For sale: 3br/2ba, $1.8m
Maybe I'm too young to remember any earlier, but I was not at all surprised by the .com bubble of the late 90s. Any stupid idea, as long as it involved the internet, seemed to attract investors. After reality caught up and almost everyone got clobbered, you'd think people would have sobered up and gone on to honest work. But, no, that simply won't do. So housing heated up to become the next bubble. Realtors(R) tell you that housing is a great investment, loans are cheap cheap cheap (no down!) and don't worry, they find a way to get you one, and everyone is jumping on the house ownership bandwagon with someone else's money. For years nobody on high publicly mentions how obviously stupid this arrangement is. Then the "sub prime" bubble starts to deflate.
No, no, no. Light speed is too slow. We're gonna have go right to... ludicrous speed.
Let me think here. Ok, I admit, I only took a year of econ in college. But I remember two things:
1) Credit allows modern economies to grow faster. When you have $100, you have $100. When you loan out $100, and are sure you'll get it back, you have $100 and someone else has $100 they can now use to spend. This works out for everyone.
2) Future economic performance depends on today's collective expectations. If I think I may lose my job, I will save my money for a rainy day. When everyone is afraid, they hang onto their money, and people lose their jobs. Yes, it is a self fulfilling prophecy, as long as expectation gains enough momentum.
I would like to add another observation
3) You can only deny reality for so long.
The .com bubble pushed the limits on how far venture capital credit could be pushed. Reality won in the end.
The sub-prime bubble pushed the limits of mortgage lending into the ludicrous zone. If you'd like an overview of how the sub-prime sandwich works (just read the first couple of paragraphs), check this out:
http://news.bbc.co.uk/2/hi/business/7073131.stm
The above link explains how banks extended the lending example I gave in observation #1 to another level by themselves borrowing through the bond market. This grows the amount of money by another 50%, making everyone happy. Except that somewhere along the line, people got greedy in the middle level and started lending to people who got stupid at the top level, and the bottom level decided to ignore that all while the money kept coming in. Yes, folks, the sub prime system is a 3 layer sandwich, and everything was good until the sandwich began to taste like shit.
That the top layer turned to crap and ruined the whole party isn't surprising. Credit card debt per capita has been festering for a while now and illustrates the problem on a more tractable scale. Haven't got the money to buy something? Charge it! The problem is that Americans like to spend money they don't have, and companies are happy to sell Americans products they can't afford.
This problems extends from the 18 year old with $25,000 worth of credit card debt because he bought a car and a Marshall stack, to the near retirement hot shot exec with a $10,000/month mortgage that is eating him alive. Reality is catching up, and Darwin is at work.
What to do? There is a moral quandary. Should the government and others bail out the boatloads of idiots who are now in a mess. One side would say no, they deserve it. But, there are so many idiots their downfall threatens the well being of the sensible portion of the population.
Credit, in a way, is a common good and a lot of people have made a real mess of it for everyone.
The Fed has reacted to this crisis in credit by lowering the federal funds rate, causing a decrease in the interest rates we the people see. Basically, to prop up the problems with credit, they've made it even easier to borrow money.
The government, a shining beacon of fiscal responsibility, has drained the entire pool we share and stays afloat thanks to credit itself.
Democrats and Republicans are now diving head first into the empty pool by mailing out checks, on more credit, to tax payers. Sure, only ~15% of the money will stay in the country, but at least with my $600 I'll get to watch the unfolding catastrophe in full 1080p high-def on a Chinese made, Japanese branded flat screen.
What have I done? My brains... are going into my feet.
Expect the big wet smack in your mailbox this May.
No, no, no. Light speed is too slow. We're gonna have go right to... ludicrous speed.
Let me think here. Ok, I admit, I only took a year of econ in college. But I remember two things:
1) Credit allows modern economies to grow faster. When you have $100, you have $100. When you loan out $100, and are sure you'll get it back, you have $100 and someone else has $100 they can now use to spend. This works out for everyone.
2) Future economic performance depends on today's collective expectations. If I think I may lose my job, I will save my money for a rainy day. When everyone is afraid, they hang onto their money, and people lose their jobs. Yes, it is a self fulfilling prophecy, as long as expectation gains enough momentum.
I would like to add another observation
3) You can only deny reality for so long.
The .com bubble pushed the limits on how far venture capital credit could be pushed. Reality won in the end.
The sub-prime bubble pushed the limits of mortgage lending into the ludicrous zone. If you'd like an overview of how the sub-prime sandwich works (just read the first couple of paragraphs), check this out:
http://news.bbc.co.uk/2/hi/business/7073131.stm
The above link explains how banks extended the lending example I gave in observation #1 to another level by themselves borrowing through the bond market. This grows the amount of money by another 50%, making everyone happy. Except that somewhere along the line, people got greedy in the middle level and started lending to people who got stupid at the top level, and the bottom level decided to ignore that all while the money kept coming in. Yes, folks, the sub prime system is a 3 layer sandwich, and everything was good until the sandwich began to taste like shit.
That the top layer turned to crap and ruined the whole party isn't surprising. Credit card debt per capita has been festering for a while now and illustrates the problem on a more tractable scale. Haven't got the money to buy something? Charge it! The problem is that Americans like to spend money they don't have, and companies are happy to sell Americans products they can't afford.
This problems extends from the 18 year old with $25,000 worth of credit card debt because he bought a car and a Marshall stack, to the near retirement hot shot exec with a $10,000/month mortgage that is eating him alive. Reality is catching up, and Darwin is at work.
What to do? There is a moral quandary. Should the government and others bail out the boatloads of idiots who are now in a mess. One side would say no, they deserve it. But, there are so many idiots their downfall threatens the well being of the sensible portion of the population.
Credit, in a way, is a common good and a lot of people have made a real mess of it for everyone.
The Fed has reacted to this crisis in credit by lowering the federal funds rate, causing a decrease in the interest rates we the people see. Basically, to prop up the problems with credit, they've made it even easier to borrow money.
The government, a shining beacon of fiscal responsibility, has drained the entire pool we share and stays afloat thanks to credit itself.
Democrats and Republicans are now diving head first into the empty pool by mailing out checks, on more credit, to tax payers. Sure, only ~15% of the money will stay in the country, but at least with my $600 I'll get to watch the unfolding catastrophe in full 1080p high-def on a Chinese made, Japanese branded flat screen.
What have I done? My brains... are going into my feet.
Expect the big wet smack in your mailbox this May.