The Fed’s role in the Housing Crash of ‘07

[rumpel]

Atlantic Free Press

Monday, 08 January 2007
by Mike Whitney

“This is the biggest housing slump in the last 4 or 5 decades: every housing indicator is in free fall, including now housing prices.” Economist Roubini Nouriel, Dow Jones, 23 August 2006

“The Fed, in effect, has become a serial bubble blower.” Stephen Roach, chief economist, Morgan Stanley

The American people appear to be oblivious to the economic hurricane which is expected to touchdown in late 2007. That’s when $1 trillion in ARMs (Adjustable Rate Mortgages) will “reset” triggering a massive increase in foreclosures and plunging the country into a deep recession. If energy costs continue to rise at the same time or if the dollar loses more ground, we may be rooting around in the backyard garden-plot ooking for passed-over spuds and radishes.

The crisis is entirely the work of Fed Chairman, Alan Greenspan, whose “cheap money” policy caused a speculative frenzy in the real estate market which sent home prices through the stratosphere. In fact, the bubble originated in 2001 when Greenspan lowered interest rates to a meager 1%and ignited a refinancing boom as well as a sudden up-tick in home sales. Now, after 17 straight interest rate increases, the bubble is quickly losing steam and the effects are being felt from sea to shining sea. Rest assured, the sudden downturn in the housing market is just the first gust from an impending tornado. By the end of 2007, America’s match-stick economy will look like the rubble strewn landscape of New Orleans 9th Ward.

Greenspan has been the biggest player in this pre-Depression operetta. He kept the printing presses whirring along at full-tilt while the banks and mortgage lenders devised every scam imaginable to put greenbacks into the hands unqualified borrowers. ARMs, “interest-only” or “no down payment” loans etc. were all part of the creative financing boondoggle which the kept the economy sputtering along after the “dot.com” crackup in 2000.

It worked like a charm, too. Aided by the Fed’s cheap money policy, the housing market sizzled. In just 6 years the total value of real estate jumped from $11 trillion to $21 trillion! (“From 2001 through 2005, outstanding mortgage debt rose 68% from $5293 billion to $8888 billion”) It’s the biggest expansion of debt in history and it was all engineered by seductively low interest rates.

http://www.atlanticfreepress.com/content/view/614/81/

[acmejack]

1. Greenspan's Fraud: How Two Decades of His Policies Have Undermined the Global Economy by Ravi Batra

Thom Hartmann's "Independent Thinker" Book of the Month Review

What do you do when you want to screw only the working people of your nation with the largest tax increase in history and hand those trillions of dollars to your wealthy campaign contributors, yet not have anybody realize you've done it? If you're Ronald Reagan, you call in Alan Greenspan.

Through the "golden years of the American middle class" - the 1940s through 1982 - the top income tax rate for the hyper-rich had been between 90 and 70 percent. Ronald Reagan wanted to cut that rate dramatically, to help out his political patrons. He did this with a massive tax cut in the summer of 1981.

The only problem was that when Reagan took his meat axe to our tax code, he produced mind-boggling budget deficits. Voodoo economics didn't work out as planned, and even after borrowing so much money that this year we'll pay over $100 billion just in interest on the money Reagan borrowed to make the economy look good in the 1980s, Reagan couldn't come up with the revenues he needed to run the government.

Coincidentally, the actuaries at the Social Security Administration were beginning to get worried about the Baby Boomer generation, who would begin retiring in big numbers in fifty years or so. They were a "rabbit going through the python" bulge that would require a few trillion more dollars than Social Security could easily collect during the same 20 year or so period of their retirement. We needed, the actuaries said, to tax more heavily those very persons who would eventually retire, so instead of using current workers' money to pay for the Boomer's Social Security payments in 2020, the Boomers themselves would have pre-paid for their own retirement.

http://www.buzzflash.com/hartmann/05/07/har05007.html

[Tandalayo_Scheisskopf]

2. It's all about...

Pumping commerce and asset acquisition, then stripping wealth and assets from the little guys. Remember what one of the Mellon Family said:

"A Depression is when money returns to its natural owners"

The same can be said of a recession. They have gotten so good at generating these economic events, they can focus them and keep them from going wide-focus, cutting across sectors.

[acmejack]

3. Don't forget Greenspan was a consultant to the infamous Lincoln Loan.

Here's a little snip from MSN Money:

snip>
That leads me to Alan Greenspan -- the very man who created the conditions for the stock bubble and the housing bubble -- who (1) claimed that real estate couldn't experience a bubble, (2) actually suggested that folks obtain adjustable-rate mortgages as short-term rates were making their lows, and (3) has been unable to realize that the Fed should have been warning banks about their imprudent lending standards.

But if you can't see a problem, you can't try to head it off at the pass -- just as he was oblivious to the bad real-estate loans and junk-bond "investments" that helped precipitate the 1990-91 S&L collapse.

Ironically, in 1985, as a paid consultant to Charles Keating's Lincoln Savings & Loan, Greenspan proclaimed that its management was "seasoned and expert" -- with a "record of outstanding success in making sound and profitable direct investments." He later wrote a letter to Edwin Gray, then-chairman of the Federal Home Loan Bank Board, telling Gray to "stop worrying so much," and "that deregulation was working as planned." Greenspan noted 17 S&Ls that had just reported record profits. Within four years, 15 of those 17 institutions were out of business, costing the Federal Savings & Loan Insurance Corp. $3 billion.

Just as the masthead of my daily column says "All roads lead to inflation," by my reckoning all financial problems lead back to Greenspan.

http://moneycentral.msn.com/content/P131154.asp

[Warpy]

4. Yes and no

The cheap money out there, thanks to the Fed, allowed a lot of people out there to become homeowners, myself included. As the demand spiked, the supply failed to meet it. There was a huge demand because a decade and a half of punishingly high mortgage interest rates had created a large pool of people with decent jobs and steady income who simply couldn't afford the enormous finance charges. Millions started to rush into the market as soon as the rates fell. The Fed is responsible for that part.

Then the supply started to increase as prices started to creep up. Cheap money and rising prices made investing in housing look like a sure thing, and about 5 years ago, small time speculators started to enter the market, usually with risky financing like ARMs and interest only balloon mortgages they expected to get out of at a huge profit before the shit hit the fan and those balloon payments kicked in. The builders kept up with THAT demand, also, and that's where the real bubble came in.

Speculation was one of those unintended consequences of cheap money. Overbuilding was another one. We now have a stock of housing that has far outstripped demand, speculators who are trying to jump out of the market and get out from under debt they have no way to pay off are starting to dump a lot of housing onto a depressed market, making things worse. The Fed didn't create speculators, nor did it cause lending institutions to issue crazy credit schemes. Human nature did the former and deregulation did the latter.

[rumpel]

5. greed

comes to mind...

[applegrove]

6. That and War spending kept a faulty economy going. Also dumps of

large amounts of money to the rich through tax breaks. Now the next President will pay dearly for Bush steerage. What fun * has had on his watch.

[rumpel]

7. Congress needs to address this issue

even though, yes, Iraq is important, however this is the livelihood of many families, and what happens to my fellow We The People is my concern, and should be of those we put into office.

[rox63]

8. This is very scary stuff

:scared: K&R, because the people need to know about it.