“If I draw illustrations from the banking field to indicate the limits to which the depression reached, it is only because I am writing about banks and not because the banks are the one glaring example marking the extent of the financial cataclysm. The railroads, the insurance companies, the building-and-loan societies and mortgage companies would quite as well depict the situation.”
The collective memories of many Americans believe and associate the Great Depression igniting from the heart of Wall Street. However, it is clear that many industries built around financial imprudence also failed during the Great Depression. Think of the many industries currently facing hard times with the housing decline: insurance companies, mortgage lenders, hedge funds, the auto industry, home remodeling centers, and many other housing associated industries. Can it be that for the past decade, we have been using the home as a center of economic prosperity? Clearly it has helped to a certain extent with unparalleled amounts of mortgage equity withdrawals. There are estimates from the FDIC that $5 trillion in wealth has been directly linked to this housing boom. How much was really lost during the three years following the Crash?:
“The decline in the price of bank stocks was only a minor phase of our debacle. The quoted value of all stocks listed on the New York Stock Exchange was, on September 1, 1929, $89,668,276,854. By July 1, 1932, the quoted value of all stocks had fallen to $15,633,479,577.”
“Stockholders had lost $74,000,000,000. This figure is so large that not many minds can grasp it. It is $616 for every one of us in
So $74 billion was lost. A massive amount. What would happen if say the $5 trillion in housing wealth would suddenly disappear? Instead of bank failures we are now facing hedge fund debacles and everyday it appears that another mortgage outfit is closing shop. Mortgage resets are hitting the market to the tune of $30 billion a month with our peak month hitting in October with $50 billion resetting. We will not fall below the $30 billion monthly mark until September of 2008. Most experts are now predicting a declining market until 2009 and these are optimistic projections.
“The South Sea Bubble wasn’t so much! We have done pretty well in the way of bubbles in our own time. All financial history shows no parallel to what we have been going through. Never before, in this country or anywhere else, has there been such a general loss in “security” values.”
Bubbles will always occur in profit driven systems because of human nature and bubbles will bust when they reach a Minsky Moment. In addition, the psychology at a certain point tips and the market no longer follows previous rules. The system was built on consistently appreciating real estate and when this ended, it turns out that millions of people were swimming naked. The only question now is how long will the market retrench. Unbelievably, those that pumped up the bubble are crying for compassion for the desolate homeowner now losing his home even though he is laughing all the way to the bank. Since he is partly responsible for the massive speculation, why doesn't he cut a check from his decade long bubble profits if he feels so bad? Instead, they want the entire nation to carry the burden of this massive credit orgy. If they truly believe in free market capitalism, then what is currently happening is the end result; the market is washing out all the excess from the system. Yet the Fed injecting liquidity amounts to corporate welfare and is only prolonging the inevitable decline.
“The decline in the quoted value of
We are already seeing this. Many REO properties are simply sitting on the market and stubborn lenders and sellers are refusing to lower prices. Buyers are refusing to buy or are unable to get loans. It is a Catch-22 that is accelerating the market on a downward spiral. People realize that housing is going down and are suddenly reluctant to buy. The MBS market now seeing the intestines of their portfolios is realizing that some overpricing may have occurred. I’m not sure if any of you have seen the new housing syndicate marketing angle (I caught a glimpse of this on late night infomercial happy television). They are now pushing, get this, FHA loans! Suddenly, the industry that pumped interest only, hybrid, reverse mortgage, 2/28 loans, stated income, and every other weird concoction of loans is coming home to the safest of the safe. But the scary implication here is they are touting, “no need to worry here, these are government insured.” Guess that means the American tax payer is going to bail out the housing industry. At least this is what the housing industry expects.
“The loss of $74,000,000,000 in the value of
The real pain is in what happens on a micro level. Like the couple earning $130,000 a year that lost their home to foreclosure and is now facing hard times; these are the real stories behind the bursting bubble. What is the psychological and financial impact of those put into 2/28 homes and are now facing foreclosure? There is no financial benefit to the buyer for jumping into a 2/28 loan aside from squeezing into a home they cannot afford over the long run. The only one benefiting from this is the mortgage broker who gets a stronger kick back for putting you into a risky loan and the agent from getting a commission check after escrow closes. What do they care? The loan is getting an extreme makeover on Wall Street and they'll never see it again. The transparency legislation now being pushed is 7 years too late. Wall Street has turned off the spigots earlier in the year. Don’t worry about the large mortgage outfits, many top CEOs and executives actually sold out [are in the process of selling out] near the peak.
“Not only did our investments shrivel in the last three years but we even frequently lost our pocketbooks. Cash in hand, left for safekeeping in a bank, often went the way of our investments, and worse. Almost $3,000,000,000 of our daily-used cash funds were sequestered in the doubtful assets of the 4835 insolvent banks. Widespread communities were left with only the mattress as a safe depository, and with little to put into it. People became so frightened in regard to the safety of the banks that they locked up in safe-deposit vaults, or selected elsewhere, more than $1,500,000,000.”
We don't have to worry much about losing savings accounts considering Americans now have a negative savings rate. Try imagining you are now in 2009. What do you think the sentiment of the American public will be when trials are going on regarding shady lending practices? Many defunct companies are now getting their legal houses in order preparing for this. Even with the previous scandals such as Enron, many folks saw this as something far and away since few even understood what Enron did or what laws they broke. But everyone will understand the debacle of the housing industry because it hits every American. It is a simple story of greed and financial negligence. And one thing is certain, Americans do not like gambling with their homes unless they are winning. Now that many are losing, they’ll be out for blood. The Democrats are already taking aim and claiming it is the mortgage brokers fault for putting us in this mess. Of course there are other major players including the Fed, hedge funds, buyers/sellers, agents, appraisers, and flat out greed.
“This is a shameful and humiliating exhibition. It is uniquely bad. Across the border in
We are facing a healthy economy as well. Unemployment is low. Wages are holding steady. GDP is still growing. Too bad most of this growth is heavily influenced by the credit bubble. Like the former banking president states, this credit bubble mess is another "man made problem" as well. Where this market will take us is anyone’s guess but I’ll leave you with the final paragraph of the article:
“Human stupidity and cupidity were the taproots of this great financial disaster. Those are evils which will always best us. There have, however, been revealed faults and weaknesses in our banking and investment practices that account in part for the extreme nature of this experience. Isn’t it about time that we began thoughtfully to examine some of the fundamentals of our banking and investment theories and methods?”
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