There are always two sides in any economic analysis, the supply and demand. Oddly enough, any transaction can be analyzed from any side. For instance, the sale of pork bellies is traditionally analyzed as a supply of pork bellies and a demand for pork bellies. However, an argument can be made that there is a supply of purchasers of pork bellies and a demand for purchasers of pork bellies.
So, basically, there is both a supply of credit and a demand for takers of credit. In this case, both are drying up. There are few people in the position to borrow money, and most of them are not interested in it. There are also few banks in an actual position to loan money and few of them are interested in it.
So, the fed wishes to alleviate this problem by pumping money into the economy at a rate never before seen in recorded history. The increase in money in the economy has so far had little effect on the continued deflation in prices. The only way to stop deflation is to let it happen.
Basically, people are in debt up to their eyebrows. For those unemployed, they don't have any room to maneuver and are going to lose everything anyway. For those employed with increasing costs or employed at reduced pay, they will lose part of what they have. For those who are on fixed pay with fixed cost, they have no ability to increase their holdings.
The axiom 'all economic activity is at the margin' applies here. If someone has committed 90% of their income, they only have a 10% cushion. An 11% increase in prices will wipe that out, leading to the need to reduce other spending, which is, of course, someone else's income. This is the crux of economic trouble, that spending is in discrete lumps which often must be entirely eliminated because they cannot be reduced. A good example is cable tv, something most people can actually do without. In most cases, the price cannot be reduced, so the cost must simply be eliminated.
Another large payment most people make is the mortgage. As people need money, they will begin, more and more, to consider eliminating what is quite often the largest single payment they have. This is particularly true if they can move into an apartment for substantially less or if another house, either cheaper or more attractive, is available. They may be able to finance the other house for substantially less and may get it financed because it is something the banks want off their books as it is a foreclosure.
What can happen next is the family simply defaults on their previous loan. This puts another house up on the 'market'. These cascade defaults pose a problem. The Bureau cannot assess the risk for this, but it most certainly is happening. However, the risk of these families moving into apartments is also there, as is the risk of them moving into houses investors bought with cash for the purpose of renting, which is effectively the same as the first case in that the old house is now in default and they are living in a house that was foreclosed on.
After this happens enough and enough banks take enough of a drubbing, some investors will step in and buy the loans that are worth something. Out of the ashes will arise a new, healthier banking system with loans generally only made to people with the means to repay them. House prices will plummet as well.
However, those in power right now are mostly bankers and are not interested in losing their shirts. So, they are attempting everything they can to not allow home prices to decrease. They are also trying to lock people into the homes they are currently paying on, which is why Obama wants to provide 'mortgage assistance'.
Most people also believe that home prices should be protected because they will lose value in dollar terms if the prices go down. Of course, what they're forgetting is that all prices will go down. Their house may go down faster, but not so fast that they are completely ruined. This is the thing I keep trying to emphasize, that everything is related. When prices go down in one sector, prices in another sector will eventually follow because the price of their production goes down.
How does this happen if the goods in one sector are not active factors in another? Well, during a recession, there's 'downward wage mobility'. This means that people often are laid off and forced to take lower-paying jobs. However, since another sector has gone down in price, they can sometimes afford to. Also, entry-level pay is lower and the pressure to raise wages is lower because the costs are lower. As costs go down, wage earners essentially get free wage increases.
Now, price collapses in the housing sector could be a major boon to the rest of the economy as people essentially cut their largest cost in half. It is precisely this thing the feds are trying to prevent so banks don't lose money. They are clearly not acting in the best interest of the rest of the economy, protecting moneyed interests at the expense of those upon whose back this economy is borne. Letting the banks fail would mean everyone pays less for everything and thus finally has more negotiable funds for growth in the rest of the industry. Propping up the banks and locking people in expensive mortgages means stopping any hope of real recovery in the long term because nobody has any margin and 'everything happens at the margin'.
No comments:
Post a Comment