“There is no means of avoiding the final collapse of a boom
brought about by credit expansion. The
alternative is only whether the crisis should come sooner as the result of
voluntary abandonment of further credit expansion, or later as the final and
total catastrophe of the currency involved.”
~ Ludwig Von Mises
The United States is now based on debt;
this perpetual debt has come from the promotion of wealth and financial
security. Some may say that consumers
and borrowers were coaxed into the borrowing to expand growth in our economy by
spending. We saw the outcome of debt and
mass loans can do in 2008. In 1999
through 2005, the housing market was up trending and the federal National Mortgage
Association (Fannie Mae) wanted to make buying a home more accessible to everyone. In 1977, The Community Reinvestment Act gave
strong incentives to lenders who would loan money to low-income borrowers
expanding the role of bankers to loan sales men. In 1980, the Monetary Control Act
Deregulation made it so lenders could change the interest rate depending on the borrower's credit score, the lower the score the higher the rate, unfortunately
a low score is a sign of debt or non-consistent income. In 1982, The
Alternative Mortgage Transaction Parity Act gave way to balloon payments making
a final payment much higher than original payments and Variable Interest Rates
Loans, a loan that fluctuates over time.
Then in 1986, The Tax Reform Act that lowered the top tax rate and
raised the bottom, it was the first time in income tax history and gave back
substantially if you bought a home. All
of these Acts were to entice home buyers who could not truly afford a home.
This gave way to a real problem called
Sub-prime lending. In 1999, the
sub-prime loan mortgage market exploded and anyone with bad credit, no credit, low
income, no income could get a loan. Sub-prime
loans are primarily used to finance mortgages that Prime loan qualifications cannot
meet. This added nine million people to
the ranks of home ownership, more than half were minorities. The people were uneducated about the loans and
the consequences that could take place. The sub-prime loans offered are expensive and have major penalties and higher
interest rates that can make the payments overwhelming as the rate increases. The people knew little about the mechanism of
a sub-prime loan, and eagerly singed papers to fulfill their dream of home ownership. The worst mortgages were
offered to the least qualified, Adjustable Rate Mortgages (ARMs) like interest
only or payment option ARMs would reset after one to two years, then change weekly
or monthly. As the increase in borrowers flooded the market, the home equity
was rising and the borrower would sell or refinance before the rates would adjust,
at least that is what the banks would convince you of while you were signing.
They knew what they were doing.
The Federal Reserve lowered the Federal
funds rate 11 times, from 6.5% in May 2000 to 1.75% in December 2001. This
created a flood of liquidity and growth in the economy and other lending
markets. The Securities Exchange Commission (SEC) relaxed the net capital that
freed them to leverage up to 30, even 40 times their initial investment in 2004. Goldman Sachs (GS) The Lehman Brothers, Bear
Stearns, Merrill Lynch (MER), and Morgan Stanley (MS) all acquired new lenders;
including Sub-prime, lenders securing trillions of dollars in mortgage backed
securities and saw bigger profits than expected for years. In return the stocks kept rising. The FED began raising its rates up to 5.25
percent.
As people became aware of the
downfalls the loans held, the horror stories were airing on every headline
creating panic and people stopped buying and started defaulting on their
loans. The lenders of the sub-prime loans
were filing for bankruptcy weekly, in February of 2007 over twenty-five
companies filed for bankruptcy. The news
spread like a wildfire. The degree of
leverage by the large companies could no longer be supported and they “broke
the buck” by creating capital risk with leverage. Many investment firms were unable to cover
the credit derivative contracts. They
halted the sales of short sells trying to stabilize the market, but it was too
late. The panic and uncertainty spread
in to the interbank market and they needed to prevent it from becoming a global
catastrophe. The government then had to
issue bailout programs with help from the European Union and Japan and other
central banks came together using conventional and unconventional methods to provide
liquidity support to the institutions. The
Fed cut rates along with the CB, Sweden,
China, Canada, Switzerland, and The European
Central Bank. It was not enough. Each with their own versions of bailout
packages, outright nationalization government guarantees, and finally The U.S.
came out with The National Economic Stabilization Act buying up billions of
distressed assets.
We still have seen the effects of the bubble that burst in
the mortgage market; the market has not fully recovered and may never. Economic cycles that are manipulated though the
monetary expansion, this debt can create a large bubble, much larger than the
natural cycle would hold. With that,
larger bubble will come much larger consequences; right now, the magnitude of
this bubble we are facing in 2015 is bigger than it’s ever been in history. Since 2008, the Central banks (CB) and Federal
Reserve (FED) removed collateral from the markets that were high quality. The American people and government are even
more leveraged out against even smaller quality assets paying a much higher price
than they ever were in 2007. The Wall Street Journal came out with an estimate
that states “a third of traders have never or will witness a rate hike” this
era has driving a rise in leverage. Chain
reaction leading to the collapse has been set in motion for some time now.
The U.S. Treasuries has a rate of
return that is considered “risk free” rate of return that is the assets that
all assets are priced based on riskiness.
The rate has been falling for over twenty-five years. These falling rates then spread to other
rates of return making investors barrow or turn to leverage to gain a higher
return. While the past thirty years, we
have seen investing risk getting cheaper because the bull market those bonds
have been in. This time it will be much different
the crash will be all assets worldwide and it will happen simultaneously to
devastate huge segments of the global population. The Fed can keep printing money until they
own all the publicly traded companies and we all end up working for the FED
or government. The powers that be like the
major investment institutes, CB the FED whose actions have perpetuated and continue
to exacerbate the bubble, know just what the outcome of their actions and decisions
will be. The European Central Bank, The
World bank along with The International Monetary Fund (IMF) all understand and
have understood just what this next massive credit bubble and most large corporations
wont be hurt by the outcome. They know
they have laid the groundwork for it and in some way, they will profit from it
in the end. The bubble will only hurt
the public and again their personal savings accounts will be drained in the
bailout funded by hard working middle class, until they have, nothing left to
contribute it will be for the good of the nation, of course.
