Woodruff wrote:patches70 wrote:Player wrote:The REAL problem is that too many people actually WORK full time and yet still cannot afford to live in this country, even in "low rent" areas such as where I live (in the "rust belt" ).
The
real reason that so many people working full time can't afford to live in this country is because of inflation.
Absolutely.
patches70 wrote:Player wrote:Too much income is now generated from investment. That itself was OK back when investment actually meant investing in people's ideas, innovation and work. Today, its about playing games with moving accounts, dodging taxes. Money is siphoned off the workers in an unsustainable way.
And what Player is saying here is absolutely true. When we give golden parachutes and bail outs to the so called "Too Big To Fail" banks and broker institutions instead of letting them go bankrupt from their mal investments it only reinforces more bad investments.
Yeah, I've been so disappointed by how this has been handled. It really disgusts me.
Now, I'm not going to argue in favor of the bailouts, but TPTB had little choice. And it's our own fault as well.
The crash was very much a Minsky Moment and such phenomenon is well known and understood. All the signs were there, we just ignored them. The economists who almost to the man are in the pocket of political masters, the politicians who don't give a damn about long term consequences only that they get elected by making promises and the regular people who generally don't know enough to understand what's happening.
Pre crash it was Goldilocks. Economic Nirvana that period was being called. DOW was at all time highs, financials were making money hand over fist, people were getting into homes easily. No one complained. Sure, there were a few people out there saying this is all smoke and mirrors and something bad is coming and those who actually understood were able to position themselves to make a lot of money in the crash.
But generally speaking we were all accomplices to the crash. The politicians were able to spend like drunken sailors, expanding government benefits and programs. Buying votes. The same old same old but in the time before the crash things were going very well for everyone.
Of course, it was all a sham. The Fed was purposely inflating the housing market and incorrectly thought that the housing market was insulated well enough from the rest of the economy so that if anything bad did happen it wouldn't take everything down with it. The Fed was wrong, so wrong.
All those bad loans that were given out and then sold as securities to unsuspecting European and Far East investors found out the hard way just how bad those securities really were. Basically it was fraud. In fact, that's exactly what it was. Loans were made to people who couldn't afford them. The banks and mortgage companies making the loans knew they were bad loans.
All those mortgages were then bundled up and sold as securities. As per US law. Freddie and Fanny were two of the biggest offenders of pawning off those mal investments on unsuspecting investors. The ratings agencies, all with nice cozy relationships with securities issuers (like Freddy and Fanny) went ahead and rated those bad securities as triple A investments. But those securities weren't triple A, not even close.
When the securities go bad, they were insured by people like AIG or other firms like Lehman Brothers got stuck with those bad securities. We all know what happened to Lehman, they went bankrupt. But AIG insured the majority of those bad securities and AIG didn't have anywhere near enough funds to cover the loss in value of the securities and the amount of money AIG was liable for.
So, everyone who had purchased those securities were just screwed. We are talking about entire European nations (correction, European central banks) who had bought those securities. The Chinese as well had invested heavily in those securities, which we have to remember were often rated as triple A when those securities were not.
And all this was done with full knowledge and endorsement of the US government. After all, we were determined that every American should own a home. People were able to get homes and those people were convinced that it was a good investment because homes always go up in value (so they were told). Mortgages are historically a good hedge against inflation* after all. That's true enough. But what wasn't understood is that The Fed itself inflated the housing market which led to that dramatic increase in home values pre crash.
It should have been a red flag to anyone paying attention. Home values historically rise very slowly, but in the bubble years home values shot up like a bat out of hell. This had happened only once before in the history of our nation, just after WWII when all the GI's came home from the war. There was a big housing boom. But at all other times home values rise very slowly. The WWII rise was a natural consequence of increased demand (lots of soldiers coming home needing a home). As opposed to the pre crash where there was no natural demand increase. There was a demand increase because tons of money was pumped into the housing market (via easy to get loans, ninja loans and subprime among others). This was an artificial demand that also increased exponentially the amount of money in that particular market (housing). Thus we get a massive inflation of home values. Not because the homes are actually any more valuable, but due strictly to monetary inflation.
And all this happened at the bequest of government who got voters to vote for the politicians because politicians promised that the voters would be able to get easy loans to get into their own houses. And all these promises were made by people who had no understanding of the consequence, taken by regular people who not only didn't understand the consequences but didn't care (after all they were getting easy loans and buying houses that were practically guaranteed to rise in value and those people could make a whole lot of money). Flip houses! Get rich quick! And so it goes. The Fed as a partner with government was all too willing to go ahead and provide all that easy money.
But as everything goes, all things must come to an end. And end it did as we now know. All these investors, these European central banks, China, and everyone else who were tricked into buying a fraud of securities wanted their money which was supposed to be insured. AIG massively over extended it turned out that this housing bubble was systemically tied with the rest of the economy. Through the creation of all those new financial products that the US government approved and regulated.
Guess what? The US government is on the hook for that, aren't they? They participated in the fraud. If someone defrauds you then that person must make restitution to those defrauded. WE defrauded the world. And so we paid. We know now that not only did a lot of the TARP money go to foreign central banks, The Fed itself had to fork over trillions to foreign central banks, a fact The Fed attempted to hide from the American people. And we are on the hook for that money. One way or another The Fed will get it's money back for all that, even if the government has to tax us to the umpteenth generation, every penny will be paid back.
Now, if we had simply said "screw you, world, investments have risks", that certainly is one way we could have handled it. Except, there are consequences to that line as well. Consequences that would have drastically affected virtually each and every American. Badly for the most part.
What the crash really was, was a market correction. A much need correction that happens every time artificial bubbles are created. Instead of allowing the market to correct, TPTB decided to put off the correction. For better or worse that's what was decided. For each individual there would have been different effects depending on which way we went. We bailed out the banks and you see where you are today.
But what if we hadn't bailed out the banks? Who understands what would have happened then?
More importantly, if the crash was really just a market correction that we haven't allowed to happen, when will the market eventually correct itself anyway?
To me, the correction is coming one way or another. And it will be painful, believe me. All we've really done is put off the pain for another day.
Woody, you may be disgusted at how it was all handled back in the TARP days, and I can feel for you on that. But I tell you to worry not about that because they didn't do anything but put off the pain. If you'd had your way and no bailouts for anyone then fear not, you'll get your wish eventually. But you still won't be very happy I can assure you. In fact, if you haven't hedged for that eventuality then you will be in for a world of hurt. As will most Americans.
I could go into exactly what that entails (not bailing out) but that's yet another long post that no one will read anyway or care. Suffice it to say, I think had we gone down that road, painful as it would have been, we'd have long since actually recovered by now and our economy could be off and racing. Of course, there would be new riders on those horses, but those new riders would have been much better informed, careful and a public that understood the ramifications of easy money and the pain it eventually brings. We'd have been scarred but wiser. And that's not all together a bad thing. As it stands we are still in the longest "recovery" ever. Recovery, heh heh. Without a proper market correction to gain true price discovery, there won't be a recovery. And no amount of legislation, promises or wishful thinking can change that.
In conclusion, artificial demand, monetary policy, unrealistic expectations lead down a road of pain and suffering. And we are still barreling down that road and the brakes are out.
*When you get a mortgage, a standard mortgage, not some ARM or sub prime junk, but just a regular mortgage; then your monthly payment is locked in for 15-30 years. Over all that time you keep paying the same amount but usually you'll get raises at your job over that period of time and you get more and more disposable income that doesn't have to go to ever increasing amounts of rent. A renter on the other hand has to contend year after year signing new leases with each lease a little bit more than the one before, typically.
