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Crewleader Donating Member (1000+ posts) Send PM | Profile | Ignore Tue Sep-15-09 11:48 PM
Original message
The Final Demise of A Speculative Housing Bubble
September 16, 2009

charles hugh smith

The speculative mania in housing has been extended by massive Federal Reserve and government intervention; the government now owns or guarantees 2/3 of U.S. mortgages.

While speculative bubbles may pop in terms of sales and valuations, the psychology that underpinned the mania lives on for some time--especially if government extends the speculation with massive interventions.

I sincerely doubt the average American understands the full measure of Federal intervention to prop up the U.S. housing market. The numbers casually dropped (with little context, of course--this is pure MSM "coverage," after all) in the Wall Street Journal report No Easy Exit for Government as Housing Market's Savior ( are truly mind-boggling:

To keep funds flowing to the housing market, the government bailed out Fannie Mae and Freddie Mac last year and now effectively owns the mortgage finance giants and their combined $5.4 trillion in loan portfolios. To keep mortgage rates low, the Federal Reserve is on track to purchase nearly $1.5 trillion in debt issued or guaranteed by the government's various mortgage arms and another $300 billion in Treasurys, which set the benchmark for home lending.
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Frank Booth Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Sep-16-09 12:21 AM
Response to Original message
1. So the government's keeping the bubble inflated?
That'll do wonders for inflation.
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notesdev Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Sep-16-09 12:28 AM
Response to Original message
2. It's not over yet
We're just getting a federal debt bubble to replace the housing bubble.

But the game is almost over. We're fucked, people, and unless the powers that be wake up NOW, this nation may not exist long enough for us to see a second Obama term.

So it's time to STFU about Joe Wilson, ACORN, teabaggers, Kayne West, Michael Jackson, health care reform, or whatever other nonsense that once appeared to be important.

There is ONE issue left, which is money and debt. We MUST was the debt out of the system immediately. If we don't, you won't see any of those other things on your TV because there will be nobody still in business to broadcast. You won't have to worry about health insurance because there won't be any such thing anywhere, at any price, nor will there be any money with which you could use to pay a premium or which an insurance company could use to pay a claim.

You do NOT want to be asleep and unaware when this historic event comes upon us. It will not be long.
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ixion Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Sep-16-09 05:57 AM
Response to Reply #2
3. well said

The caveat is that the powers-that-be are fully aware of this. They've telegraphed their awareness with the Consumer Protection Act (sic).

It looks like a seining operation at this point. Those who are asleep (and sadly some who are not) are going to get caught up in that net.
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IrateCitizen Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Sep-16-09 07:28 AM
Response to Reply #2
4. You're exactly right regarding debt...
And we are failing on every single level to even make an attempt at addressing the problem. I don't share your view that we're going to see a complete disintegration of the socio-political entity known as the USA, but serious changes are coming (and, in many cases, have already arrived) when you step outside of the Washington/mass media bubble.

I think that Chris Martenson explained it in the simplest terms. When you have been spending $1.10 for every $1.00 you make, sooner or later you have to begin spending only $0.90 for every dollar you make in order to come back to equilibrium. All of the talk about "unlocking credit markets" is simply an attempt to continue spending $1.10 without any consequences -- a situation that can continue indefinitely only in fantasy-land.

Sooner or later we need to trim our expenditures down to $0.90 for every $1.00 we take in -- or, more likely, something like $0.75. Any way you slice it, it ain't gonna be pretty.
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econoclast Donating Member (259 posts) Send PM | Profile | Ignore Wed Sep-16-09 07:37 AM
Response to Reply #2
5. Fair warning
The best analogy I can think of is forest fire.

We used to believe that every fire had to be fought with a maximum effort. But we have come to understand that fire is an integral partof long term forest health. Small fires clear undergrowth and remove sick trees, making room for new healthy growth. Our maximum fire fighting behavior has, over time, only set the stage for huge conflagrations. So now forest managers use controlled fire tokeep forests healthy.

Same with the economy. We have for decades routinely jumped on every recession, large and small,with both feet. Defecit spending. Bailouts. Consolidating failing entities with healthy ones. Increasing debt. A vain attempt to eradicate the uncomfortable parts of the business cycle. I believe that all we have done is perpetuate firms and financial/economic behaviors that shouldd have been allowed to fail when they were small. Why does Manhattan have so many great restaurants? Because bad ones don't last long. But we don't apply this simple culling process in most sectors of the economy.

