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Where did the money go? It was borrowed from some rosy
future that never came. December 5, 2008 · In the suddenly topsy-turvy
economy, sometimes the simplest questions are the hardest to answer.
Like this one: When the housing bubble burst, where did all the money
go?
Where did the money go? It was borrowed from some rosy future that never
came.
A listener to NPR's Planet Money wrote in with a brainteaser about the
housing bubble that I'm still thinking about. I decided to ask a couple
of people to help me act it out. I started with one person who doesn't
know a lot about the housing bubble — NPR reporter Laura Sullivan — and
one who does — Russ Roberts, an economist at George Mason University.
To solve the puzzle of where the money goes, we first need a house, in
this case a thumbnail-size one from a Monopoly game. "It's lovely, too,"
Sullivan says. "A nice shade of green. I'll take that house." She got
the house.
Next, we need some money — but not toy money. I arrive with a small
stack of $100 bills. "I'll have that, if you don't mind," Roberts says.
He gets $200.
So that Roberts and I will be even, I take $200, too. Remember, Sullivan
has the house.
Let's imagine that we're at the peak of the housing bubble. Sullivan
bought the house years ago, for a cheap price — just $100. Now she turns
around and sells it for $200, to Roberts.
"Here you go," Roberts says. "I'm looking forward to living in it."
Now imagine that a couple more years go by. Roberts watches his
neighbors sell their houses for $300, $350, $400. Then the housing
bubble pops. Sales stagnate. Prices fall.
"And I have to move, it turns out," Roberts says. Bad market or no,
Roberts puts his house up for sale.
"Oh, I'll buy it from you, Russ," I say. "But I am just going give you
$100 for it. I know you bought it for $200."
"But I was expecting $400," he says.
Never mind his expectations. This is a very realistic re-enactment of
the housing bubble. He stalls. "Let me wait for a little while till the
market comes back," he pleads. "So I wait, and it doesn't come back. So
the best I can do is $100? All right, I'll take it."
"OK, give me my plastic house," I tell him, ignoring his pitch about the
lovely formica landscaping.
I've got my house, for $100. The only question is where the money went.
I'm holding a $100 bill. Sullivan has $200. And Roberts got a $100 bill.
We shouldn't be surprised — no money disappeared from the room. The
bills just shifted hands. The house still exists.
But if this were all that had happened in the global economy, we would
not have had a crisis. The problem, of course, is the house. It's worth
less. Even though a house is not money, per se, many were turned into
money. Roberts, for instance, assumed his little green house was going
to double in value.
"I may have even acted as if I had the extra $200," he says. "I may have
taken out a home equity loan, I might've bought a new car based on that.
And then all of a sudden, that profit, that wealth never materialized.
It did sort of disappear."
The financial world was particularly vulnerable to the drop in housing
prices because of something that doesn't show up in our little game.
That something is a factor economists call "leverage." Remember, we
borrow money to buy houses. Lenders count on us to pay off our
mortgages. The property serves as collateral, to back up the loan. When
the bubble burst, that property was suddenly worth less than the amount
of the loan — the backup failed.
But why can't we all just go back to believing the houses are worth
more? Wouldn't that actually increase their value?
Roberts, the economist in the group, is skeptical. "Isn't that how we
got into this problem to start with?" he asks. "We all kind of pretended
these prices were going to go up and up and up. And that encouraged a
whole set of behavior that turned out to be dysfunctional.
"You know, it's a funny thing," he continues. "When the bubble pops,
everybody says, 'Where did the money go?' ... It didn't come from
anywhere other than the belief that [prices were] going to keep going
up. And when that belief didn't turn out to be true, the prices came
down to their original level. So in that sense, there was no harm done.
The problem was a lot of people made bets along the way. And when those
bets didn't pay out, the ramifications of all that money not getting
paid out like it was promised to be turned out to be very destructive."
Still, there were some people along the way who profited. In the end, I
think of it like this: Where did the money go? It was borrowed from some
rosy future that never came. And now we have to pay it back.
