Canada's Housing Bubble

Mar 28, 2011 Ron Sanders surfhopkins.com

MADISONVILLE, KY - Answers to the continuing economic slump should be of concern.

Even economists who usually have answers for everything aren’t offering any rosy projections. Furthermore, there is no consensus among economists (that is not unusual). There is consensus of the cause of the recession and there is widespread agreement among economists that as bad as the recession has been – it could have been much worse.

Like many recessions, this one was caused when an economic bubble burst. But it was a huge bubble – housing. When the tech bubble burst it hit the stock market and just a narrow part of our economy. When housing burst, it spread across the nation and around the world causing the worst recession since the depression.

The housing bubble was caused by a complex network of home financing and bundling of mortgages. This “bundling” of mortgages was called “securitization”. Lending one to believe, perhaps, that the bundled mortgages were more secure for investment banks to purchase and own than individual mortgages. This was not the case because mortgage originators and banks took risks they should have never taken. Federal encouragement of lending money to traditionally underserved income levels known as “sub-prime loans”, lenders making 100% loans, mortgage originators falsifying loan applications a.k.a. “liar loans” and the loan originator not having any risk if the loan failed all caused the system to become fraught with debt that could not be paid back. Furthermore the securitization process with the bundled loans being combined to ever increasing larger “bundles”. The large bundle loans were sold to large banks and investment banks which were further sold to Freddie Mac or Fannie Mae or foreign banks and investors. Some banks retained the bundles because they were billing and collecting enormous fees. The banks and other financial institutions were using sophisticated programs to assess their risk and they bought insurance for these risks. Who insured these risks? AIG.

The housing bubble burst when gasoline prices increased suddenly and consumer confidence dropped. This caused a pause in the speculation that was fueling housing prices in many markets. With this pause, suddenly a segment of the over leveraged home owners could not make their mortgage payment and housing sales slumped. Foreclosures began to increase and housing prices began to fall and then freefall.

At this point the banks began to realize that the assets securing bundled loans were insufficient. The banks continued to write down assets and many found that they were bankrupt. The largest banks in the United States were in peril and were in danger of failing. Claims were made for losses to AIG and AIG was bankrupt with billions of claims from other banks still coming in. The government stepped in with billions of dollars of liquidity and loans to the banks to keep them afloat. The federal government bailed out AIG to the tune of 180 billion dollars. A number not far from damage estimates of Japan with the earthquake and tsunami.

Over reaction by federal regulators and suddenly cautious banks shut off money supply to small business loans and lines of credit. Small businesses began to contract, unemployment began to rise and the recession was in full charge.

To prevent the economy from total collapse, it was believed that the big banks would have to be saved to save the economy. Billions of dollars were pumped into the banks as foreclosures mounted and bank assets dissolved away. Most of the big banks were saved but hundreds of smaller banks were not so lucky. The millions of foreclosed home owners were also not as lucky. The banks, after suffering crippling losses, were able to scrape up enough taxpayer bailout money to pay their executives lavish, multi-million dollar bonuses.

Americans have lost confidence in Congress and they have lost confidence in our President. Americans have lost confidence in the republicans and they have lost confidence in the democrats. The economy is careening along at who knows what percentage of unemployment while the US Government is spending 1.65 trillion dollars that we don’t have each year. That is a deficit of 137 billion per month, 4.5 billion dollars per day, 3.1 million dollars per minute, and $52,321 per second. All this money must be repaid someday by a generation who can live within their means and pay back this debt plus interest.

Are we as Americans too self centered to solve this problem? Is our government too big and too powerful and too corrupt? Are our news media too lazy and too corrupt? Are our businesses too big and too corrupt? Are our labor unions too political and too corrupt? Are our banks too big and too corrupt? Is Wall Street too arrogant and too corrupt? Are we going to change our ways or wait until reality of the real world changes us? America is not too big to fail. American is not too big to fall. America is squandering our greatness and will economically fail if this course is not dramatically changed and soon.

Ron Sanders
Posted by Karen Orange - iSurf News