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Letters by a modern St. Ferdinand III about cults

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Plenty of cults exist - every cult has its 'religious dogma', its idols, its 'prophets', its 'science', its 'proof' and its intolerant liturgy of demands.  Cults everywhere:  Corona, 'The Science' or Scientism, Islam, the State, the cult of Gender Fascism, Marxism, Darwin and Evolution, Globaloneywarming, Changing Climate, Abortion...

Tempus Fugit Memento Mori - Time Flies Remember Death 

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Thursday, November 12, 2009

Another Housing Bubble on the way ?

Humans don't learn it appears – especially when political corruption is involved.

by StFerdIII

It is a non-partisan problem. It was first encountered in 1819 in the post Napoleonic era of cheap money, zero interest rates and no money down for land – all secured and promoted by government. It has been repeated perhaps half a dozen times since in a cycle of bubble and bust. The latest crisis is probably the most severe in US housing history – but no reforms have been enacted which would resolve the underlying issue in US housing and finance, namely the corruption by government of the real estate and housing finance markets.

The largest explosion or 'boom' in US housing occurred after the War of 1812 and the rapid expansion of trade, capital and investment once the despotic totalitarian claims of Napoleon were expunged in 1815. Indeed Europe remained largely at peace for 100 years – the only time in history where Europe was not ravaged by war on a regular basis. The basis of that peace was of course the incredible increase in living standards, incomes, innovations and the easing of life for the working 'mass' encased in the twin revolutions of the rational and the industrial.

In the US from 1815-1819 the American government both national and local decided to take advantage of rising land prices. King cotton's price rise and the fact that the American south provided over 2/3 of the world's cotton supply made the expansion of cotton plantations economically and politically important. Speculation was rampant post 1815, in land suitable for cotton farming. As cotton prices rose, so too did land values. Banks, with governmental consent, ignored down payment, and income guarantees. Many state banks were handing out a second mortgage as a down-payment on the first. Total debt issued regularly exceeded 120% of the stated land value. The belief was that King cotton's price would rise forever, and that within a year or two the land value would exceed the loan balances.

This mania spread to US cities and urban centers. The largest urban expansion in US history took place between 1815 and 1819. Towns, suburbs and city centers were all developed. No money down became normal. Interest rates were nominally near zero per cent. The money supply was increased to provide liquidity to the fast growing banking center. New banks – many of them no more than frauds – sprang up in many states. Mortgages and loans on land became a huge business. Regulators did nothing to stop it, and government through a lax fiscal and monetary system actively stimulated it.

Flipping a housing asset became a hobby for many full time job holders. The financial industry grew dramatically creating jobs. Newspapers and the media extolled the new prosperity – ever rising housing prices guaranteed the wealth of families. Politicians talked about 'home ownership targets', urging people to partake of what was a sure thing, all the while intoning that home ownership meant social stability, strong communities and was fundamental to achieving the 'American Dream'......

Housing prices of course do not only go up. When cotton prices plummeted due to Indian and Egyptian competition, in 1818 and 1819, much of the newly acquired plantation land in the southern US was declared insolvent. Banks were faced with huge write-offs, loan losses and cash flow problems. Hundreds went out of business in 1819. The financial panic spread to urban centers. Prices everywhere declined. Banks called in loans and foreclosed on properties. By 1820 the boom was bust. Bankruptcies increased and misery followed.

Fast forward to today and the same set of factors are in existence. Easy money, negative interest rates, huge stimulus and deficit spending and politicians with home-ownership targets. Worse we have a panoply of housing programs designed to stimulate house buying – HUD, CRA, and the $400 billion subsidized state mortgage behemoths Freddie and Fannie who are still lending sub prime loans. Some $6 Trillion sits on their books much of it is bad paper. Yet no reforms to the HUD, CRA, housing regulators or Fred and Fan have been proposed. No criminal charges for the 2008-2009 bubble have been laid. No investigation of why Fan and Fred, the HUD, the CRA and other government agencies pushed so much bad paper and bought so many D rated mortgages which they then gave to Wall Street to magically rebrand as Triple A worthy derivatives.  Nothing.  Just glorious speeches about 'market failures.'

It is all very surreal.  Edward Pinto a former chief credit officer at Fannie Mae during the 1980s, wrote a very good article in the WSJ stating quite rightly:

From 1977 to 1991, $9 billion in local CRA lending commitments had been announced. CRA lending by large banks increased dramatically after the affordable housing mandate was in place in 1993, growing to $6 trillion today. As Ellen Seidman, director of the federal Office of Thrift Supervision, said in a speech before the Greenlining Institute on Oct. 2, 2001, "Our record home ownership rate [increasing from 64.2% in 1994 to 68% in 2001], I'm convinced, would not have been reached without CRA and its close relative, the Fannie/Freddie requirements."

The 1992 GSE Act was the fuse, and the trillions of dollars in subsequent CRA and GSE affordable-housing loans would fuel the greatest housing bubble our nation has ever seen. But who lit the fuse?”

Who lit the fuse ? Government, politicians, easy money, no equity down, land use restrictions which drive up urban prices and make a 'normal' price and loan impossible.

There never has been a market in US housing. For a myriad of reasons the Americans feel that land, home ownership and real estate are 'too important to be left to the market'. The result is predictable – a cycle of booms and busts stretching back to 1819,  which destroys wealth, punishes the poor, and which divides society along class and income lines. The CRA, HUD and Fan and Fred need to be closed, shut down, and liquidated. Easy money and negative rates need to repudiated and a strong money policy instituted.

Since none of these 'reforms' will happen another housing bubble is assured – and of course the 'market' and Wall Street will be blamed yet again.


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