Why Did The Government Allow Housing Bubble
The government let the housing bubble happen because government had to inflate the money supply to avoid a crash during their watch. Governments have been doing for decades! And that is the problem. Let me explain.
When we borrow money, banks create money out of thin air and give it to us. They do not lend existing money. Here is how banks create money:
http://www.tradingstocks.net/html/banks_create_money.html
When you buy a home for 1 million dollars, bank lends you the money. But notice, they do not give you the actual 1 million. You write a check and give it to the seller. Seller takes the check back to the bank. Bank gets the house for 30 years. No real money is used in this transaction. Seller keeps writing checks against his account, uses credit card, and never really asks for the 1 million from the bank. He uses it as a credit that is backed by the house on the balance sheet. 1 million really does not exist! It is bank credit. It works like real money. All this check book money that circulates in the economy is bank credit. It is not real money. It is not printed money. But it has the effect of money. Thus we can say the bank creates money out of thin air even though it does not literally print it. And it can deflate and dissapear into thin air too because it is just a promise to pay! Let me explain more:
America borrowed bank credit for 50 years and inflated the money supply and the price of everything along with it. Stocks, housing went up due to this inflated money supply.
Well, guess what happens when we stop borrowing??? Credit expansion stops! When we pay back debt, the mechanism reverses. It has the effect of a deflating money supply. You bought the house. You keep working and making payments. These payments suck the money out of the economy. When complete, your payments cancel out the banks 1 million dollar promise to pay. Bank gives the house to you. The 1 million that was created when you borrowed 30 years ago dissapears as you pay it back. This is why all the money FED prints does not make a blip in inflation now. That is because total money supply is deflating, it is not inflating!
Government allow sub-prime to happen, because they needed more borrowers to borrow to keep the ponzi scheme running. FED went along because they like their banks make record profits on expensive mortgages. If they did not allow these loans earlier, the housing crash and deflationary crash would have arrived sooner:
http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html
This is why home prices are falling. There is simply less money (bank credit) available to use. This is why companies are having difficulty employing people at the current salary levels. This is why consumers shop less. This is why sales are down accross the board. There is simply less money available. An entire nation cannot borrow for 50 years, expand the money supply, inflate the price of everything, and then expect that all will be fine when the pay back time arrives.
When we borrow money, banks create money out of thin air and give it to us. They do not lend existing money. Here is how banks create money:
http://www.tradingstocks.net/html/banks_create_money.html
When you buy a home for 1 million dollars, bank lends you the money. But notice, they do not give you the actual 1 million. You write a check and give it to the seller. Seller takes the check back to the bank. Bank gets the house for 30 years. No real money is used in this transaction. Seller keeps writing checks against his account, uses credit card, and never really asks for the 1 million from the bank. He uses it as a credit that is backed by the house on the balance sheet. 1 million really does not exist! It is bank credit. It works like real money. All this check book money that circulates in the economy is bank credit. It is not real money. It is not printed money. But it has the effect of money. Thus we can say the bank creates money out of thin air even though it does not literally print it. And it can deflate and dissapear into thin air too because it is just a promise to pay! Let me explain more:
America borrowed bank credit for 50 years and inflated the money supply and the price of everything along with it. Stocks, housing went up due to this inflated money supply.
Well, guess what happens when we stop borrowing??? Credit expansion stops! When we pay back debt, the mechanism reverses. It has the effect of a deflating money supply. You bought the house. You keep working and making payments. These payments suck the money out of the economy. When complete, your payments cancel out the banks 1 million dollar promise to pay. Bank gives the house to you. The 1 million that was created when you borrowed 30 years ago dissapears as you pay it back. This is why all the money FED prints does not make a blip in inflation now. That is because total money supply is deflating, it is not inflating!
Government allow sub-prime to happen, because they needed more borrowers to borrow to keep the ponzi scheme running. FED went along because they like their banks make record profits on expensive mortgages. If they did not allow these loans earlier, the housing crash and deflationary crash would have arrived sooner:
http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html
This is why home prices are falling. There is simply less money (bank credit) available to use. This is why companies are having difficulty employing people at the current salary levels. This is why consumers shop less. This is why sales are down accross the board. There is simply less money available. An entire nation cannot borrow for 50 years, expand the money supply, inflate the price of everything, and then expect that all will be fine when the pay back time arrives.