Jun302015
House prices depend on bank policies toward delinquent borrowers
The house price crash and subsequent bubble reflation was heavily influenced by bank policy.
Most people assume house prices are the result of market forces determined by supply and demand from individual homebuyers and home sellers. The reality is that policies at the major banks, particularly policies related to delinquency and foreclosure, often become so important that they overshadow the activities of everyone else.
Back in September of 2010, I first observed that How The Lending Cartel Disposes Their REO Will Determine the Market’s Fate. Today I want to revisit that post and update it based on what we learned over the last five years.
The insane lending practices of the housing bubble abruptly terminated in a credit crunch in August of 2007. Shortly thereafter, borrowers began defaulting in droves, and lenders followed their standard loss mitigation procedures and foreclosed on several million borrowers and liquidated the inventory. The result of this policy was an epic price crash from late 2007 through early 2009. Through aggressive intervention in the housing market including mortgage rate reductions engineered by the federal reserve and a series of tax credits to buyers offered by the government, a false rally was initiated in mid 2009 that continued through the expiration of the tax credits in mid 2010.
Many people believed the crash was over by mid 2010 because removing the supply temporarily stabilized prices. Most people who carefully watch housing markets agreed that a cartel of lenders controlled the market through its ability to control supply. Since lenders were permitted to hold non-performing loans on their books, which allowed delinquent borrowers to squat, lenders controlled the flow of properties through the foreclosure process. Also, they controlled the approval of short sales; therefore, they controlled the flow of properties through the short sale process. Since distressed sales of foreclosure properties and short sales were a significant percentage of market sales, lenders controlled the bulk of the supply on the market.
Ultimately, lenders did gain full control of the market and eliminated the distressed inventory by a combination of aggressive loan modifications, permissive attitudes toward squatters, and denial of short sales in late 2011, but from mid 2010 through early 2012, house prices fell for 18 consecutive months while lenders worked to remove the distressed supply.
I believed this cartel would fall apart partly because all cartels are inherently unstable, and partly because the Government Expedites Foreclosures, Threatens Banking Cartel., and foreclosure processing at HUD and the FHFA (the GSEs) did greatly impact the distressed inventory supply. The article below from the Wall Street Journal is one of the better descriptions of the problem in the mainstream media in 2010.
Banks’ Plans for Foreclosed Homes Will Drive Market
By NICK TIMIRAOS — SEPTEMBER 13, 2010
The speed at which house prices fall over the next few months could depend less on mortgage rates and Americans’ appetite for home buying than on how banks decide to manage the huge number of foreclosed homes they own or may take from delinquent borrowers in the near future.
Unlike home owners, banks often are much quicker to slash prices to unload properties quickly.
This has certainly been true in the past, but lenders seem much more willing to emulate homeowner denial this time around. Loan owners are quick to lapse into denial on the false belief that prices will quickly rebound. We explored that phenomenon in Contrarian Investing and the Psychology of Deflation. Lenders are usually pressured by regulators and investors to process their non-performing loans and dispose of their REO. Because this inventory problem is so large, the groups that usually pressure disposition are embracing a hold-and-hope strategy largely doomed to fail.
The upshot is that, the more homes being sold by lenders, the faster prices tend to fall. That pattern was clear over the past two years: Price declines that began four years ago accelerated rapidly in 2008 as banks dumped foreclosed properties at fire-sale prices. By January 2009, the share of distressed sales had soared to 45% of all sales nationally; it was even higher in hard-hit markets such as Phoenix, according to analysts at Barclays Capital.
Even though mortgage defaults kept mounting, housing markets began to stabilize early last year as low prices and government interventions broke the downward spiral. Policy makers spurred demand for homes by holding down mortgage rates, offering tax credits for buyers, and extending low-down-payment loans through the Federal Housing Administration.
This is the squatting problem. We didn’t have much squatting prior to 2008 because lenders processed their foreclosures in a timely manner. When they saw what this did to markets like Las Vegas, they stopped processing these foreclosures. Since subprime defaulted first, they were foreclosed on, and since the alt-A and prime mortgages defaulted later, and since those mortgages are much larger, lenders have opted to let those delinquent owners squat.
The government also attacked the supply problem. Regulators relaxed mark-to-market accounting rules, giving banks more flexibility in valuing certain real-estate assets and removing some of the impetus for banks to quickly foreclose.
This is mark-to-fantasy accounting. For a more detailed explanation please see: Lender manipulation of MLS inventory is remedy for housing bust.
Meanwhile, the Obama administration put in place an ambitious program to modify mortgages.
