If you were to go back in time about 10 years or a little more you would have possibly noticed many Americans living off the rising equity in their homes. In fact this trend had become so prevalent that even the chairmen of the fed seemed to suggest it at one point.
Homes were the stable foundation of the American dream and it was widely believed that they would only increase in value.
Of course it was a house of cards where the whole structure was supported by easy credit and lower than market interest rates. It seemed like easy money and it allowed consumers to convert home equity into new cars, new appliances, college tuition with the expectation that they would be able to pay everything with the growth in equity, not the income from their jobs.
Construction was booming, credit was easy, and life was good.
Until it wasn't and when it turned ugly it really turned ugly.
Interest rates rose a bit, demand slumped a bit and suddenly house prices took a dip. It didn't seem like a big deal at first, of course the housing market has some corrections, but the bubble was fully inflated with no slack available.
As teaser rates expired and suddenly what was owed was more than could be refinanced we started to see foreclosures and mortgage defaults.
This led to defaults in bonds that were based on complicated derivatives but which were ultimately dependent on the worst sub-prime mortgages.
Large financial institutions had obligations they couldn't meet, credit got tight, construction and buying ground to a halt and we saw a potential depression that would rival the great one of the 30s.
We managed to avoid that using easy money and some economic stimulus to boost the economy while adding some regulations to try to avoid a similar situation in the future.
It worked but the easy money and stimulus were supposed to be short term remedies not a way of life.
Still the economy recovered at a slower pace than it had in some previous recessions but it recovered and some long term trends in the American economic structure hindered it a bit.
We now are trying to recreate the period of unsupportable growth via tax stimuli and allowing the financial institutions to resume their reckless practices.
We see the national deficit and debt increasing at record paces, but the one thing that is still true as always.
If you ignore history, you are doomed to repeat it.
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