When Lee Huskey talked about the Boom and Bust economy and used the current collapse of the real estate market in the US as an example, I could not help but note some significant dissimilarities to the collapse of the economy in the 30's and 40's.
Lee stated that in the stock market an investor uses his own capital to invest. He assumes that stocks will increase in value based on economic market principles such as supply and demand. In the real estate market, an investor is risking the cash of a third party investor who bares the brunt of the risk in order to gain from an upfront return. In the earlier real estate fiasco of the 30s and 40s, banks did not take a calculated risk because they were dually invested in both the stock market and real estate market. Federal regulations were not in place to require bank reserves. As a consequence, when the stock market collapsed there were no cash reserves therefore the real estate market collapsed to enable bankers to meet the demands of the public for liquid assets. Neither the banking industry nor the stock market were regulated and so there was an integral financial relationship between the two financial industries.
The collapse of the real estate market today was due to the greed of large security companies such as AIG. These companies employed illegal, unethical, and predatory lending practices and marketed their loans to under-educated investors in the real estate market. Security companies such as AIG not only over-evaluated their collateral to acquire more money upfront from their investor, they also sold 15 year adjustable rate mortgages with no cap on the interest rate. In addition they used aggressive and unethical debt collection practices to include foreclosure rather than refinance opportunities. When AIG and others took these practices to the international economic market in Europe, and the weak European economy could not sustain these practices, AIG began to unravel. This began the real estate collapse in the US when people began to suffer from a weak economy and could not pay higher than warranted mortgage payments nor sell their over-evaluated homes.
The stock market collapse in the US in the 30's was caused by the Invisible Hand of Economic principles. Keeping Government out of private business and letting the free market create stability failed due to overproduction of consumables. These included agricultural products and a weak pre WWII European and Asian market. The problem was exacerbated by over farming thus causing crop erosion. When unfavorable weather conditions prevailed, the agricultural economy or bread basket of the world failed. It was inevitable that the real estate collapse would follow.
Today there are many regulations governing both the stock market and the banking industry. However, large International Securities Companies have been able to literally get away with committing fraudulent crimes of epic proportion. Even this evening's news on 60 minutes, it has recently come to light that most of the major banks handling homeowner loans have been caught illegally foreclosing on over a million homes by doctoring legal mortgage re-conveyance paperwork that did not give clear deed and title to the banks.
A century ago the real estate market collapse was a by product of outdated economic principles for the times, technology and lack of sound agricultural science, and devastating weather conditions. Today the fall of the real estate market was due to the greed of large banks and security companies. Their unethical and illegal business practices and poor government oversight of the industry has led to our current economic melt down.
Jim Rehmann
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