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July 26, 2008
Mortgage Gambling and Inflation

Source: Newsweek
July 26, 2008
The Homeownership Obsession

    Quote from the banking community:

  • The difference between an investment banker making $2 million/year and a debt-recovery manager making $50,000, is that the debt-recovery manager knows what she is doing."
Leverage and The Great Depression

One of the prime causes of the Great Depression has been identified as banks allowing their customers to buy stocks on margin. Their customers would put up as little as 10% to buy stock, with the bank loaning the rest. Stocks went up and everyone was happy. You see, with $1,000 a man could buy $10,000 worth of stocks. If his stock went up only 10%, he would make 100% profit. The $10,000 became $11,000. He took out the $9,000 he borrowed and that left him with $2,000. Twice what he had before. You bet this was addictive! Banks made money and investors made money.

Standing in the background watching all this unfold was the Federal Reserve, created in 1913 to stabilize the financial markets. Keep that in mind.

However, Black Monday happened. Stocks dropped by more than 10% immediately wiping out 100% of the bank's customers entire worth. --Leverage works both ways, you see.

Now, banks are not idiots. They know that an investor who had lost 100% of his investment had nothing to lose if he waited, hoping and praying, that his investment would come back up. If on the other hand, he sold the stocks with the more than 10% dip, the investor knew he would then be absolutely guaranteed to lose everything he had.

So what is a prudent banker to do? -- He called in the notes.

Everyone was forced to sell, and no one had any money to buy.

And thus began the "panic of 1929", that itself turned into the Great Depression.

Now, we can argue that this much needed "correction" to wake everyone up to reality was just a pin prick that would have fixed itself and cleared over, without the federal government and FED coming in AFTER the damage had already been done, in order to cause even MORE DAMAGE! And we could point out certain Jewish Sadducees who had anticipated such an event, even timed the event to happen when they wanted it to happen, who sold high, and later bought low. But that is material for another article, not this one.

Leverage and the Sub-Prime Morgage crisis

The housing market had long been a 1920's leveraged affair. A potential home buyer would be required to pony up 5% to 10% to buy a home and the bank would loan the rest. For decades, the governmentally caused inflation made it an absolutely guaranteed safe bet that home prices would rise year after year. And it is still the case today, as the government shows no signs of stopping its inflationary ways of creating more money out of thin air to spend than it takes in from taxes.

Let's say that you had saved $5,000 for a $100,000 home. You would have the home and then with a 5% inflation rate, courtesy of the Fed, you would make another $5,000 year after year after year. It would actually start compounding.

On the other hand, the prudent home buyer may want to save for him home in order to pay cash. So, the first year, he would save $5,000. But he would find that the $100,000 last year now cost $105,000 to buy. The next year, he saves another $5,000. But once again, the price of the home he was looking at moved upward to $110,000. In other words, there is no way in the world that a prudent man could save for a decent home. In fact, his target would become even more difficult to obtain as compounding takes place. This is real gain as, most of the initial investment is not your money. Of course, the mortage note is 7% or 8% of the entire debt, so do you really come out ahead?

Inflation forces normally rational sane people to leverage in order to get into a home in a safe neighborhood. Bad enough, but it seemed to work.

Then our governmental officials thought, "If this is good for people who could save 5% to 10%, then it should be good for everyone." Thus began the sub-prime housing market.

All of a sudden, there was this huge influx of people who were buying homes. They did not have to have a minimum down-payment that would insure they had something invested in their home. They also could obtain adjustable rate mortgages to go along with the no-down-payment plan.

What a recipe for disaster. -- And where was the Fed? -- Thick in the middle of it!

The sudden demand on housing started pushing home prices upward. Rising home prices caused a stampede of people buying homes before they were priced out of the market. Rising home prices made for a good investment, so everyone started buying as much house as they could afford. The ARMS would adjust later. It was no longer about shelter, it was all about making money, lots of money!

