Swindled and brainwashed by the banks again

 

The Banks and the federal government were very wise in their implementation of the onerous psychological strategy used to “lock” the moral burden into place on American citizen that says under no circumstance is one to walk away from their debt obligation on a mortgage. The collusion of banks, government and the media tirelessly worked to place the fear of shame and chastisement on to any homeowner who dare consider strategic default or otherwise.

We could argue that this was in the best interest of the country but really it was just in the best interest of the banks and money lenders. Although, the system worked rather well as long as the federal and state governments were able to keep a handle on the rate of inflation.

If the money supply was kept at a reasonable level the economy would have its normal ups and downs but there would be no unreasonable appreciation or depreciation in real estate prices. The exception would be the few boom and bust areas that have had extreme pricing fluctuations over the years. The best examples would be California, Florida and the Texas gulf coast that was up and down with the boom and bust of the oil exploration.

As long as we had a federal reserve that was not overly influenced by the Banking system itself, it was likely that this method of economic stabilization could go on indefinitely. It would serve as a future method of taking pressure off of the “social security black box” as well as calm American’s fears of the devastation of another “great depression”. People were convinced to work hard, buy a home, pay 3 to 4 times what it was worth in interest and then recover about ½ of what they paid overall when they sold their home upon retirement.

The Banks were getting fat and the government was getting a reasonable calm and non-revolutionary population that was content with these terms. People came to believe that paying your mortgage was an honor and a privilege. Defaulting on a mortgage, unless you were in extreme distress was extremely taboo.

Over time paying down a mortgage looks reasonably good if you stayed in your home for 10 or 15 years. The ability to pay the same as you would for rent while having the boost of pride people felt as “homeowners” seemed to make this a workable arrangement even though the banks benefited far greater in terms of return than did individual owners.

The banks used this manipulation to continually lower their capital requirements as both the banks and the government came to rely and the “moral and ethical” home owner. Over time, many people came to believe that increase or at least the stability in the real estate market was a normal part of the capitalist system. However, all the misleading information and manipulation lead to a false sense of security, undue pressure on families in times of crisis and extreme tolerance of risk that was taken by allowing banks to become under capitalized.

Slowly but surely the big banks and the Wall Street elite came to realize that this stable and consistent market could lead to some ridiculous wealth if it could be exploited. It would just take a few of the right players to get into office at the right time. We began to see the creation of the “greatest real estate depression” in history as we moved into the 21st century.

A number of factors would eventually lead to repeated mistakes by the Federal Reserve that would drastically increase the money supply. Interest rates were kept far too low for far too long as growth and expansion of the economy became the North Star guiding fed policy.

After we suffered the tragic events of September 11, 2001 our reliance on excessively low interest rates strengthened. It was more circumstance than deviance that prodded the reserve chairman to opt to keep interest rates at “hot” levels. As patriots many of us could argue little with this strategy that was one way of boosting “morale” of the country. It was as if we made a pact with the devil at times of vulnerability. Politics has over taken common sense at the Federal Reserve and within a few years the “nuclear” housing race was in full effect.

I was extremely puzzled by the flow of money into the economy at such low interest rates. My opinion in discussions with friends was that the government had painted themselves into a corner with such low rates. It was promoting the unsustainable rise in home values. Wages and income were not keeping pace with the extremely quick rise in real estate cost.

The fed and to big to fail banks become the new “batman and robin”

But have no fear the big banks would come to the rescue. They would only need a little help from congress and they would help the fed kick the can down the road a few more years. They had the solution to letting the fed keep up with its rope a dope tactics a few more years, or at least long enough for the players to get out of Washington.

What was the Answer? : Exotic mortgage products based on the assumption that real estate will never lose value or significant value in the first 7 years of a mortgage.

Business Opportunities Handbook

The seven year time frame is critical because banks realized that the average home owner would move or refinance at least once within the first 7 years of the mortgage. So the method of amortization used was to have nearly 100% of the payments on the mortgage be put towards the interest balance of the loan.