Steve Roach pipes up from his new job in Siberia Asia. His point is one that I have made in the past - central banks cannot ignore asset prices.

“It is high time for monetary authorities to adopt new procedures–namely, taking the state of asset markets into explicit consideration when framing policy options. As the increasing prevalence of bubbles indicates, a failure to recognize the interplay between the state of asset markets and the real economy is an egregious policy error.”

(Note: readability grades: Kincaid: 16.3, ARI: 16.9, Coleman-Liau: 16.5, Flesch Index: 22.4/100, Fog Index: 18.0, Lix: 57.0 = higher than school year 11, SMOG-Grading: 15.2 - must be a real economist)

And from the same Fortune section, we have Jeremy Grantham:

“There is a lot of pain still to be had in the equity markets, particularly aimed at the risky end of the spectrum. We think the fair value on the market is about a third lower in the U.S and EAFE from today and about a quarter less in emerging markets.”

And Jim Rogers:

“I have been and continue to be short the investment banks and the commercial banks. If they bounce up, I’ll probably short more. I’m certainly not buying anything. The market’s only down 8%. I don’t consider that a buying opportunity. The things that I’m short, some people probably think are buying opportunities, but I don’t. I’ve been short the banks for close to a year, and for a while it was not fun. But I added to my positions, and now it’s a lot of fun.”

And to round out the crew with a wistful note, we have Warren Buffett:

“In one way, I’m sympathetic to the institutional reluctance to face the music. I’d give a lot to mark my weight to “model” rather than to “market.”"

I found a new blog this weekend - Sacramento Area Flippers In Trouble - which provides listings where speculators are in the process of getting burned. Last year, even the National Association of Realtors (NAR) admitted that 40% of sales were to “second home” buyers. That doesn’t include the liars who claim they are buying a primary residence even though they are not intending to move in (to get a better mortgage rate), or the “stealth” speculators who are, in good faith, buying a new family home but who do not sell the old one.

As Warren Buffett famously said, “When the tide goes out, then you see who is swimming naked”.

Warren Buffett (and Charlie Munger) speak at the Berkshire Hathaway annual meeting:

On the real estate bubble

Buffett: “What we see in our residential brokerage business [HomeServices of America, the nation's second-largest realtor] is a slowdown everyplace, most dramatically in the formerly hottest markets. [Buffett singled out Dade and Broward counties in Florida as an area that has experienced a rise in unsold inventory and a stagnation in price.] The day traders of the Internet moved into trading condos, and that kind a speculation can produce a market that can move in a big way. You can get real discontinuities. We’ve had a real bubble to some degree. I would be surprised if there aren’t some significant downward adjustments, especially in the higher end of the housing market.”

On mortgage financing

Munger: “There is a lot of ridiculous credit being extended in the U.S. housing sector.”

Buffett: “Dumb lending always has its consequences. It’s like a disease that doesn’t manifest itself for a few weeks, like an epidemic that doesn’t show up until it’s too late to stop it Any developer will build anything he can borrow against. If you look at the 10Ks that are getting filed [by banks] and compare them just against last year’s 10Ks, and look at their balances of ‘interest accrued but not paid,’ you’ll see some very interesting statistics [implying that many homeowners are no longer able to service their current debt].”

On a commodities bubble

Buffett: “I don’t think there’s a bubble in agricultural commodities like wheat, corn and soybeans. But in metals and oil there’s been a terrific [price] move. It’s like most trends: At the beginning, it’s driven by fundamentals, then speculation takes over. As the old saying goes, what the wise man does in the beginning, fools do in the end. With any asset class that has a big move, first the fundamentals attract speculation, then the speculation becomes dominant. Once a price history develops, and people hear that their neighbor made a lot of money on something, that impulse takes over, and we’re seeing that in commodities and housing…Orgies tend to be wildest toward the end. It’s like being Cinderella at the ball. You know that at midnight everything’s going to turn back to pumpkins & mice. But you look around and say, ‘one more dance,’ and so does everyone else. The party does get to be more fun — and besides, there are no clocks on the wall. And then suddenly the clock strikes 12, and everything turns back to pumpkins and mice.”

Munger: “I think money management is a low calling relative to being a surgeon. I don’t like the percentage of our GDP and brainpower and professional effort that’s in money management. I don’t think it’s a good thing for our country, and don’t expect it to end well. The present era has no comparable precedent in the history of capitalism when so many people are trading pieces of paper. We have a higher proportion of the intelligent sections of society involved in buying and selling bits of paper and trying to make money doing it. There are more people doing this than at any time in history. A lot of this reminds me of Sodom and Gomorrah.”

Buffett: “When we’ve seen baby versions of this in the past, there have been future [very negative] implications [for the stock market].”

Munger: “When you get so much nonsense going on, it feeds on itself and creates a frenzy. [When this has happened historically,] there have been serious implications.”

Buffett: “A lot of the psychological well being of the American public comes from how well they’ve done with their house over the years. If indeed there’s been a bubble, and it’s pricked at some point, the net effect on Berkshire might well be positive [because the company's financial strength would allow it to buy real-estate-related businesses at bargain prices]….

“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.”

Munger: “You have a real asset-price bubble in places like parts of California and the suburbs of Washington, D.C.”

Buffett: “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.”

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.”