Monday, April 24, 2006

"A Harvest of Financial Despair" or "The Most Calamitous Clustering of Financial Error in U.S. History"

...the common American does not understand he is being manipulated and impoverished by the Federal Reserve. When money is no longer real (i.e. fiat currency vs. gold and silver), then people may come to believe in the surreal, and a hyperreality emerges. In particular, during the reign of Alan Greenspan, money and credit – created out of thin air – rained upon Americans as if to assure us that crop failures and misfortune had been banished from U.S. soil. Hence, we came to live in a world of plenty where one may become wealthy by simply purchasing a house – with lots of borrowed money – and by "investing" in stocks for the long run. What a dream it is to become wealthy without effort. This mass delusion is only one step away from collectively believing that cotton candy is a cash crop. Alas, Americans will soon discover that housing values don’t grow to the sky and that heavy mortgage debt leads to a harvest of financial despair.

Because of the housing bubble, as engineered by the Federal Reserve, Americans are now drowning in mortgage debt while naïvely believing that living in a house is the path to wealth creation via long-term capital appreciation. Thus I am just going to come out and say it: countless American homeowners are already insolvent and simply don’t know it; and many of them continue to make ends meet by borrowing against credit cards and ever-shrinking home equity.

It is commonplace for me to see married couples with mortgage-debt-to-income ratios that are wildly askew. The hyperreality conjured by the Federal Reserve’s relentless inflation of the money supply is characterized by a populace which believes that a permanent plateau of prosperity has been attained. This is the boom phase of the trade cycle.

Let’s face it: highly leveraged Americans have little to no chance of ever paying back their enormous mortgage debts. All it will take is for a husband or a wife to lose a job, or for interest rates to go higher, in order for mortgage debt to become unmanageable. In the bust phase, mortgage defaults will become a deluge.

Earlier, I mentioned that the Federal Reserve "engineered" America’s housing bubble. To be sure, there are those who deny a housing bubble exists. Hence, such deniers argue there is no correlation between aggressive growth in M3 and the spectacular rise in housing prices across the United States – as if the Federal Reserve’s pounding down of interest rates occurred in a vacuum. To this I respond with a quote from page 1 of a September 2005 study sponsored by the Board of Governors of the Federal Reserve System titled House Prices and Monetary Policy: A Cross-Country Study [warning: PDF]. Here is the smoking-gun quote: "Like other asset prices, house prices are influenced by interest rates, and in some countries, the housing market is a key channel of monetary policy transmission."

As surely as night follows day, a credit-induced boom is followed by a bust.

This mortgage-debt bubble, as engendered by the Federal Reserve, is leading millions of Americans to financial ruin. This may become the most calamitous clustering of financial error in U.S. history. If anything positive comes out of this economic mess, perhaps it will be the demise of the Federal Reserve itself. Regrettably, the Fed’s failure will have come at an enormous price, including the possibility of volatile social unrest.
You can read the entire article here.

Oh, and Bill Fleckenstein declares the bubble as officially popped.

6 comments:

Marinite said...

This post is just plain BS.

Is the post BS or is the article BS?

The author suggests that the end-game might include the dissolution of the fed, not me (it's too bad he ends the article in that way). The article makes some otherwise very good and articulate points IMO that are worth thinking about at least for those for whom they are new. I don't want to 'throw out the baby with the bath water' here.

But come on. Where was the fed when all these borrowers took out 100% financing and option ARM’s to get into a McMansion they knew they could never afford

It is a matter of public record that Greenspan was advocating the increased use of ARMs at a time of ultra-low interest rates...an environment where rates could only go up. IMO that was incredibly irresponsible.

FWIW, I agree with you 100% that personal responsibility by people taking out loans must count for something.

Also, simply assigning blame (if that is what one must do) to a single entity (i.e., the Fed) is silly IMO. The blame is shared by many...the Fed, lenders, borrowers, appraisers, realtors, etc.

Bashing the Fed, for maintaining financial stability (no matter the consequences to housing) is un-productive and comes across as a little bitter.

The ends justify the means?

sf jack said...

"It is a matter of public record that Greenspan was advocating the increased use of ARMs at a time of ultra-low interest rates...an environment where rates could only go up. IMO that was incredibly irresponsible."

*****

I believe we need the, and I agree with much of anon's thoughts... though for the life of me, I could never figure out why Easy Al said that (above).

It just seemed beyond responsible, thinking about how the "average" American might respond to that (perhaps not the average, but those who might even know that Easy Al was Fed chair and what he meant at the time).

Looking back, the only word that comes to mind to describe it is "surreal."

sf jack said...

Should say: "I believe we need the Fed..."

Marinite said...

...but he was also very careful not to say that everyone should use this type of financing. It was the banks who provided it to anyone with a pulse - not Greenspan.

True. But I am not so sure if at that time it was taken that way.

I am also definately not advocating abolishing the Fed. It's just that there is some good info here and it is valuable to revisit the past every once and a while so that we keep in sight where we have been.

Athena said...

What I always want to know is... when you know people are drinking the kool-aid... what image does that conjure up for you?

I remember how the original one ended and have come to the conclusion that any time there are masses and kool-aid involved, it is going to have the same ending and steer clear!

Marinite said...

The only thing to do is make sure that there are enough safety nets and valves to soften the busts that always come.

maven -

Should there be "safety nets", etc? How are people going to learn if not by paying for their mistakes? If this were children we were talking about, then using such "safety nets" would ensue criticisms of 'spoiling the child by sparing the rod'.

It's been argued before that as long as we have fiat currencies and credit there will always be financial bubbles of one sort or another. It seems to me that the only way to lessen the chances of bubbles (assuming fiat currencies and credit remain in place) is by changing popular expectation and behavior. What better way to change popular psychology than taking the lumps they deserve?