My Email Reveals Bank Insolvency and Hot Money Speculation

My friend sent me this email:

"Have you heard that Obama wants to bundle foreclosed homes in 50 homes per lot and sell them cheaply to high-rolling bidders? Americans will have to pay taxes to make up for bank losses. Another fiasco in the making-- like the past bailout for savings and loan companies that occurred a few years ago."

My email response:

I heard that. But the banks are insolvent, and are sitting on more houses than have been reported. The option would be to wind down each bank separately, before they all implode together. I don't know if any politician will do that now. Both parties want speculation, and allow hiding of inventory in oil, and in housing. It hurts everyone who buys stuff, unless you are an insider. But this selling of houses at true market value is no different than insiders buying bank assets at a discount. The only thing is that the "wholesalers" are given the easy deal while everyone else is left out. That is the same when it comes to banks borrowing cheap at the Fed but we can't.

But here is the deal, the banks have already written down the houses they possess on their books. They have to sell the assets. The mortgages are held by investors. They refuse to take haircuts on cram downs for the average Joe. I don't know if they will take haircuts on these houses sold in bulk. The only thing I don't like about it is that everyone cannot participate, so that prices of houses will stabilize above the market. It sort of freezes the market. On the other hand, if house prices are allowed to fall to a free market value, quickly, as inventory floods the retail market, that is going to hurt a lot of people on main street too. It is a mess. The mortgage investors should be forced to accept cram downs for main street borrowers, but the greedy pigs won't.

Now they want to introduce covered bonds. Senator Corker of Tennessee, who says borrowers, not banks, were the irresponsible ones, is introducing covered bonds. (Banks were the source of the housing scam and of easy money. Corker is wrong!) It is both Republicans and Democrats offering the bonds. Now, covered bonds work fine in parts of Europe, because you cannot fill them with junk there. There are exceptions, like Greece, and who knows how far that could go. However, in the US, the covered bonds could be sound and maybe not over time. It depends on the lending standards. They appeal to investors because if the bank goes insolvent, the investors are at the head of the line, before the depositors, and before the FDIC!

On the other hand, there is little demand for the 30 year fixed loan. These banks want easy money once again. I don't know how soon they will get it but it is a crack high for them. I see another housing bubble by 2020, and Paul Ryan in his 6 trillion dollar budget has budgeted in a housing bubble! It is the casino versus the rest of us. Some Democrats and the American Enterprise Institute do not want another bubble in housing. But many Republicans and some Democrats do want another bubble in housing. At Davos, last January, the insiders called for a doubling of world debt in 10 years. The problem is that it depends on who has the debt. If corporations have access the debt, and can improve their businesses, then fine. But the consumer doesn't need more debt. Another housing bubble will flood the world with misplaced debt.

I say people should rent and invest the rest. Easy money is hot money, looking for a quick return and then it flows out before the followers realize it. Hot money is the curse of the world, and is not real investment. The center for hot money in the world is the UK Square Mile, where worldwide banks come to gamble. Wall Street is just a helper. Look at where the implosions have come from. MF Global in the UK. AIG in the UK. Madoff in the UK. If you think about it Diane, the Parliament of GB has no power over the Square Mile. The Queen alone is the protector of the UK financial system. The Square Mile, or City of London, allows gambling on a scale not even allowed on Wall Street.

So, since the Square Mile will never be regulated, even though Sarkozy of France wanted the Tobin Tax on it's transactions, that financial powerhouse will never be reined in. That speculation center will kill the Euro, then attack the Euro currencies. You wonder how much Europe can take. Will there be a war in Europe? Who knows. It isn't that Germany or the PIIGS are not blameless. But clearly, the speculation comes from the UK and Wall Street, and even Euro banks play that game. The Eurozone politicians are in over their heads, and the British Empire still reigns, even over US consumers too.

Austerity will not cause economic growth. Austerity almost insures another housing bubble as main street will be desperate for credit down the line.

Gary

While the private equity folks want to buy up all the distressed housing, thereby being able to rent and perhaps undercut the mom and pop renter, there is an even bigger ultimate problem with this practice. While the banks will become more sound by selling properties already written off (a reason banks don't want to modify your mortgage), the entrance of big business into the housing market will result in more manipulation. Indeed, once the big boys control a boatload of real estate in the United States, they will be able to boost any easy money housing bubble that comes in the future. They will sell into that bubble, and the ability to get buyers into toxic loans will result in another bubble and crash. They will then wait for prices to decline, and repeat the process of buying cheap and selling high.

Having big business in the housing market with the power they will have is a really bad idea in the long run. As one fellow said in the comment section of a blog, Mr Potter will indeed own the whole town now.

A follow up email was sent to my friend regarding the S and L Crisis that my friend had previously mentioned.

Hi *****,

With regard to the S and L crisis, two issues ended up destroying the S and L business, so that the banks had to be taken down. First, FDIC insurance did not come with a higher premium for risky players. That happened in the housing bubble of this century as well. And second, the inflation of the 1970's, with no ability to establish adjustable mortgages, resulted in the S and L's paying more to depositors than they were making on the mortgages. The solution was, as in the case of the housing bubble of this century, to allow the S and L's to operate with less capital and make more risky loans! Sound familiar? This has Greenspan written all over it. The massive gimmicks used like allowing lender and borrower to be the same person, was reinforced by the Keating Five, including John McCain, a slave of finance.

Of course, we now see the folly (because of the 21st century housing bubble) of offering main street adjustable mortgages. The average Joe cannot handle them. The 30 year FIXED mortgage, with a controlled inflation policy, is still the best loan for main street.

Here are two articles regarding this S and L fiasco, and the second one I wrote:

http://www.econlib.org/library/Enc/SavingsandLoanCrisis.html

http://www.businessinsider.com/phil-gramm-legacy-mccains-evil-twin-2010-12

Gary