I hear the financial press talk about the "deleveraging" taking place. But I don't see it. Overall we have re-leveraged, swapping housing and bank and auto debt into government debt on an industrial scale. We have set the stage for a huge conflagration.
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PassingFair Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Sep-17-09 07:23 AM
Response to Reply #2
6. Mind telling us what we can do about it?
Maybe I DO want to sleep through it.

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clarence swinney Donating Member (673 posts) Send PM | Profile | Ignore Wed Sep-23-09 11:32 AM
Response to Reply #2
8. what debt?
79 million elderly come aboard our sinking ship to get Social Security and Medicare.

Of course, net out those that Will pass out.

2010 Federal Budget Shows:

Deficits as % of GDP


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westerebus Donating Member (1000+ posts) Send PM | Profile | Ignore Thu Sep-17-09 08:05 AM
Response to Original message
7. Bernake's speech.
" The recession is probably over." .... Translation....We at the Banking Industry continue to do what we have always done, We make our money the old fashion way, We sell you debt from which We profit. We are still making a profit despite our lack of judgment. Ergo, the recession for the Banking Industry is over.

Please refer any questions to the White House or Congress. They will not do much, but that's what We pay them for.

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steven johnson Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Sep-23-09 02:25 PM
Response to Original message
9. Reinflating the Bubble
Edited on Wed Sep-23-09 02:33 PM by steven johnson
The Onion published an article on 7/14/08 article titled "Recession-Plagued Nation Demands New Bubble To Invest In". Apparently the demand is being met.

The FHA has been cranking out new government-insured subprime loans, which it packages into government guaranteed securities for sale to banks. They let let banks swap toxic Fannie and Freddie securities for new toxic debt that is 100% guaranteed by U.S. taxpayers.

The FHA and its mortgage-backed securities broker, Ginnie Mae, have taken up where Fannie and Freddie left off, and are now the dumping ground for toxic mortgages.

Because Ginnie Maes are explicitly 100% guaranteed, they are considered risk free, and on par with U.S. Treasury bonds, notes and bills. There is no reserve requirement, or haircut, on Ginnie Mae securities. Its such a good deal for the banks and actively promoted by the Fed and Treasury, that banks are using Troubled Assets Relief Program (TARP) money to buy Ginnie Maes. Its all a sham. Capital reseeve ratios are being manipulated and insolvent banks are being propped up.

The bubble is being reinflated.

Some of the players may have changed since the first subprime-mortgage crisis, but the game apparently remains the same. With banks currently unwilling to lend, the new federal triumvirate of the Obama administration, the Treasury and the Fed are trying to inflate the moribund U.S. housing market. This time around, however, the FHA is the weapon of choice.

Obama & Co. are making an all-or-nothing bet that the U.S. economy will recover and bail out the housing market before the final bill for this ill-advised gambit comes due.

When this bubble bursts and it will U.S. taxpayers will be on the hook for more than $1 trillion in government-guaranteed debt.

Special Report: How the Government is Setting Us Up for a Second Subprime Crisis

A year after the financial system nearly collapsed, the nation's biggest banks are bigger and regaining their appetite for risk.

Goldman Sachs, JPMorgan Chase and others, which have received tens of billions of dollars in federal aid, are once more betting big on bonds, commodities and exotic financial products -- trading that nearly stopped during the financial crisis.

That Wall Street is making money again in essentially the same ways that thrust the banking system into chaos last fall is reason for concern on several levels, financial analysts and government officials say.

Banks go back to their risky ways

Bernanke, Paulson and Geithner ... They avoided another great depression? It's more accurate to say they've done a handsome job of delaying the day of reckoning.

Problem is, you can't keep problems this big under the rug for long, nor can you cure one bubble by blowing up another - yet that seems to be the only solution the fed knows.

The Fed is apparently purchasing as much as 80% of mortgage backed securities (MBS). 80%! What happens when they pull out of that market? Likely a total collapse - where will interest rates go then?

Everything that is being done to solve the housing crisis is only delaying, and exacerbating, the problem. Rather than letting the huge bubble that formed over 2000-2006 deflate all the way to sustainable prices the government keeps trying to reinflate it (or at least keep it half inflated).

A New Bubble of the Fed's Creation.

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