What goes up must come down. Speculation drove up prices, houses that went up 1-2% a year went up 20% a year. That lead to a bubble, and as they get larger they get thinner, then pop.
My complaint on 401Ks, private retirement accounts would inflate the market in stocks, and the money would have to be invested. More dollars buying a limited pool of goods, prices go up.
The stock market should reflect the earning ability of companies, just as housing should reflect it's rental value. When you can rent a house for half of what it would cost to buy it, houses are over priced.
That everything would reset to value was understood, and if it had been a normal downturn, people would be buying everything at 50% off now.
The problems are the tax code, housing became the leading tax shelter. The more expensive the house, the bigger the tax deduction, and when it went up 20% a year, it created imaginary capital.
When the music stopped, there were no more buyer to keep the Ponzi going, there was still a lot of paper wealth which is worthless, if sold, but carried on the books like it was good.
There are people still holding Russian Czarist Railroad Bonds. Tobacco plantations in Cuba.
The money lenders lost. Stocks, houses, office buildings, prices drop, but it is still there.
Capital invested in money lending is gone forever. The imaginary took the real with it.
Banks keep a capital fund equal to 10% of assets, loans. If the loans go bad they can be written down, which increases the capital ratio, but they sold bonds based on assets, and they owe.
A 50% decline in assets means the bond service costs twice as much.
Banks are allowed to loan ten times capital reserves, so if assets drop 90% the bank is still solvent, it lost future earnings, which never existed. The Bonds do exist, and do have to be paid their interest, and funds must go into a sinking fund to redeem them, pay back the capital invested.
The debt of the banks exceeds capital and assets, there is no way out.
The Banks, Brokers, who issued the Bonds, and the companies who insured them, are all way beyond bankrupt, can never recover, but as long as they do nothing they keep their paychecks and bonuses.
Those who bought the bonds know they are worthless, but the interest payments keep coming.
This bubble is getting thinner by the day.
The major bank/brokers are one company, they lost all the money of the rich. It has to pop.
We the people still have the world, cheaper housing, the factories and stores are still there and we are 70% of the economy.
A new house does have a market value,but like a car, boat, it should decline in value. It runs down, needs constant repair, and ages.
A ten year old factory is not worth more than new cost, but much less.
We need a new economy based on We The People.
Capital blew it and is gone, there is nothing left but Labor.
02 Feb 2009, 7:21 pm