I think Shylove got it right...the money disappeared into
a very sophisticated and well-planned rip off,...exacerbated with/by the
assistance of super computers...knowingly, bad paper was hung all over
the place. The real estate game became a 'mark'....fat for the
taking...the public got "Enron'd" again...I gotta hand it to these high
finance folks, they are consistently amazing me with their expertise in
coming up with all these financial genius scams....is that what you call
a "bubble" ??...I'm sure a lot of 'paper' money was lost and I'm sure
there were a lot of folks out the back door with big cash too. Im just
an ordinary guy, and that is what it looks like to me.
When David Kestanbaum concluded "Where Did The Money In
The Housing Market Go?" with "Now it is time to pay it back.", I
couldn't believe my ears! Politicians, bankers, brokers and regulators
created the imaginary Titanic we were all sailing in, and now they want
us to lay down our lives so they can have the lifeboats AND a clear
conscience! I say it is time to identify the most innocent and those
most capable of perpetuating the best of the human race and put them in
the lifeboats.
This "bubble" sounds like of what is going on in The U.S.
Economy, generally. The government, in compliance with the Federal
Reserve, creates too much dollars in the system; adding inflation and
hurting the economy further. Sounds something similar to the Great
Depression. Do a google and Yout Tube search on Painscourt,
doctorofghetto, Alexander Paul Morris, Darryl Montgomery, and search for
video "Money as Debt."
Agree Terrance, I left out; all potentially would have been fine had
risk been factored more accurately.
The liars loans had a sour taste, but most of the infrastructure was
complicit. IMO that oddly predictable, that why regulating forces to
save us from ourselves exist
everyone simply cannot net loss, someone had to lose and the bigger the
institutions the bigger the responsibilities.
Greenspan admitted he gave way too much faith in the system, I remember
a moment long ago a student stepped on my foot when I comment socialism
had potential perks and could work, their answer "IN THEORY! " well now
it’s my turn, "Capitalism works, IN THEORY!"
Fundamental faith in 1 structure never lasts forever, everything we do
has flaws and everything needs a balance.
I know Money can’t be "too much" speculation, it has to be rooted in
something tangible and probably as many simple things as possible. As
for what? hmm. food probably, energy next, metal 3rd? and obligating
full disclosure of such harvests. it’s an imperfect system like anything
we have, and sadly, I have 0 answers.
but I know there is reasons why you can’t pay a visa off with master
card, Master card then with Discovery and then Discovery with Visa
etc-etc.
Funny... I asked the same question you did. If you want
the answer, you should ask what the US can afford first. Then, after
you've done some math on your own, ask the agencies that should be
responsible for knowing these answers... Let us know what you find out.
We have hundreds of supercomputers in this country. Do you think any is
engaged on this subject? How far do you think the GAO and Dept of Tres
projections go out to?
GDP is always a fine measure, but it suffers from at least three
problems.
- People always assume it will increase with only very few exceptions
(kind of like real estate)
- At what precise time can and will you actually do something tangible
with it?
- What type of economy is that based on? Oil based, manufacturing,
services, etc?
Some other things...
"That is to say; Commodity, presumed to be returned in the future, had
been lent to people who would not be able to pay on a grand scale." -
Mostly true but what came first, the creative loans or flipping craze.
This also dumped a lot of money into the system at the foundation level
and raised home values, and their taxes. It's not just the people at
this point, although they do have a lot to do with it now. IMHO
v/r
T
Terrance, Much of what is "left out" is a bit too complicated to express
without a huge diagram but it is all covered by the closing statement.
Value of $X was lent to be paid back in the year-20YY with the globe
consisting of C in actual hard assets/commodities.
$X was inflated presumed to $X+% over 15-30 years
That is to say; Commodity, presumed to be returned in the future, had
been lent to people who would not be able to pay on a grand scale.
It was just complicated poor gambling. All the Default swapping and
MBsecurities, terminology just big bank euphemisms for it.
Just as Dave says, they borrowed too much from the future.
My question is would there be a way to approximate what is "too much".
