What surprises us about this market is that anyone finds it surprising.

Lenders lent to people who couldn’t pay the money back. Naturally, the loans went bad; what’s surprising about that?

Consumers spent more than they could afford. Naturally, they ran out of money and have to cut back. Do you see anything unusual about that?

Wall Street partied for years on cheap credit. Now, credit is becoming harder to come by. Is it any wonder that they’ve had to turn off the music and close down the bar?

Yesterday, the Dow slipped 224 points, after the giant insurance company, AIG, announced a bigger-than-expected loss. AIG got taken down more than at any time since the company went public in 1969.

Oil went up yesterday – $1.32. But gold lost another $5...to $877.

And the 10-year T-note rose to yield 3.93%.

And now we read in the paper that Freddie Mac has posted a big loss. What a shocker! Gosh, we thought financing houses at 100% to poor credit risks, who lied on their mortgage applications, was a good business. And it was a great business, until housing prices went down. But, who could have seen that coming?

Well...anyone.

Prices go up. Then, they go down. That’s the way it’s been going for a long time. Housing prices are “mean reverting,” as economists say. In fact, as we pointed out here, they’re about the meanest reverters in the whole financial world. Houses, unlike dotcom stocks or paintings by Lucien Freud, are useful. They’re bought by wage-earners to live in. So, they have to be priced at levels that the buyers can afford them. In fact, the average house-price has to be within the housing budget of the average house buyer; that’s all there is to it.

So don’t bother telling us that the housing decline came as a surprise; we’ve been predicting it ever since it began. (Of course...we’ve predicted many other things that haven’t happened yet...but that’s a different story.)

But here comes the article from Reuters: “Freddie Mac’s negative net worth raises questions.” Well...yes. The first question is how a company with a quasi monopoly granted by the U.S. government could make such a mess of its business. And so fast! Hardly 12 months after the biggest bubble in property in the history of the world and it’s already $5.6 billion underwater.

A rumor making its way around Wall Street – started by us – is that Freddie is secretly being run by Robert Mugabe. Of course, a string of bad luck can ruin any business. But Freddie Mac couldn’t be explained by bad luck alone; it took an act of Congress! Or maybe a couple of acts of Congress. The one that created the Federal Reserve System, for example.

But let’s leave that subject for another day. We opined yesterday, that the financial industry has had its season in the sun; it won’t recover its youthful vigor in our lifetimes. Which brings us to the second question: why would investors buy the shares? Freddie is clearly insolvent.

But most investors don’t believe it. Freddie may have a net worth of negative $5.6 billion, but investors buy the stock anyway. These summer forecasters expect the clouds to pass and the sun to come back any day. Ain’t gonna happen is our guess.

The number of unsold houses is at its highest in 26 years. Half of them have to be sold before sellers have any pricing power. That will take a long time. Then too, our bet is that the inventory is understated. We know at least a couple people who have taken houses off the market. Not because they want to own them, but simply because they don’t think they can sell them. When the inventory gets worked off, these houses will be put up for sale again – holding prices down even longer.

But the big change in the economy is not in the housing market itself, but in the change of opinion that it causes. Markets make opinions, say the old-timers. And a drop in housing is about to cause an epochal shift away from debt and towards savings. We report it here, even though it hasn’t happened yet. As we explained yesterday, baby boomers now look to retirement as a condemned man looks to the scaffold. They know they shouldn’t have done what they did...and should’ve done what they didn’t. They regret not saving money – deeply. And now, the poor baby boomer has only one chance for redemption...trying to make up for the last 15 years by saving as if the rest of his life depended on it.

In fact, it does.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.