“It takes two to speak truth, one to speak and another to hear.” -Henry David Thoreau

For those following the housing boom and bust carefully, the solution to let prices correct is not a novel concept. That is why it is surprising to see headlines, four years after home values peaked and have been falling, arguing for home values to fall. The equation is simple because people that make less money can only afford a certain amount of home. The only reason to keep home prices inflated artificially was to appease those with tremendous amounts of housing debt. It took four years for some to see the light (many have not) yet trillions of dollars are now out the door under false pretenses for something that was going to happen anyway. In the end we have created the biggest moral hazard with housing as the centerpiece in this modern game of Monopoly. Yet after all the pain and economic suffering that Americans have suffered and with obvious culprits, nothing has occurred to fundamentally change our banking system. To that issue we focus our attention today

Banking Stockholm Syndrome

Some people still believe in the narrative that we had to save the banking system. There is a legitimate case for this. But did we have to save in the way that we did? Absolutely not. Under pressure and fire the biggest looting of American wealth has occurred and no revolution was necessary. Remember when good old Hank Paulson gave us a three page memo requesting $700 billion for “troubled assets” which was a nice euphuism for toxic mortgage crap? Some have forgotten the days of September 2008 when the word bailout seemed to be a daily utterance. By the way, the vast majority of those toxic mortgages still sit on the balance sheet of banks even after the money is now out the door.

Some suffer from a banking Stockholm Syndrome where they now believe in the propaganda pushed out by the bailout winners. Use logic when thinking about this. If that initial bailout was to remove toxic assets from bank balance sheets and banks still have those toxic assets, then the program was an expensive failure by definition. And this bailout was only one of many. The big issue is who has shouldered the cost of the banking and housing calamity. We need only look at the biggest net worth line item for American households, homes:

Source: Federal Reserve

At the peak of the housing bubble in 2006 Americans had $13 trillion in equity in their residential real estate. At the peak, total residential mortgage debt stood at $9.8 trillion. Today, American households have $6.2 trillion in equity while mortgage debt has grown to $10.3 trillion. In other words American households have faced a real financial loss of $6.8 trillion. At the same time you’ll notice that the amount of mortgage debt has remained steady. The toxic mortgage waste just sits idly by while banks use the taxpayer wallet as an ATM. You can’t have a double-dip without bouncing first. Americans hold most of their net worth in housing. That has not recovered because employment is weak. Stocks, which are heavily tilted as a primary source of income for the top income earners has only made people feel better temporarily. The mainstream media for the most part represents this tiny group and that is why it has taken so long to even realize that there really is no recovery outside of the stock market.

Again, without fixing the core of the banking system we are doomed for another crisis. Those that believe the narrative that “we had to do what banks wanted us to do” forget that it was the banks that spearheaded this housing bubble in the first place. They were the industry that created collateralized debt obligations and options ARMs. The anger in this upcoming election is justified but might miss the real financial problems. The fix has been in for decades. Until we reform how banks and corporations lobby politicians we can simply expect more crony capitalism for years to come. In fact, the amount of lobbying dollars went up at the height of the crisis:

Source: Open Secrets, data up until July 2010

You don’t become wealthier as a nation by shipping off your jobs or diluting your employment base. Years ago my focus was on jobs and it still remains there. So what if a home costs $750,000 if local area incomes were at $300,000. Home values need to reflect a healthy job market meaning wages can support local home prices without taking on some exotic loan. Instead of focusing on that key part of the equation, banks with the support of the government have been obsessed with lowering lending standards, 3.5% FHA insured loans, HAMP, wacky refinance programs, ignoring non-payments, pushing option-ARMs into 40-year interest only balloon mortgages, but in the end it hasn’t worked because jobs can’t justify bubble home prices even today after a severe correction.

The price tag of the bailout is much higher than headlined

How many times have you heard about the Federal Reserve on your morning news? When we hear about the bailout it is usually confined to the tax breaks and stimulus funds push forward. Not to diminish that but the one simple action of the Fed buying mortgage backed securities is double that amount yet not much is mentioned about this in the media. If we really want to break down the numbers the total cost is astronomical:

Source: Nomi Prims

The current total price tag is $9.1 trillion. When you break down who got what, you can see the biggest wealth transfer in history. We can debate whether we should have let banks completely fail or to bail them out. Yet there was no debate or even open public discussion about the biggest bailouts in our nation’s history. Wall Street scared the crap out of people in those days when the DOW was dropping constantly so all this was passed in a panic by Congress (with lobbying dollars flowing in). Yet if you remember, it was the public who didn’t want the bailouts in the first place. Their gut intuition was right but our government is unfortunately broken when it comes to protecting us in the financial realm. Right now, this is predatory capitalism where all the productivity of the American public is being skimmed off like froth from a cappuccino and handed out to Wall Street bankers.

Where does the housing market stand today?

It isn’t sufficient to say that giving banks everything they asked for has saved us from a second Great Depression. For the 26 million Americans that are unemployed, underemployed, and have given up looking for work this is a depression. Plus, how many people that have lost jobs and have taken up lower paying jobs are not cited in the above figure? We know that 4 out of 10 of those fully employed workers now are part of the low paying service sector. Do you think buying a new home is the first thing on their mind?

Let us look at housing starts:

The $9.1 trillion didn’t seem to do much here to help out. In fact, this collapse is on par with that seen in the Great Depression and no $9.1 trillion was handed out to Wall Street back then. Let us look at home sales:

New home sales never did any significant movements because people don’t have the funds to buy expensive homes. Existing home sales had tiny spikes but this was all based on government tax breaks and massive amounts of gimmicks. Once that was removed, home sales collapsed. So $9.1 trillion did what for the housing market? Now we have people saying home prices should correct? They already have and would have done that anyway! We need to go back and get a refund on that $9.1 trillion especially when it comes to the banks.

So what is the solution? At this point, the system is so broken and from reading comments here on this blog and other places the public gets what is going on. This is no mystery. Right now we need some heavy handed leadership to step up and bring justice to the financial ills that have occurred. $9.1 trillion flushed down the toilet should bring up some new Pecora Investigation. As we saw with the AIG deal only after the fact, Goldman Sachs recovered 100 cents on the dollar for all their bad bets. Can you walk up to the Fed and ask for the 30 percent you lost on your home purchase? Or maybe you want a refund for that bad bet on roulette? In the end home prices need to correct. The longer we delay the inevitable the more we look like Japan and their zombie banks. We can debate culture, demographics, and all other things but our banks are doing exactly what their banks did.

Home prices falling is merely a reflection of a bubble popping and people not having incomes high enough to support current prices. How about we focus on fixing the income side of the equation and let housing prices fall where they may?

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