Considering spending rates, global commodities, population, GDP; could
there be a way to imagine the economy as sponge. Water is debt and
evaporation = time.
What is an acceptable %amount of debt the globe could hold over given
time?
Well it seems the dot.com bubble burst and some people decided real
estate might be more dependable at least until the market stabilizes. So
real estate values start going up, that attracts wall streets greed when
they get the scent. The low interest rates also attract some who
couldn't afford homes normally and the increasing property values make
it a smart way to get into a house. Then the wizards figure out a
sophisticated way to rip everyone off but turning it back into stock
funds of some kind that make huge profits and lure the greedy investor
class back to the market for fast bucks. Since the values are going up
it makes perfect sense to loan to buyers guaranteed to fail at the end
of the 3 yr arm and the funds get to sell for a higher price after
having fleeced the poor first time homebuyers of whatever collateral and
payments they had. I think that is what happened and that it is immoral
and our system of free enterprise has become quite simply a socially
irresponsible rip-off machine. Some people may have lost the invisible
money, some profited big time, but some poor people lost everything and
I hear them being called deadbeats and blamed for being the victim. Our
society of vulture capitalism at its best, buyer beware!
Darryl Evey has a point I've been trying to make on different sites...
You forgot something. Here's THE problem you didn't cover in the
exercise...
1. Vast amounts of money made on the "flip" was spent in the economy to
buy things... Trips, wine, Starbucks, cars/SUVs, aircraft, more houses,
etc...
2. Money from these flips was invested (stocks, bonds, hedge/mutual
funds, insurance) AND put into the banking system...
3. The companies that now had HUGE amounts of new business ran to the
banks to ask for money to expand.
4. The banks had HUGE amounts of money (derived from real estate) to
lend out, and readily accommodated the companies.
5. Companies expanded on revenue that shouldn't have been in the first
place.
6. POP!
7. Pretend to be a banker looking back on the last 20 years of lending.
Who/what company do you lend to knowing a lot of the money was generated
and perpetuated by the bubble? What companies do you lend to that you
know 100% that you'll make you loan back? What companies are totally
free of real estate? Now, what do you when the Fed gives you a billion
dollars & says lend it but make a profit or else? Or do you put it in
the vault because more people will rely on savings because the bubble
bursting?
This is helpful, but seems to me incomplete. As the total value of the
U.S. economy goes up (and sometimes down, doesn't the money supply
expand (and contract), under the control of the Fed? How does this
happen? As houses around the country go up in value, the banks must have
more money to lend -- how do they get it?
Fantastic,
From the stand point of a poor person, that I am, I have not had a "nice
ride." In fact, I have never been able to buy a home. We don't have
decent jobs.
Nicely done fantastic, the only real wealth involved is the hard work of
the "wanna be middle class" folks who keep buying into the game. If we
could keep housing and other commodities priced at realistic levels
things couldn't get out of hand.
But then that would be unamerican-anticapitalist wouldn't it? The corp.
bigwigs and high dollar investors wouldn't be able to cash in on all
that imaginary money.
Sounds more like a pyramid scheme to me.
P (for poor) bought a house (100% financing) for 100, sold for 200. made
100 on money he never had to start with. Bought a bigger house for 200
with 0 down again but did not sell this time when the price went up to
300. Instead P took out additional 100 k based on equity on his house
and bought some junk he did not need, took expensive vacations and got
this idea that he has found the secret of good living. The value went
down to 150. He owes 300 to the bank so decided he is better off if he
packs and leave and settle for short sale of his house. So far, P has
not lost anything yet. Bank is loosing 150 that is the amount of the
house appreciation based on fraud that everybody participated in. The
government is now bailing out the banks and the CEO's and the investment
bankers who also made ton of money based on P's stupidity and bought
themselves art work worth of millions, several multi million dollar
houses here and there. Now P has to somehow payback that 300 indirectly.
Did i say that P lost his job too? So the bottom line is that Poor had a
nice ride for a few years and now is paying for it. Rich had a super
nice ride and will never have to pay for it. The money, as always went
to the pocket of the rich.
