The Great Mortgage Bubble
"Economic Morality" means people involved in the enterprise of business, state
and economy should carry with them some type of "social consciousness"
that governs their judgments and actions. There needs to be a balance between
social needs and economic freedom even at the expense of the amount of profit."
"Anytime there is "debt" for someone, it is due to 'investment' by another".
THE DOWNSIDE of the Mortgage bubble (The free money give-away)
When I bought a house in 1969, the rule of thumb was: lend no more than twice a borrower's yearly
salary. Following strict guidelines, Fanny and Freddy managed the mortgage business successfully for
decades. Like waves lapping on the shore, in time, the same money can be "invested" over and over
again building more "debt" than the total of money in circulation. It is only if, and when, this
money is paid back that the books are balanced. If this debt is not paid back to the investor,
with it's interest, it effectively VANISHES, or is given-away. Without being paid back, in essence,
the investment money was being "given away" (The Mortgage Bubble). This give-away was accomplished
through constantly inflating mortgage prices, equity loans on inflated prices, slick mortgage creations
such as interest only, no payments for first year, and balloon payments down the line, all of which
encouraged people to sign mortgages they would not be able to pay back. However, without guidelines,
Wall Street was selling (over-selling) "triple-A-rated" securities as fast as they could with no idea
if they were properly backed, and the mortgage sellers around the world only needed a mortgage with a
signature to sell to the Wall Street Banks, Fanny, or Freddy without condition. Apparently the buying of
mortgages exceeded the selling of securities because the banks ran out of money.
Recently, a couple I know, "short sold" a condo for 95K that they bought for 220K in
2007. This is similar to a foreclosure selling for less than the original mortgage.
Real estate values for homes, apartments, and other buildings are decreasing everywhere,
as much as 40%, returning to reasonable values.
This event has numerous effects:
1.With the exception of payments, 220K -95K = 125K money has literally VANISHED for the people who
invested in this mortgage.
2. The value of the mortgage backed securities representing this mortgage has diminished in value, and
3. The interest payments are diminished on the new mortgage.
This tseunami of vanishing money will continue as long as there are foreclosures and short sells.
To help this predicament, the Federal Reserve bought 1.2 trillion dollars of the Mortgage Backed Securities with
"printed money" (actually "checks"). NPR interviewed the people who were hired by the Federal Reserve to do this
in a six week period. This has continued at the amount of 40 billion dollars per month. I'm guessing that purchasing
these securities eased the ability of banks to meet their
obligations to the remaining securities. These securities of diminishing value are deep into the economy of the world,
purchased by foreign governments, lobor union pension funds, and wealth management companies, for example.
However, if instead the Federal Reserve were able to pay people to produce goods and
services with this "Quantitative Easing", by balancing the state budgets, or otherwise ensuring the employment of
people to increase goods and services, for instance, people would return to
work, and the banks would get the money anyway.
THE UPSIDE of the Mortgage bubble (The free money give-away)
During the years of the unregulated development of the mortgage bubble, there were several aspects that
ensured economic good times and strong employment:
1. These unregulated loan creations paid for millions of great homes, commercial buildings, and complete communities,
resulting in high employment numbers and the accumulation of great wealth (Billionaires created through taking
2. If these mortgages had been responsibly administered there would NOT have
been a plethora of construction,there would have been NO great employment
numbers, and there would have been NO gush of expendable money
exploding into the consumer market. All these added to the economic boom
of the years preceding the bust.
3. As soon as the free-money was infused into the construction business, it was gobbled up to be reinvested
rather than being left to inflate the economy.
4. It could be estimated that 40% of the mortgage business from the bubble
has vanished as free-money-giveaway. This is trillions of dollars.
LESSONS WE CAN DRAW FROM THE BUBBLE
Even though the government did not include real estate in their estimate of inflation,
dramatic inflation in everything else did not occur. So we can say, as long as goods and
services are increased, money will not over-accumulate to pay for these additional goods and
services. This is against the doctrine that creating money always causes inflation.
During the bubble, money was gathered and reinvested to prevent over-accumulation. This is
similar to "tax and spend". During the World War II, we had the political will to depend on
taxation, and reinvest that money by expanding goods and services to prevent over-accumulation.
When my hero, Niall Ferguson, author of The Ascent of Money was asked about this real estate
inflation he said, simply, we'll either have to "write it off" or "inflate up to it". Perhaps there is a
third way: the idea is to put people to work with money to replace just these VANISHING funds without
inflation by paying people to increase goods and services.
Supplementing states with infused money to keep teachers, police, utility workers, and firemen
in work is just plain obvious. These are necessary services. To not do this only increases unemployment
and further reduces the consumer market and weakens society and the economy.
Government contracts are the marriage between government and private industry. Government contracts have
started and maintained many privat companies. Hungry people are job creators, not always wealthy people.
Money used for job creation is tax deductable and taxes should be constructed to encourage this activity.
Government contracts are the most common originators of start-ups. Much of this work can be around
government mandates for technological advancements in medicine, infrastructure, energy, etc. This is a
common source for new advancements in technology.
The category that has the greatest growth of goods and services, not only in America, but in the world,
is in the field of health care. Healthcare could be considered as really starting in 1945. Before that,
there was little medicine could do to extend life. The healthcare plan up to that time was free and called
live till you die! Today the picture has changed radically. A case of pneumonia can cost $100,000.00.
An MRI can cost thousands of dollars. There are thousands of people on dialysis at $1200.00 per week.
Before 1975, when there were few machines, there was a panel that decided who would get dialysis and
who would die. The death panel has been here for a long time and may be busier than ever soon. Due to
the rapid increase in expensive medical technology and the difficulties providing service for everyone,
there will always be decisions as to the most ethical use of the funds available. Some people think
that the free market will answer this, but it's a bitter pill. This is the area of technological
advancement that is the most expensive and endless. Health care could be supported around the world
and supplemented by the US government. The US has successfully done this with war. The Affordable Healthcare
Act is good and fights over-accumulation of money avoiding inflation.
OTHER ECONOMIC CONSIDERATIONS
Presently, the USD is apparently the Gold of the world. USD's are being hoarded off shore by foreign governments to shore up
their own currency. This money comes from various sources but all remains primarily uncirculated. All things being equal, this
decreases the amount in circulation.
Government Scholarships for deserving students are our best investment for
a strong future with diversity and innovation.
As far as paying off the investors who have chosen US Savings Bonds, I can't imagine why the Federal Reserve, which can
create US currency, would have any trouble paying off these Bonds, if people are still refusing to pay taxes to cover this
debt. US Bonds are very low in interest and need not be any more than inflation.
Possibly, an even more perplexing problem we will face in the near future is what futurists have been predicting for decades:
leisure time. We may be facing an era when there is literally not enough work to go around for everyone. The idea of getting
money for nothing has been well established in the wealthy class. In spite of their cries of earning their money by risk and
hard work, we may be faced with establishing some manner of doing this for the rest of us.
Permission to copy with byline of:
The Realistic Idealist
Philosophy based on evidence.