in how they behave--it is not the sum of how they _should_ behave.

MikeM | Jul 11, 2008 | 2:51PM

I think one of the reasons the realty profession is going downhill is the percentage clause. I've heard Realtors--officially licensed ones--cannot offer hourly services. Therefore, they get six thousand more dollars for selling a $400,000 home than they do a $300,000 one. That's the failure on their side to regulate their own costs. Where it fails the homeowner is that Realtor gets nothing--nada--if the home doesn't sell so it's in the Realtor's best interest to enticed the homeowner into taking _any_ offer. The homeowner 'loses' whatever money the offer falls below the asking prices; the Realtor appears to lose 6% of that money, but actually gains the commission. Ask any homeowner about turning down a "reasonable" offer when it's the only one on the table.

There is a perverse incentive there. As homeowner, I'd prefer a to pay a flat fee for work done because that means the incentives work more in my favor.

MikeM | Jul 11, 2008 | 2:58PM

Here is a really good video explaining the subprime mortgage problems.

The video explains discrepancy in risk-adjusted returns for these financial brokers. They made obscene amounts of money without taking on any risk. Assets are no longer a function of value but a function of liquidity.

Foreign institutions such as Chinese banks hold a large amount of mortgage backed securities. Warren Buffet said that the US was a master at getting other countries to purchase our bad debt (paraphrased).

Not The Lender | Jul 11, 2008 | 3:44PM