I enjoyed this immensely when I heard it this morning. This is something
that has troubled me for ever since the dot com bubble. Any time there
is a commodity that has a price on it that seems unbelievable I have to
walk away from it.
There are several people I know who tried to cash in on this last boom
and they are hurting now.
Now I’m wondering how many folks will fall into the next “best thing" on
the markets.
The money didn't disappear, hope for the future did.
Here's the bigger picture. Capitalism is defined as the maximizing of
profits and the minimizing of losses. That is job#1 for people handling
money. Almost anything goes to create wealth for stockholders. Until we
change our philosophy about the boogyman of government interference, we
will not have the kind of regulation of markets that is necessary for
sustainable and compassionate economic growth not only in this country
but aound the world. If you think you are hurting as a result of our
governments' gross negligence, think about the 38 million starving
people in the world who will not have rice because Wall Street felt
obligated to amp up profits by selling 60 trillion dollars in phantom
paper promises!
Isn't the government supposed to regulate this stuff? Shouldn't the
government keep banks from getting themselves into a "High Leverage"
situation?
Money is a construct that only has the value that people believe it has.
To answer Tachyons question the 52 trillion is everyone's bet on the
value of future economic activity. Peoples' belief in the future is the
driving force behind all economies. Would you go to work tomorrow if you
knew you were going to die the next day? Most probably would not. When
the economy is growing very rapidly people probably have unrealistic
expectations of the future value of economic activity. When the economy
shrinks or grows very slowly people are not optimistic enough about the
future. When the economy grows at a reasonable rate peoples expectations
of the future are probably more in line with reality.
Where did the money go? Please for all those who are truly interested in
where the money went READ Modern Money Mechanics. The money to buy the
house in the first place NEVER EVER existed. It was created out of thin
air. This is how the central bank CREATES money and allows other banks
to CREATE money for loans. OUT OF THIN AIR. So they (the banks) make
money (i.e. the money you "repay" to them) from money that NEVER
existed. PLEASE read this book. It is the Federal Reserve's policy for
banking and money making.
This is very scary.....
Where is a good question, but more specifically Who? Personally, I'd
like to see a list of names. Long or short is no matter. Is this profit
sitting in their accounts and in assets, and we get to pay off the debts
they created and they keep the cash?
Dickinson (BobD) wrote:
Great. We know where the money went, or where the money didn't go. Nice
exercise but the problem still exists. The $100 that the author paid for
the house can decrease further, and the neighbors, no matter how long
they lived there, are negatively impacted. Here's a plan to help solve
the riddle:
THE U.S.A. HOUSING RECOVERY PLAN
By AMERICANS - For AMERICANS
The following is an alternative to THE FEDERAL GOVERNMENT’S
$700,000,000,000 (Plus) BAILOUT
THE PLAN
$25,000 goes to each primary mortgage holding household meeting the
criteria and eligibility requirements below:
o For all households with primary mortgages greater than $100,000, the
household will have two options:
1) $25,000 will be paid directly to the household’s primary mortgage
company as a lump-sum payment towards the principal of the household’s
primary mortgage. The bank will unilaterally write a new mortgage for
thirty years at the interest rate of the original mortgage or at 5.875%,
whichever is lower.
2) The mortgage holder may elect to retain his current payment schedule
(not rewrite it but simply reduce the principal by $25,000) and keep the
current mortgage interest or a 5.875% interest, whichever is lower, if
current income is sufficient.
o For primary mortgages between paid-in-full to $100,000 the households
may elect from the above or apply the $25,000 to the following:
1 - credit card debt
2 - car payments
3 - student loans
4 - health insurance or health related expenses
5 - installment loans
6 - investment in an IRA or government bonds
7 - application to the purchase of another permanent residence if the
applicant(s) are credit worthy and provide verifiable and sufficient
income.
o Cases wherein the households have mortgages exceeding $200,000, the
house was purchased since 2001 or later, and the purchase price of the
house is 125% or more than current market price, may qualify for up to
$50,000 being paid towards their principle (primary) loan. This plan
cannot be combined with any other options stated above. To qualify for
this option both the bank and the individual must agree:
1. To a new loan that is within 5% of current market value
2. Interest Not to Exceed (NTE) 5.875% for 30 years
3. The NTE $50,000 is computed as $25,000 PLUS the current home value
subtracted from the original purchase price.
