A Letter to the Editor of the Oregonian Newspaper expressing dismay at an article blaming average folks for the financial meltdown. by Gene DeNardo
(liberal)
Friday, January 2, 2009
This is a letter I wrote to the Oregonian Newspaper after reading a front page article entitled, "'Easy Money' Magnified Real Estate Crash". The headlined first sentence read as follows:
"Opportunistic schemers and overextended mom 'n' pop investors take Oregon's problems right down to the grass roots."
Basically the article gives examples of average folks really messing up their own lives and the lives of others through malinvesting during the housing boom. I am not debating that fact but the underlying reasoning that this was the root cause of the downturn and the blatant absense of any mention of federal monetary policies.
It is appalling to me that the media can repeatedly misreport or non report when discussing this issue. The fact that average Americans are not at least presented with alternate viewpoints, many of which are more valid than the prevailing viewpoints, confounds me. I think it just shows the immensity of the problems facing us. I hope you enjoy the opinion.
The Oregonian front page article "Easy Money Magnified Real Estate Crash" never mentions the source of the easy money or the root cause of not only the crash but the original bubble. This exemplifies the lack of understanding we have of the workings of our economy and the great lengths the controllers of the economy have gone to hide a few simple facts.
The most obvious fact we can distill from the recent downturn is the fact that housing prices went to a level that far exceeded their value. Although we have tried to blame everything and everyone else the real cause has rarely if ever been brought to light. The actions of the Federal Reserve and the Treasury, the same folks that have ask for upwards of a trillion dollars to fix the problem, are the fundamental reason we are experiencing this so-called crisis.
The Federal Reserve makes decisions every day on monetary policy. To put it simply, what this means is that they decide how much money to "create" or to "borrow" to add to the already existing monetary supply. They can also decide to "withdraw" money by selling securities and then keeping the money they receive in their bank which keeps it out of circulation. They have basically decided over most of the last thirty years and especially the last 15 years to keep adding more and more funds to the economy.
The also have control over interest rates. They have also kept interest rates artificially low. Both of these actions are the legacy of the policies of Alan Greenspan. It should be added that in a truly "free market" economy, rather than the directed and managed subsidized corporate economy we have, both interest rates and monetary levels can be established naturally. But it is more important to know that there was and is too much money and at too low of interest rates.
An overly simple example is to picture 10 apples in a store with 10 purchasers. They each have a dollar. The price will be determined by what they will pay. Now what if someone mysteriously placed an extra fifty cents in each of their pockets? Would the prices change and which direction? Can we expect them to be prudent and careful with the extra fifty cents? Has the amount of apples, representing goods produced in the economy, changed? This is in effect what the Federal Reserve does day in and day out.
The Treasury on the other hand, is responsible for carrying out the budget of the United States. The Bush administration achieved the largest budget deficits in the history of our country. When this happens, the Treasury must issue securities to cover the difference between tax revenues and the total budget. When this happens, money is borrowed by our government, lately from foreign sources, and injected into the economy through government spending. In a sense, this is another form of money creation, as new money enters the economy without any underlying increase in production. The same number of goods but more dollars.
In fact, the money supply was so bountiful and the rates so low that banks were able to basically give away mortgages, and especially the riskier subprime mortgages. Combine this with the newfound security, the "Mortgage Backed Security". First marketed by Henry Paulson's former employer, Goldman Sachs, these securities "bundled" multiples of mortgages, hiding the riskier short term, below market rate mortgages in with the standard, healthier mortgages. Banks no longer were interested in carrying these loans, thereby eliminating the need to screen applicants, as bundles of these mortgages could be sold at will moments after the final papers were signed. The perfect recipe for disaster formulated by the very people entrusted to caretake the economy.
These actions were taken not because these people lack the brains to do the right thing, but because there is so much money to be made doing the wrong thing. It fits right into their playbook when average folks go around blaming average folks for the problem, just as this article did. There were plenty of mistakes and ensuing tragedies but the truth is you can't misspend money that doesn't exist.
Until we let the production of our economy determine the amount of money that circulates rather than trying to produce by permitting our government to create money out of nowhere, we will continue to experience these extremely damaging boom-bust cycles. The true "easy money" was made at the federal level not in the hands of "mom n' pop" or some "opportunist schemer". We all try to "earn" or "make" money, but only the Federal Reserve can "create" it out of nothing.
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Posted By: Walt Thiessen
Date: 2009-01-02 15:45:17
All excellent points. The one point most people miss most often, from all economic viewpoints, is that they forget what the psychology was like during the housing boom. Almost everyone in the industry thought that the prices were going to keep going up. Even those who thought there might be a market correction never dreamed for a moment that it would be anywhere near as bad as the current correction has been.
