Banks are Central

I’ve got very little time today, and I’ve been writing a whole book on this subject – but to answer the many questions I’ve been receiving about the current economic situation, let me explain really briefly what has been going on.

The mortgage/credit crisis was created by a SUPPLY SIDE GLUT, not a high demand for product. It basically went like this:

1. Lenders had more money to lend than there was supply of people wanting to borrow.
2. Bush pushes for home ownership as the New American Way, to stoke demand for credit.
3. Banks create really enticing (but really bad) mortgage products.
4. Banks thus created DEMAND for the CREDIT/cash that is in OVERSUPPLY.
5. Loans look like they’re going to bad someday, because their terms are unreasonable and somewhat non-disclosed. Housing prices rise because mortgage money (appears) cheap.
6. Creditors lobby Washington to change bankruptcy laws so that people who default will have to pay even after they go belly up.
7. Loans start going bad.
8. Creditors don’t want to talk possession of all these foreclosed houses, because this will create supply-side glut of real estate.
9. The Treasury department and the Fed and other central banks take a two-pronged strategy towards fixing the problem. First, they want to create the illusion that something is being done (fake superfunds to bail out homeowners, etc.) because they won’t want Barney Frank’s bill for real help to gain traction. Second, they want to make more money available to the creditors (banks), so they can keep lending money – because this is their business.

Homeowners will get a slight delay in the paralyzing rate increases on their mortgages, giving banks and creditors the chance to make a more orderly exit. They will bail from these mortgages while selling the artificially secured credit to the likes of you and me through money market accounts and other retail products. They just need time to make sure the real losses trickle down to someone else.

Should home buyers have taken those mortgages in the first place? No, of course not. But they were convinced that paying the bank for a mortgage somehow made them more of an ‘owner’ than paying a landlord for rent.

And remember – this whole mortgage fiasco is just a preview of what happens next year when the credit card industry faces the same “crunch.” Combine that with China calling in some of its credit to the US, and you get a real interesting situation.

Put it this way: You may want to become better friends with your local Community Sponsored Agriculture organization.