4. If the mortgage holder acted in good faith, elected this option and
an agreement could not be reached within thirty days:
A - The mortgage holder may elect the original $25,000 option for
mortgages exceeding $100,000 OR
B - Walk away from the loan without having their credit negatively
affected In this circumstance, the property would then default to the
lender and neither the bank nor the individual would receive any federal
assistance.
o All mortgage options chosen will commit the buyer into retaining the
mortgage for a period of two years with no further financing. Exceptions
to this rule would be the death of a mortgage holder, a job transfer or
extreme hardship such as financial due to job loss. All credit payments
incur having the household not to carry more than $4000 annually of
credit card or installment debt, discounting auto loans. Failure to do
either would result in a penalty of 50% of the tax money requiring
repayment.
EFFECTS OF THE PLAN
o Stabilization of current housing market - Bottoms out housing market
The immediate impact of a home’s equity decline will stabilize.
Consumer confidence begins to improve
Housing market bottoms out and begins accent
o Stops many foreclosures
Increased equity in a home while reducing the monthly payment and
stabilizing the monthly payment to a 30 or 40 year fixed loan, will
create a manageable monthly payment and stop many foreclosures.
o Stimulates home sales
With stability and confidence in the housing market new and used home
sales will begin to increase.
o Creates broad base of disposable income
Increase the available spending money for all Americans by generating
additional monthly funds. Renegotiated mortgages will result in
homeowners having more disposable income; hence, more money to spend on
durable goods.
o Creates jobs throughout America
With additional disposable income Americans will spend. Spending
creates demand and the increase in demand will create the jobs needed to
produce the supply to keep up with the demand.
o Reenergize the Tax Base
With increased spending tax revenue will flow into state and federal
funds. This reenergizing of the tax base effectively lessens the
original outlay of the 1.5 trillion dollars for THE PLAN.
o Places REAL dollars back in the hands of lending
institutions-Everybody loses if no one spends
Lending institutions need money to lend. With THE PLAN money flows
directly back to the lending institutions to lend out in the form of
cars, homes, and durable goods.
ELIGIBILITY REQUIREMENTS OF THE PLAN
The Plan affects only U.S. citizens or legal permanent alien
residents.
Mortgages must be first without additional liens and not exceeding
$400,000.
Vacation homes, second homes etc., and investment property, including
land are not eligible.
Mortgages must be for primary residences.
Mortgaged property has to be in neighborhoods (zip codes or parishes)
that have realized declining median prices since end of 2005 median
prices.
Closing costs NTE “.5%" of mortgage
BEWARE OF EARMARKS
There will be no earmarks, add-ons, pork barrel spending or any
attachments to this bill.
THE PLAN IS AN AMERICAN PLAN BY AMERICANS FOR AMERICANS
We urge you to forward this message to all of your contacts. Most
important, forward this message to your federal legislators, and show
your support for THE PLAN. Simply copy this document then go to
www.visi.com/juan/congress and attach it within a message to the
appropriate senators and house members of your state. Add your comments
as you see fit. If you don’t agree with THE PLAN, do not have a better
alternative, or do not agree with the pending BAIL-OUT, contact your
federal legislators and let them know that you are unhappy.
Respectfully submitted,
Robert J. Sequeira and Robert R. Dickinson
Not a workable pork plan!
The USA is not alone in this recession. The entire world
has this problem!!!
The cost 10 trillion plus .... Think... $300.00
stimulus check cost 125 billion add 2 zeros to that, Taxes would need to
double just to pay the interest only. I'll pass on that.
What your plan is - Devaluing US dollar. Mexico did that
in 1994. Look it up. Take from rich give to the poor.
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