Sunday, October 10, 2010

Bursting The Housing Bubble Myth

I was out surfing this morning and ran into this, another blogspot to find the sage and cogent writing of Sippican Cottage.

And as usual, he is dead on the money. The commenter's are a fairly competent bunch as well.

Until the 1990s your home was not a short term investment piggy bank. You bought a house and took out a mortgage because you could build equity over a long term- 10 to 15 years usually- and building that equity was a hedge for retirement.

Then all of the sudden your house would increase 20% in value (for no real apparent reason), and folks would strip that equity out of their homes and spend it. Encouraged by two things; free money tax encouragements and the lemming-like follow the Jones over the cliff instant gratification society.

Why did the government encourage spending yourself into debt? Because our economy has been based on consumerism since the end of the Cold War. We don't make things in this country and sell them to others; we employ each other by swapping goods we bought from China (on credit) for money we borrowed from China, back and forth, each time hoping we could make enough on THIS transaction to get us out of the debt we were incurring on both ends.

Guess what?

Didn't work, did it?

Nothing is worth more than somebody will pay for it. The problem with housing became that people were not spending their own money. They didn't care what they paid for a house when they spent your money for it. And since the loss was yours when they walked away, they didn't care if they did that either, and walked away from the debt in droves.

Now we can either bail out the homeowners with government (Chinese borrowed) money; bail out the lenders with government (Chinese borrowed) money, or allow the entire financial structure of this country's (and a decent portion of the western world's) to collapse.

Damned if you do and damned if you don't.

But this is why I was in favor of the original TARP bailout 2 years ago. The original program was to relieve the banks of their worst defaulted properties, allowing them to liquidize these troubled assets and let the Federal Government hold them until they regained some worth.

But somewhere between the stated purpose of the bill and the spending of the money we got shafted. The Feds just gave the money away to their buddies, who donated large portions back to the elected officials who gave them billions.

It was not a housing bubble; it was a government bubble.

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