The Home Affordable Modification Program has fallen short of its goals. So far, fewer than 500,000 loans have been modified, below the target of three million to four million. Yet the program served as a “closet moratorium” on foreclosures that stanched the flow of bank-owned homes to the market, said Ronald Temple, portfolio manager at Lazard Asset Management.
The result: The share of distressed sales fell by November to 25% of home sales, and prices stabilized. After rising in the winter, the distressed share fell to 22% in June, before bouncing to 30% in July.
The problem is that these measures are wearing off. Demand plunged this summer after tax credits expired, and unsold homes are piling up. …
Of course the market did roll over after the tax credits expired just as many predicted.
The next leg down in prices “isn’t going to be the foreclosure-induced freefall where you just had inventory coming out the wazoo, and it was going to be sold one way or the other,” said Glenn Kelman, chief executive of Redfin Corp., a real-estate brokerage.
He was right that we did not have a mass forced auction that pounded prices back to the stone ages, but we endured pricing pressure until this supply cleared from the market 18 months later.
Prices also have come down so much already they have less distance to fall. During the housing boom, prices inflated much faster than incomes rose, thanks to speculation and lax lending. The ratio of home prices to annual incomes reached 1.6 at the end of June, which is below the ratio of 1.88 from 1989 to 2003, according to Moody’s Analytics.
By those metrics, prices are actually undervalued in markets that have already seen huge declines, such as Las Vegas, Phoenix and Los Angeles. But Moody’s data show that prices remain “significantly overvalued” elsewhere, including Boston; New York; Seattle; Orange County, Calif., and Charlotte, N.C. Markets in both camps face supply imbalances that will pressure prices for years.
Moody’s was right on. Las Vegas was too low relative to incomes, and Orange County was much too high. I went out to Las Vegas and bought properties due to this value imbalance.
While more tax credits aren’t likely, policy makers could still attack the supply problem by, for example, taking foreclosed homes off the market and renting them out.
An idea I endorsed in From Squatting to Renting: Another Solution to Stabilize Housing. This later developed into the REO-to-rental business model that ultimately bought thousands of residential homes before prices became too high.
Ultimately, market fundamentals will prevail “and any attempt to get around that will only be short-term,” said Susan Wachter, a professor of real estate at the University of Pennsylvania’s Wharton School. But officials should be prepared to intervene anyway, she said, if psychology spurs a downward spiral “where price declines are feeding further price declines.”
You mean if deflation psychology takes over? Good luck combating that one: Contrarian Investing and the Psychology of Deflation.
That leaves few attractive options. Prolonged intervention could backfire by creating uncertainty that keeps buyers on the sidelines. Extending foreclosure timelines also risks inducing more borrowers to default and live rent-free.
The amend-extend-pretend policy has been a fiasco: After Eight Years of Squatting, Who Absorbs the Losses?.
Letting the market take its medicine sounds more appealing than it did 18 months ago. But it risks saddling taxpayers and the banking system with billions more in losses and trapping more borrowers in homes on which they owe more than the house is worth.
Kudos to Nick Tamiraos for such a lucid description of the problem, and of the problems associated with all the bad solutions that have been implemented to solve the problem though mid 2010.
The housing market bottomed in early 2012 because lenders stopped foreclosing and started can-kicking with loan modifications. They morphed must-sell shadow inventory into can’t-sell cloud inventory, and it worked.
Inventory evaporated, institutional investors entered the market, and the balance of supply and demand favored the reflation of the housing bubble; we entered a gilded age of low housing inventory. The situation is the same today, and it’s likely lenders will keep this policy in place until collateral backing returns to their bubble-era bad loans.
It’s important to notice here that both the bust and the reflation rally that followed were largely driven by lender’s policies.
First, the housing bubble was caused by lenders making loans with toxic terms they invented to borrowers who were not properly screened through underwriting procedures they circumvented.
Second, lenders facilitated and deepened the crash by following their loss mitigation procedures in response to the delinquencies on the unstable loans lenders never should have originated.
Third, lenders then modified their loss mitigation policies to remove the distressed supply from the MLS and create an artificial shortage of supply, a shortage that persists to this day.
Hopefully, we are back to a Housing market where prices are expensive, affordable, stable, and boring, but if we do have unnecessary excitement going forward, you can comfortably rely on the fact that it will be a direct result of some future change in lender policy.
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In the news today …
Greece is insolvent
Puerto Rico wants to file BK
I bet members of the FOMC aren’t sleeping well these days.
