CHASING A BUBBLE YOU CAN'T CATCH
As reported by AP's "Economics Writer," the bursting of the housing bubble continues unabated. As expected, states that saw the most dramatic rise in real estate prices during the first half of the decade -- peaking last year -- are experiencing the most precipitous drops now. Leading the way? Arizona, Florida, California, Virginia, & Nevada. 23 other states join them on that unfortunate list.Anyhow, we all know about this, and it's a bit scary. What I want to reitterate is that this is no accident. The rise of the housing bubble was engineered by a very non-neutral Federal Reserve back in 2001, and allowed to run wild by opportunistic politicos, from Bush on down. Alan "The Green Genie" Greenspan sunk interest rates to almost nothing in the years following the crash of the tech bubble in April, 2000, and flooded the markets with liquidity that summer and even moreso in 2001, after Bush was elected. And then another huge increase in the fall of 2004, before a certain someone won re-election.
At any rate, these artificially low rates encouraged folks to buy homes they couldn't afford, or to refinance mortgages to get quick cash. As Stephen Roach explained, in a 2004 article from The Economist:
America's economy has survived the bursting of the [dot-com] bubble better than had been expected largely because policy-makers have pursued what is possibly the biggest fiscal and monetary stimulus in history . . . historically low interest rates have inflated the prices of homes [] encouraging households to pile up more debt.(Emphasis added). So why am I explaining this? Because it's yet another thing to remember as November approaches, another drum we need to keep banging. The Fed -- ostensibly neutral -- paused its hiking & lowered interest rates a few weeks ago, which could temporarily staunch the bleeding in both housing and equity markets.
This Is No Accident.
On a personal level, good if that helps you out temporarily. But please realize, it won't fix the problem. Don't forget that on Election Day.
posted by Mike at 8:23 AM
12 Comments:
Since the Fed claims that it was trying to get the economy out of recession back then, what could they have done instead to stimulate the economy?
Could? No limit.
Should? Absolutely nothing. When Central banks "stimulate" the economy to hasten the rise out of recession, they're only putting off the inevitable.
It's better to take your medicine early on, rather than have surgery (or worse) later on.
When energy supplies and thus industry is slacking, it's time to increase interest rates.
This tends to make physical investments in labor and industry more attractive. Jobs become more important, wages go up, benefits increase. People invest in infrastructure.
When interest rates go down, financial speculation becomes more attractive. Real world industries and infrastructure maintenance become poor investments compared to runaway bubble gambling.
The job loss, bankruptcies, foreclosures, deteriation of our infrastructure are all predictable outcomes of the Fed policy since Bush took office.
My wife still asks why we didn't refinance. I told her that I looked into it, and couldn't get anyone to finance for a fixed rate. And it's true, when I told refi sales people I didn't want an ARM, they'd stop calling back.
I know owe only 40% on the value of my house. If things hold a bit longer, it will be paid for in a five years.
In an effort to stimulate the economy Bushco lowered taxes and Greedscam dropped interest rates simultaneously. It was hoped this would spur business investment. How funny, since they themselves shipped all the manufacturing overseas. What we got instead was a massive housing bubble, and while it did create jobs for awhile they did not keep pace with the cost of housing. Furthermore all the loose cash exacerbated the trade deficit. Bushco's spending increased dramatically as well. Until the trade and debt situations are resolved we will either be in a recession or a bubble economy. Take your pick.
Weaseldog: No one would give you a fixed rate mortgage? We had no problem at all ditching our ARM for a 30-year fixed. The same bank was involved for both mortgages. I don't know if that was a factor.
Mort: Yeah, that sums it up.
Mike: That's kinda what I thought, but I had to ask as Economics classes put me to sleep in my youth and I've had to catch up on it as an adult. So basically, it was all politics and an incessant need to micromanage the economy.
Ded-
I, too, graduated college as an absolute moron when it came to Econ. I knew nothing.
Today I know almost nothing.
What I said earlier is certainly my opinion, based on a lot of reading over the past year or so. It's nonetheless an unpopular analysis, outside the circles of fiscal conservatives/libertarians/Austrian School economists.
Some would say my view's overly cynical, others that it's overly naive. I'd recommend checking out Murray Rothbard, Ludwig von Mises or Lew Rockwell. Of course, Keynes, Friedman and others have dramatically or subtlely different takes on it.
Washington Mutual bought my mortgage.
They told me that they do not do refinancing. Then sent me literature on refinancing though Washington Mutual.
Their staff is operated by computers. They can't do anything or say anything that doesn't appear on their screens.
They've told me quite a few lies since they bought my mortgage. It's hard being their customer.
For a while, they weren't even crediting my mortgage payments. The person responsible,quit her job and the payments were piling up on her desk. It took them eight months to get around to crediting me.
They never did give me a satisfactory explanation for that, though they did charged me for late payments.
Weaseldog: Sorry to hear that. We specifically went with a local bank, and I do mean local. Although it's been in business for a few decades, it doesn't operate any branches outside of the state. It's headquarters is the next town over. Our bank rep actually knows us by name. It's a rare thing to be able to say that these days.
WaMu is going down hard. You might think about switching to someone local.
I was local. Washington Mutual bought my loan. Now I'm in tight financial times and can't switch.
If I do, Washington Mutual might just buy my loan again.
Ack!! They do that sometimes. Next stop for your mortgage might be Hong Kong. Wow.
It seems strange that we can't have the power to decide who we are indebted to.
I know the practice of selling loans is centuries old. This practice has led to abuses, wars and racism based violence and even genocide.
It seems history repeats and age old abuses keep resurfacing.
We're probably going to see a new round of severe abuses as times get hard.
Rather than Hong Kong, Beijing or the UAE might buy my debt next...
My grandparents knew how to avoid it. They lived debt free.
Post a Comment
<< Home