This link has been bookmarked by 2 people . It was first bookmarked on 21 Apr 2008, by someone privately.
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22 Apr 08
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Summary and conclusions The proponents of greater government power are busily absolving government of any blame in the subprime crisis, deflecting criticism from government, and taking the opportunity to propose that greater government will prevent future such crises. And in doing all of this, they are busy blaming as culprits the greed of market participants, lenders, the market, the free market (even though it is heavily regulated), the capital markets, securitization, market instability, capitalism, illiquidity, bond raters, state regulation, and insufficient federal regulation. It is rather easy to spread the blame and confusion around because the financial structures involved are novel and complex. There are many targets. But we should place the blame squarely where it belongs, which is on government failure, that failure being in the fiat money inflation brought about by the Federal Reserve. How are we to explain and understand the details of the subprime crisis? Is it a sudden outcropping of market madness? Is this an instance of a free market gone haywire? Is it a case of mass lender stupidity? Is it a case of greed and corruption? Is it a case of inefficient regulation by the states? The subprime crisis is none of these. Its origin lies in a housing price bubble brought about by excessive central bank money creation and the subsequent puncturing of this bubble. The price declines in housing then induced the large rise in foreclosures of the recent past and present. Fiat money inflations often bring on real estate booms followed by busts. These inflations are the common element in real estate cycles that span many countries and many centuries, and they put the lie to the hypothesis that bad lending practices are the culprit. Fraudulent money creation is the culprit, not faulty evaluation of the credit risks of borrowers. Jesús Huerta De Soto’s book Money, Bank Credit, and Economic Cycles provides documentation of cases. For example, real
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Summary and conclusions The proponents of greater government power are busily absolving government of any blame in the subprime crisis, deflecting criticism from government, and taking the opportunity to propose that greater government will prevent future such crises. And in doing all of this, they are busy blaming as culprits the greed of market participants, lenders, the market, the free market (even though it is heavily regulated), the capital markets, securitization, market instability, capitalism, illiquidity, bond raters, state regulation, and insufficient federal regulation. It is rather easy to spread the blame and confusion around because the financial structures involved are novel and complex. There are many targets. But we should place the blame squarely where it belongs, which is on government failure, that failure being in the fiat money inflation brought about by the Federal Reserve. How are we to explain and understand the details of the subprime crisis? Is it a sudden outcropping of market madness? Is this an instance of a free market gone haywire? Is it a case of mass lender stupidity? Is it a case of greed and corruption? Is it a case of inefficient regulation by the states? The subprime crisis is none of these. Its origin lies in a housing price bubble brought about by excessive central bank money creation and the subsequent puncturing of this bubble. The price declines in housing then induced the large rise in foreclosures of the recent past and present. Fiat money inflations often bring on real estate booms followed by busts. These inflations are the common element in real estate cycles that span many countries and many centuries, and they put the lie to the hypothesis that bad lending practices are the culprit. Fraudulent money creation is the culprit, not faulty evaluation of the credit risks of borrowers. Jesús Huerta De Soto’s book Money, Bank Credit, and Economic Cycles provides documentation of cases. For example, real
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21 Apr 08
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On June 23, 2003, Christopher Byron published a stunningly accurate article in the New York Post. He wrote:
"Instead of giving the overall economy a sustainable boost, the Fed's increasingly cheap money keeps pouring into just two sectors – the housing and home mortgage refinance markets – and it is creating what is shaping up as one of the most spectacular sector bubbles in memory.
"But first a thought or two on the Washington official whose endless supply of hot air has created not only this bubble but the dot-com mess before it, and who long ago deserved to be fired from his job: Federal Reserve chairman Alan Greenspan.
"No serious student of the economy any longer doubts that Mr. Greenspan's cheap-money policy of the 1990s led directly to the stock market bubble that popped in the spring of 2000, pushing stocks and the economy into the downturn from which they have yet to recover.
"Meanwhile, his rhetorical waltzing has become utterly shameless, as he intones, in that ponderous way he has perfected, that the housing market has not swelled into a bubble – because, when it pops, the result won't be a ‘negative’ for the economy but the disappearance of a ‘positive.’ Oh, puhleeze, Mr. Greenspan, do you take the whole world for fools?
"It is the speculative bubble in the housing market, fueled by lower and lower mortgage rates, that is alone propping up the economy, and everyone knows it. In this summer of 2003, the national pastime is no longer baseball or going to the beach – it's going to the bank to refinance the mortgage.
"When the bubble will pop is hard to say, just as it is hard to guess the moment when the nation's patience will at last be exhausted with Washington's czar of financialoney. But one senses that time is starting to run out for both."
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When the bubble burst, investors who buy and sell mortgage loans recognized that the houses as collateral were no longer enough to cover the loan value.
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Jesús Huerta De Soto’s book Money, Bank Credit, and Economic Cycles provides documentation of cases. For example, real estate prices fell by 50 percent by 1349 in Florence when boom became bust. That boom was fed by bank money creation:
"Evidence shows that from the beginning of the fourteenth century bankers gradually began to make fraudulent use of a portion of the money on demand deposit, creating out of nowhere a significant amount of expansionary credit. Therefore, it is not surprising that an increase in the money supply (in the form of credit expansion) caused an artificial economic boom followed by a profound, inevitable recession."
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In the face of excessive money, lenders tend to adopt laxer standards for making loans. Borrowers and investors tend to use higher amounts of leverage. Asset prices rise. When the rate of money creation slows or halts and asset prices begin to decline, those who have bought houses at high prices, perhaps with little or no equity of their own, quickly find themselves in a position of negative equity, with their promised loan payments exceeding their house values. This induces default and foreclosures.
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That is how the subprime crisis began. It then spread to other sorts of securitized loans and to capital losses of investors, including major banks, in all sorts of loans.
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