The whole f##king world economy is nearing the collapse, but this time the central banks are all at ZERO PERCENT! LOL .. FOOLS!
http://blogs.wsj.com/moneybeat/2015/06/29/why-central-banks-worry-about-greece/
“The latest Bank for International Settlements report warned that central banks have largely used up their ammunition to fight recession. In which case an ordinary economic downturn could become particularly vicious as central banks run out of tools to reignite growth.”
One more point …
The FED has been parked at ZERO PERCENT during this entire “7 Year Recovery”. Some say they’re fighting inflation (tongue in cheek). LOL
Get ready for this:
(A) About half of America’s Private Debt (about 44 Trillion) will be demolished. The Govt will rewrite the bankruptcy laws.
(B) Asset prices that are supported with this debt will collapse.
(C) Dollars disappear … like puff.
The Global reset is approaching.
The central bank chief who saw the 2008 crash coming worries about end of unconventional policies
Last week, Raghuram Rajan, India’s rock star central bank governor who is credited with foreseeing the 2008 financial crisis, said the world is currently facing Great Depression-era problems.
But now the central bank is backtracking on those comments.
In a statement, Royal Bank of India general manager Alpana Killawala said the press “mis-characterized” Rajan’s remarks:
The Great Depression was a period of great turmoil, caused by many factors and not just beggar-thy-neighbour policies. Governor Rajan did not imply or suggest that there was any risk of the world economy, which is in steady recovery notwithstanding uncertainties like those in the Euro area, slipping into a new Great Depression.
According to local Indian media, Rajan warned at a London Business School conference that, in a global collective effort to “produce growth out of nowhere,” we could be “shifting growth from each other, rather than creating growth.”
“Of course, there is past history of this during the Great Depression when we got into competitive devaluation,” he reportedly said.
Rajan, a former IMF chief economist, has previously voiced concerns that central banks are pushing toward competitive monetary easing.
The official script that Rajan was speaking from, released by the RBI, read: “I use Depression era terminology because I fear that in a world with weak aggregate demand, we may be engaged in a risky competition for a greater share of it. We are thereby also creating financial sector risks for when unconventional policies end.”
I wonder if all the value/vulture investors that scooped up Greek bonds recently will actually take losses. That could start a contagion that spreads like wildfire, with another death spiral of investor redemptions and forced liquidations, and a general stock market panic as a result.
Panic Sets in Among Hardy Hedge Fund Investors Remaining in Greece
http://www.nytimes.com/2015/06/29/business/dealbook/panic-among-hedge-fund-investors-in-greece.html?_r=0
When it became clear that a radical Syriza government under Mr. Tsipras would come to power, many investors quickly turned heel, dumping their Greek government bonds and bank stocks in large numbers before and after the election.
But a brave, hardy few stayed put — around 40 to 50, local brokers estimate — taking the view that while the new left-wing government could hardly be described as investor friendly, it would ultimately agree to a deal with Europe. It would be a bumpy ride for sure, but for those taking the long view that Greece would remain in the eurozone, holding on to their investments as opposed to selling them in a panic seemed the better course of action.
For now, at least, that seems to be a terrible misjudgment, especially if Greece defaults and leaves the euro.
In recent days, as it was becoming clear that the Syriza government was not going to accept the latest proposal from its creditors, stress and anxiety, in some cases, turned to outright anger.
“I just can’t believe these guys are willing to torch their own country,” one investor with a large holding of Greek bonds lamented in an email. “They thought this was a game. Now, when the supermarkets run out of food, gas stations run out of gas, hospitals have no medicine, tourists flee, salaries don’t get paid because banks shut — what are they going to do?”
What are they going to do? They’re going to give all their creditors the bird, that’s what they are going to do. Anyone who bought Greek bonds knew there was a huge risk, which is why most of them bought in at a huge discount. I can’t feel sorry for them.
I think we’ve all been conditioned to expect bailouts for major institutions, so I can understand why they thought this was a compelling risk/reward scenario. As long as Greece continued to meet the terms of the bailout, they would continue to receive the bailout. The problem is that government officials don’t always act rationally. Greece decided to play chicken and it looks like the Eurozone isn’t going to blink this time.
Back in 2009 there was a great article in the Atlantic, The Quiet Coup. It was written by a former IMF official that talks about how the oligarchs have to take haircuts when a country’s finances get out of order. The Greek oligarchs made the same assumptions as the bondholders did, and they refused to give up any of their power. The Trioka has been foolish to let it go on this long. The utter collapse of the Greek economy will probably force the political change necessary to reform the system, but the cost paid by the Greek populace will be terrible.
Simon Johnson wrote “A Quiet Coup”. Still one of my favorite articles.
