The 30 year home mortgage is at unheard of low interest rates of 4%. Of course people with savings in the bank, are getting about 1 ½ per cent interest. Whereas the banks, are borrowing short term from depositors and loaning long term to the home buyer.
What if bank B offers 5% interest on savings deposits? Whose money at bank A was loaned out for the 4% 30 year real estate loan? The most a depositor has to wait to get their savings out of a bank A is 90 days. The real question here, are the banks stupid enough to loan at these rates and repeat the fiasco the Savings and Loans had in the 1990’s (borrowing short and loaning long)? My guess is no, this is probably some sort of government supported funding of our real estate market.
The one thing that everyone overlooks is the fact that the original sellers of the homes now in trouble got paid cash when the sale closed. All the new owner had was a promise to pay for 20 to 30 years. This new home owner will walk away from the agreement. His promised payments over thirty years would have generated real earned dollars. Guess what, with a foreclosure, the Fed has to step in and pay the full amount today. When you look at the final outcome, the tax payer will pay for all those homes bought and foreclosed on. The previous owners got real money, and when the homes go into foreclosure, the banks get printed dollars from the Fed to cover their loss. If the loan had been paid off as agreed, the borrowers earnings would have been spent on servicing the note over a 30 year period. With the Feds quick payout, 30 years of future payments get blasted into the financial system immediately with no work effort to produce the funds.
This is where the difference lies between the deflationary depression of the past and the inflationary one we have today. In the 1930’s the banks failed, real estate collapsed, and the stock market crashed. Everyone lost money. There was no government bailout.
If the real estate bubble of 2006 had been allowed to fail (GSA’s included) and the banks not reimbursed, we would have had a deflationary depression.
We just had the biggest bank robbery our nation has ever seen (real estate speculation). Our government’s solution, print a like amount of dollars to cover the loss. The reasoning, the “stolen funds” will have only half of the buying power because of the dilution and as long as most of the money stays in the banks (why not, they’re federally insured) the loss of buying power will be realized very slowly. Of course Congress got carried away and printed an extra trillion or two (nobody will notice).
At some point in the future, interest rates have to rise. The present very low interest rate on 30 year bonds makes them dynamite. The same with 30 year 4% home loans, and as to who owns them, we can probably assume that the banks have none. They may write these loans but figure them to toss them like a hot potato.
The real kicker is the FDIC bank insurance and the Treasury offerings. All are insured against loss, but not against loss of purchasing power. The historical affection the Hoi Polloi had for gold in relation to the printed dollar has been broken. The price of gas, gold and ice-cream are all rising. We know OPEC is responsible for the increase in gas prices, but who’s responsible for the rise in the price of ice-cream?--- probably some dairy farmer cartel.
The last time there were complaints like this, someone said, "Let them eat cake." My advice this time around, let's not lose our heads over this.