The housing credit cycle was building. -- And where was the Fed? -- Thick in the middle of it!

And just as irrational leveraged stock market frenzies come to a close, so has the irrational leveraged housing frenzy come to a close. Except this time, with no money down, any downturn in housing prices will put bankers into immediate financial peril. Foreclosures started the unraveling of the housing bubble.

Fannie Mae and Freddie Mac are two mammoth home loan brokerage business that are half private and half government. Along with the FHA, six trillion of the nation's twelve trillion dollar mortgage loans were supplied with federal strings attached. The government created them. The government encouraged them. The government financed them. In the end, the government is now coming in to bail them out with your tax dollars. Your centrally planned home curtesy of the central government feds.

Investment banking firm Bear Stearns went belly up. along with some of the smartest investment bankers in the business (see quote at the top) -- And where was the Fed? --There to bail them out of their hardships by marrying them off to a suitor with money.

  • Fannie Mae was too big to let fold.
  • Freddie Mac was too big to let fold.
  • Bear Stearns was too big to let fold.
  • The federal government is too big to let fold ---ups, I'm getting ahead of myself. The federal government has not folded --YET!

      Is there s solution?
    The housing damage is already done, as was done in the Margin Panic of 1929. But one of the better proposals that came out of the Great Depression was the decentralization of banks. If very large banks failed and caused serious harm to the economy, then the solution was to not let them get so big so as to cause so much damage. Banks were not allowed to operate across state boundaries. Too bad the obvious solution was not taken to the next logical conclusion -- These state-based banks should have been regulated by the states, not the federal government. But instead, as a result of the Great Depression, they were now guaranteed by the federal government, setting the stage for where we are now. After a while, we forgot the pains of the Great Depression, and letting our better judgement leave us, we allowed unregulated banking across state lines once again. -- Result, the huge Citibanks and Bank of Americas and Wells Fargos -- All too big to fail.

    Now do NOT get me wrong. The Christian Solution believes in the free market. In this case, the feds broke it and the feds had to fix it. But, a real free market economy allows for neither the fed to be there to regulate the market nor to save investment bankers when they royally screw up. (Royally screw up, meaning so big as to involve even the Royallty)

    The ONLY SOLUTION is to go back to gold and silver based commodity money with fiduciary money backed by gold and silver as the standard, as was the case on August 15, 1971 when President Nixon took us off the gold standard.

    Before that date the dollar was pegged at $35 per ounce of gold. After leaving the gold standard, we had the 1973 oil crisis and gold spiked at $800 per ounce. The dollar was only stabilized after we told the oil producing countries that they would be required to base their oil in dollars or we could not guarantee their protection (even from us, as Saddam Hussein found out when he started pricing his oil in Euros.)

    We had an oil-backed dollar now instead of a gold-backed dollar. It means something when people say "Black Gold!" For the international markets, our money was now guaranteed to buy a determined amount of oil, not gold.

    The real solution is constitutional money where all the states take nothing but gold and silver in exchange for goods and services, while the federal government's only role is to determine how the gold and silver coins are minted. Just as the federal government determine weights and measures to define how long a mile is and how much a pound weighs, so should it determine how an ounce of gold should have its value protected to prevent gold shaving from the coins by the unscrupulous. The states should have the power to regulate the market in terms of gold and silver exchange. The feds were never given that responsibility by the Constitution.

    Another solution is to not allow 30-year mortgages. Biblically, the longest loan allowed was 15-years. Every 15-years, all debts were required to be paid in full. In the vein of a Jewish Jubilee, I editorialize about a Christian Jubilee from the Jewish financial Sadducees. Instead of the federal government giving us all a $600 dollar stimulus package, they would give all taxpayers a $600,000 stimulus package. Mortgage crisis gone. Mortgage industry gone as well, but with $600,000 in their pockets they could find another job soon enough.

    And the last solution is to get rid of inflation that drives demand to spend now before the price increases. Gold and silver backed money already suggested would automatically fix this problem.

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