Fannie Mae and Freddie Mac between them account for approximately 50% of the outstanding mortgages in the United States. Most of these mortgages are not the "sub-prime" mortgages that have been in melt-down for the past few years -- Fannie and Freddie didn't even get into that business until recently, and only 5% of their outstanding mortgages are subprime. Rather, the problem is that their prime mortgages are now melting down as the housing market plummets, to the point where it seems unlikely that they can continue to perform their task of purchasing and securitizing loans because, well, they just won't have the money to do so.
And at that point, the whole housing market goes into complete meltdown, because the only way you could buy a home would be to pay cash. Which means that the average home would be 10% of its current cost. Goodbye to your retirement if you hoped to sell your home and move out to the desert to retire on the proceeds, 'cause there ain't going to be any proceeds! But more importantly, all that money represented by the equity in people's homes just vanishes. Trillions of dollars. Vanished off the books. The galloping deflation end economic collapse that results would end up making the Great Depression look more like the "sorta big-ish Depression".
So what to do? Well, it's crank up the printin' presses time. And believe me, that's exactly what they're doing. They're guaranteeing to make up any losses on the loans in order to keep mortgage lending going, because if you collapse mortgage lending, you collapse much of the money supply. But to do this they're having to crank up the printing presses and create more money out of thin air. The result is going to be stagflation -- prices going up, but the economy sputtering. We've been here before -- remember the late 1970's? But we're out of good options thanks to the Bush Administration hiding its head in the sand for way too long until the only options left are bad, and even worse. Thank you, George W. Bush. Thanks for nothing.
-- Badtux the Economics Penguin
It's not just going to be stagflation in the Greater Depression -- it's going to be stagflation on steroids. The Schwarzenegger of stagflation!
ReplyDeleteI hope I have a chance to come back to the United States (before OR after they split up) to wave my mighty plastic Aussie banknotes around. Or possibly Canadahoovian ones. (Mrs. Bukko wants to migrate to Vancouver. It's good to be a trained arse-wiper. With a bit of jumping through bureaucratic hoops, you get to live wherever you want to in the English-speaking world. Except San Francisco, sadly.)
"Goodbye to your retirement if you hoped to sell your home and move out to the desert to retire on the proceeds, 'cause there ain't going to be any proceeds!"
ReplyDeleteWe have about seven years left on our mortgage on a house that would have sold for about $300,000 in last year's market. We actually HAD discussed doing just what your quote above suggested. That talk lasted about two weeks, when I watched our so-called 'healthy, comparitively' housing market crash. And unlike others, I don't think seven years is going to fix it. Good thing I like it here, besides, the desert I wanted it running out of water.