Friday, 9 July 2010

What caused the US housing bubble? (Also has UK implications)

A comment on a Real Clear markets article really caught my eye and I repeat it here:

Another Washington Dog & Pony Show.

A sick patient lies in a hospital dying. The doctor sends a nurse into the room to open a window – ostensibly to afford the dying man some fresh air. Over night, the temperature drops below zero and the man freezes to death. The next morning the doctor comes in, looks at the frozen corpse and says, “Ahhhh, too bad - he was a sick man… Oh well, it was 'his body' after all!”

And the point is?

It was not the banks or the markets or the financial institutions that created the housing bubble that burst. The housing bubble was created by Congress to make home ownership more affordable for people who could not afford to own a home. To do that, they enforced a lowering of the standards of traditional rules for lending, that had been in place for decades. And when you lower those kinds of rules, and when you lend money to people who cannot afford to make the payments they begin to default on those loans. And when those people begin to default on loans - loans that were made because the government coerced the banks into making faulty loans by establishing quotas based on qualifications (like color, or gender or neighborhood), other than financial, and then penalizing those banks who failed to make the quotas the Fed set - then the market quickly gets flooded with houses for sale, for short-sale and houses in foreclosure.

When that many houses hit the market all at once, (coincidentally, just about the same time that most of those 5yr teaser rates ended), then the abundance of houses for sale, make prices fall dramatically. And those who were caught short having (in many cases) loaned more on the 1st mortgage than a house was eventually worth when it went into foreclosure; suddenly found out that robbing Peter to pay Paul, when Peter dies first, doesn’t work so well, when you’ve borrowed heavily from Paul! Even when Congress twisted your arm into doing it!

So who can you trust these days? The banks or Congress? Maybe neither. But one thing is for sure, this legislation is a complete sham!

When you can't trust the government to work in your best interest, then it is in your best interest to support a government that "really" cares - and isn't just for show. One that owns up to its mistakes and as FDR said, "Confront them frankly" and move forward with some reform that has a chance of making a real difference, and not some show that will put even more of a squeeze on the already shortened money supply! And speaking of FDR - if he'd understood that, we may not have ever had a "Great Depression" !!!

The government created this with regulations put in place for Fannie-Mae and Freddie-Mac and then forced those same rules on the banks too, forcing them to make loans they previously never would have made - in the name of "equality" in lending. Now that all sounds very nice and altruistic - but people are not equal when it comes to their ability to repay loans. No matter how politically correct that sounds - because politics is very often very very wrong!

This Senate Bill does not include Fannie-Mae and Freddie-Mac reforms because;

1) They don’t want to blame this financial disaster on themselves – and conveniently, the public generally doesn't understand the dynamics behind the crisis - so the banks and the financial institutions who have simply done what Congress bade them do, make a very easy target!

2) They probably want to try to do it again, - but this time limit the scope of who loses what and who gets to stand first in line for the bailout money, when the bubble bursts next time.

3) Home ownership for those who cannot (and in many cases will not) afford a home, is still the goal. The theory is that it makes better citizens, when people have a vested interest due to home ownership. And that may be true to a degree, but lowering the standards and subsidizing failure, is not a very ethical, practical or fiscally responsible way to increase home ownership!

Giving away housing to those who cannot afford it is a great way to get re-elected of course! But the people who ultimately have to pay for it are the worse off for their misplaced philanthropy!

The numbers for those who care:

The percentage increase in home ownership during the boom, went from 64% to 69%. Just 5pts. Five percent of out a population of 300-million is 15-million people. Guess how many jobs were lost in the crash? That's right! 15-million.

So, 5% of the population lost their jobs, so another 5% could buy a home they couldn't afford to keep.

Nobody got a home, and we're all worse off for it!

If Washington paid more attention to the numbers than to the window dressing - more of us would be looking out windows instead of looking in!

Watch out America… Here we go again….

"Oooooooh.... Pretty pony!".'

Excellent piece that summarises so much that we know to be true but that the MSM wants to keep from us.

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