Borrowers who borrowed unwisely believed at the time that even if they found they couldn't keep up with the payments, they could still get out of it with a profit because the prices were going to keep going up. That's what everyone from realtors to lenders to appraisers to newspaper pundits told them, and they believed it. Everyone convinced themselves that the real estate market couldn't crash because they weren't making any more land but populations continue to increase. It was the pricing structure which convinced them, and this same pricing structure was artificially inflated by Fed actions.
It's easy to see from this side of the real estate crash how foolish their thinking was. From the other side, it was almost impossible for most people to see. That's what we need to remember.
I remember when my wife and I moved to our current town in 2004. It was right in the middle of the boom. Housing was out of our price range. I wasn't willing to buy even if it was within our price range, because I recognized what was going on. But every real estate and rental agent I talked to as we were hunting for a place to live thought we were crazy not to buy while the buying was good.
Even in 2007, when we moved again to our current home, despite the fact that the market had cooled off, very few believed that we'd experience the kind of crash that we saw in 2008. Realtors insisted that the downturn was only going to be slight, and then we'd be back to the races. Lenders felt the same way.
Were all of these people just plain stupid? No, they were duped by the money supply. They didn't realize the damage that all that monetary inflation was causing. Many of them still don't understand what happened, and that's the worst tragedy of all. It's bad enough to go through an experience like we're going through now, but if people don't learn from it because they don't really understand what happened, then that's a true tragedy.
Today, my wife and I are still renting, and I'm not ready to buy yet because I'm not convinced that prices have bottomed out yet. Real estate sales have picked up lately as people buy at bargain prices, yet inventories aren't decreasing substantially. This means that a lot more sellers are waiting in the wings.
Further, we're not done with the mortgage crisis yet. We've only just survived the subprime portion. The alt-a and option ARM portions are yet to come. A 60 Minutes report last November showed a graph which indicated that we can expect more of the same in late 2009, mid 2010, and late 2011. The unanswered question is how many of those mortgage holders will successful refinance before the spam hits the fan. At this point, there's not enough information to know.
Hi Walt, That\'s great foresight if you percieved this problem in 2004! In light of what has happened, truly visionary. Too bad the Fed didn\'t or if they did, that they would have acted on it. I think another common misperception is that the "house" is escalating in value when in fact most of the appreciation is the underlying land. When we keep this in mind, it is easier to understand and figure out whether it is actually value or just inflationary value. We can look at the supply and demand of land rather than the house. In most places there was plenty of land, so as soon as the demand slackened prices dumped. Wasn\'t the case here tho, so the prices are only down about 10%.
Posted By: Jake, the champion of the constitution
Date: 2009-01-03 18:42:19
Dear Gene -
Nice article! I certainly wont claim to have been as visionary as Walt, but I can happily claim to have not bought a house either :)
From what I have read, H1 2009 may be steady-state, but in H2 the AltA and option ARM stuff will start hitting the fan. The degree of the downturn is debatable, but I think its for sure another downturn - even with the increases in money supply that will eventually should up as inflation. Of course in purchasing power terms, everything sucks.
One thing a lot of people talk about (like Peter Schiff) is how the other foreign currencies will rise against the dollar significantly. While I grant this certainly could occur (and would in a ideal economic world that we just dont live in), one interesting thought is what if all Western bloc (and Asian?) gov'ts debase their currencies all at more or less the same rate to prevent a "collapse"?
For sure, whats pretty funny is that Jim Kramer guy shouting that its all over, everyone should go buy a house now, etc.
..... In other news, gold was up for the 8th straight year in the USD, at 5.8% on the year. Silver didnt do so hot, and the many other base metals are still in the deflationay basement like copper. :)
Posted By: Walt Thiessen
Date: 2009-01-04 12:40:49
Gene: I'm convinced that the Fed did know about it. They knew exactly what they were doing. However, they didn't care. It was more important to them to "stimulate" the economy than it was to be responsible for the consequences of all that stimulation. This has always been the Fed's policy, including the Volcker years, when they tried to simultaneously stimulate the economy while keeping inflation "under control." The result: 1987's market crash and a whole bunch of S&L bailouts.
The reason that the Fed (and the bankers) have never been concerned about the consequences is that they knew that they could dump the mess in the taxpayers' laps, as they have done repeatedly since the Fed's creation. In fact, I'm willing to bet they knew that it would eventually lead to taxpayer bailout, because that's what always happens. They just didn't care about it all that much. Nice guys.
Walt, i am sure you are right, i think i was expressing "hope" more than anything. How could they not know? i just read the article "The Federal Reserve as a Cartelization Device" by Murray Rothbard. Traces the formation and the ensuing great depression. According to Murray the Reserve was created as a cartel with the expressed goal of continuous inflation without the natural competitive tendency to deflate when credit is called in. this enables never ending, increasing bank profits. with that in mind, it may be that the current leaders thought they had accomplished that goal and were a bit surprised by the downturn.
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