Financial bubbles and the 'greater fool' theory

[flashl]

The anatomy of the United States housing crisis

The U.S. housing market is hurting, as you undoubtedly know. Home foreclosures are the highest since record-keeping began 35 years ago. 1.69 percent of all outstanding mortgage loans have entered the foreclosure process.

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This is the unpleasant aftermath of the housing bubble of the early 2000s. After the stock market bubble burst in 2000 and further weakness caused by 9/11, official Washington's fear of a 1930s-style deflation prompted the Federal Reserve to flood the markets with cheap credit.

It should be noted in passing that the stock market boom-bust cycle that ended in 2000 was caused by the Fed's inflationary expansion of money and credit, so it should not inspire our confidence that the Fed's remedy for its own inflationary policies was more inflationary policies.

The artificially low interest rates engineered by the Fed — abetted by a compliant financial industry that cranked out reams of irresistible mortgages (e.g., no money down, no- or low-documentation, minuscule introductory interest rates on adjustable rate mortgages — ARMS) — had their desired effect: they stimulated a housing boom that spearheaded an economic recovery.

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Buyers, conditioned by a decades-long trend of rising home prices, figured that as long as they could "tote the note" (that is, afford the monthly payments) then they didn't have to worry about the actual price of the house, because they assumed that there would always be someone willing to pay an even higher price for their house.

This is the "greater fool" theory that recurs in every financial bubble.

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[lapfog_1]

1. Anyone remember Bush bragging about how home ownership

had gone up, and that this was "good news for families".

Well, expect a really high divorce rate for this year and next as family finances are the number one reason for couples to split.

Thanks, George!

[Double T]

2. There is ALWAYS a fresh crop of suckers born every minute.

The American economy depends on THEM.

[fasttense]

3. The supposed "free market" depends on fools.

The only reason people got hoodwinked is because they trusted the government. They trusted the government to regulate out things like loan sharks and usury lending. When the conniving, corrupt "free market" idiots like Milton Friedman and the bushies rapidly removed all regulations that citizens were use to trusting, the carpet baggers and con artists started their games. Once people catch on, the thieves move on to a new scam.

When everyone found out the dog food had poison they stopped buying it. When everyone found out kids toys were laced with lead they stopped buying them. When everyone found out these exotic loans were nothing but a scam they stopped buying them (and paying on them too apparently).

It took US citizens eight years to figure out that the republican party and their corporation CEO friends were nothing but con artists. We were accustomed to good government and it took us a while to understand we were dealing with crooks.