Nobody understands it.
The system is too big and too complex and nobody knows why it does what it does.
The only important questions then: Who prospers? Who suffers? Who takes the blame?
***
I've seen a lot of explanations of this sort:
Banks made loans to people who couldn't repay them. And that was the bleeding heart lefty government's fault, for encouraging loans for houses for people who couldn't afford them. The poor people couldn't afford their payments, and so they broke the system. Result: They lose their homes; and it's their fault; and the government's job is to bail out the banks, otherwise...
Otherwise, what? Who knows.
But Ron Paul says that the result of all this stuff should be a drastic lowering in housing prices:
When interest rates are lowered to below what the market rate would normally be, as the Federal Reserve has done numerous times throughout this decade, it becomes much cheaper to borrow money. Longer-term and more capital-intensive projects, projects that would be unprofitable at a high interest rate, suddenly become profitable.
Because the boom comes about from an increase in the supply of money and not from demand from consumers, the result is malinvestment, a misallocation of resources into sectors in which there is insufficient demand.
In this case, this manifested itself in overbuilding in real estate. When builders realize they have overbuilt and have too many houses to sell, too many apartments to rent, or too much commercial real estate to lease, they seek to recoup as much of their money as possible, even if it means lowering prices drastically.
This lowering of prices brings the economy back into balance, equalizing supply and demand. This economic adjustment means, however that there are some winners -- in this case, those who can again find affordable housing without the need for creative mortgage products, and some losers -- builders and other sectors connected to real estate that suffer setbacks.
The government doesn't like this, however, and undertakes measures to keep prices artificially inflated.
So...
The problem is that low interest rates caused builders to build too much? Sayeth Paul. And that should mean a drop in prices. Which should mean more people able to buy houses, etc, but real estate sellers losing money. And -- What? The real estate people, or, the homeowners(?) Have to sell their property, now at a low price because supply exceeds demand(?) But-- What? They can't repay the banks? So the banks go broke? And that's what the Fed is trying to fix?
That seems, if I even understood it correctly, like the dead opposite of the previous explanation.
***
Then there is an explanation I heard the other day from the guy that does our finances:
Banks gave people 100% loans for houses. These people had payments that were lower than their interest rates. (How?) So the amount of money they owed the bank continually increased. Meanwhile the value of their home decreased. (How?) So they now owed the bank $105,000 on a home that was worth $100,000 but now is only worth $70,000. The house being the only collateral, and being now worth less, the hypothetical homeowners abandoned it.
Who are the culprits, according to this guy? The Rich.
***
Another explanation, from a different forum:
You need money to get money. People (banks) loaning other people money is the "heartbeat" of the economy: If they can't loan money, other people can't take their money and make even more money with it. So the government can't let them crash. I look at this statement and think of anything ol' Ron Paul said:
Additionally, the government's actions encourage moral hazard of the worst sort. Now that the precedent has been set, the likelihood of financial institutions to engage in riskier investment schemes is increased, because they now know that an investment position so overextended as to threaten the stability of the financial system will result in a government bailout and purchase of worthless, illiquid assets.
***
The only thing that I can understand fully right now is that the government is bailing out ultra-wealthy people who made bad decisions, and that this is a pretty common pattern.
***
Writing for Asia Times, Otto Spengler gives us this delightful metaphor:
Think of America as a town with one casino, in which the only economic activity is gambling. Most people lose, but the casino keeps lending them more money to play. Eventually, of course, the casino must go bankrupt. At this point, the townspeople people vote to tax themselves in order to bail out the casino. Collectively, the gamblers cannot help but lose; individually they nonetheless hope to win their way out of the hole
Spengler goes on to, seemingly, confirm what Ron Paul had to say:
Contrary to what the Bush administration says, it is not the case that banks' troubled mortgage assets cannot be sold in the private market. Those are the so-called "Level III" assets that banks say they cannot value. But that is only a dodge that the banks use to postpone taking losses. There is a ready bid for these assets from hedge funds, in multi-hundred-billion-dollar size. The trouble is that the market bid is 25% to 30% below the prices that banks carry these assets on their books.
***
It comes up occasionally that this fellow Treasury Secretary Paulson is being given an immense amount of power and no oversight. It also comes up occasionally that he used to be the CEO of Goldman-Sachs.
***
So what's going on? An afternoon of reading and I still don't quite understand. One thing: We're told the Big Bail Out is necessary for the economy. So, what's the economy? And why does it need to continue?
No comments:
Post a Comment