Paulson’s fund is taking a blood bath on both regions…
This hedge fund manager just lost millions on Greece and Puerto Rico
https://fortune.com/2015/06/29/john-paulson-greece-puerto-rico-hedge-funds/
He kicked ass with subprime, but he’s beeen sputtering ever since.
Paulson fixed the game.His agency sold their investors long positions on 30 year paper and he and friends all took short postions.Funny how no one investigated the inside trading.
He arranged some subprime deals through Goldman Sachs specifically so that he could short them.
http://www.reuters.com/article/2010/04/16/us-goldmansachs-abacus-factbox-idUSTRE63F5CZ20100416
I don’t think he sold any of his own clients the long side, but Goldman Sachs was certainly willing to do so. At the time, Goldman Sachs probably thought Paulson was crazy, so they didn’t see the sale as a conflict.
Here are the 20 hottest housing markets in America right now
California housing markets lead the nation, and nationally prices were up 7% year-over-year, with the median price hitting $288,000 for a home.
Median days on market, now at 66 days, continued a sharp decline, down 11% year over year and 10% month over month, according to the latest report from realtor.com.
Helping create more opportunities for buyers, the listings inventory is now growing faster, at 4% over April but still down over last year.
“On the demand side we are seeing traffic and searches on realtor.com continue to set new highs,” said Jonathan Smoke, chief economist for realtor.com. “Unique users for the month are once again on pace for 40% growth year over year, while visits and searches are expected to be up more than 50% and 35%, respectively.”
California dominated the “hottest” markets list with half of the country’s 20 hottest real estate markets. San Francisco and San Jose maintain the #2 and #3 spots from April rankings, respectively. California markets rank highly because of tight supply and economic-powered growth in demand.
http://www.housingwire.com/ext/resources/images/editorial/Trey-6/Screen-Shot-2015-06-01-at-103217-AM.png
What are smoking, Smoke? Your predictions went up in smoke.
http://25.media.tumblr.com/tumblr_ma8cleJw2j1r015l2o2_500.gif
Thanks for sharing that clip. I was a teenager the first time I saw that movie. At the time, it was the funniest movie I had ever seen.
Wow, the fact that 5 out of the top 10 are in the extended Bay Area leads me to believe we really may have a very localized bubble. Once the VC cash flowing into social media and big data companies dries up (and it always cycles) there may be some disruption here.
A buddy of mine just bought a fixer in San Jose for $900k. He left a 1-bedroom apt in San Francisco (not even that great an apartment). We has paying $2400 for it since 2009. It just got re-rented at $3800. This is not sustainable.
I have no idea *what’s* going to happen, but it sure seems like something is going to happen here. It’s going up too fast and the various communities here are unable to respond.
You know what is going to happen.You just did not say it !
Yet I always think it is just around the corner…. always just around the corner…
That’s the funny thing about financial bubbles, they rarely have good signals at the top. If you see Bay Area sales suddenly fall off a cliff, probably induced by rising mortgage rates, that will likely be a sign of a short-term top. It will depend on how much rates rise and how quickly they do so. Also, if something shakes up the flow of VC funds into Silicon Valley tech companies, that would be the sign of something bad about to happen.
Will home prices in the San Francisco market continue to increase?
Home prices in the San Francisco area have been rapidly increasing since early 2012, reaching year-over-year appreciation rates of more than 20 percent in early 2013. Since then, home prices have continued to increase but at a slower pace. Figure 1 shows the CoreLogic Home Price IndexTM (HPI) and year-over-year change for the San Francisco market.
http://www.corelogic.com/imgs/blog/june2015/bin_sf_fig1_large.png
It shows that the HPI has surpassed pre-crisis levels and continues to climb. The year-over-year appreciation rate remained above 10 percent for the first three months of 2015, which is considerably higher than the 5 percent appreciation in the U.S. index.
An analysis of CoreLogic data on homes listed for sale and those that have sold shows some of the forces that have driven prices higher in the San Francisco Core Based Statistical Area (CBSA). Figure 2 compares the final sale price to the initial list price, indicating the premium or discount paid relative to the initial list price.
http://www.corelogic.com/imgs/blog/june2015/bin_sf_fig2_large.png
It appears that buyers, on average, were taking more than a 6-percent discount in 2009. However, in 2014 and so far in 2015, they have been paying between a 1 percent and 5 percent premium, which indicates buyers are bidding up prices in the San Francisco market. In a buyer’s market, we would expect greater discounts on a sold property, and in a seller’s market, we would typically see multiple offers, and even offers above the initial list price.
Another field that can shed light on the state of the San Francisco housing market is the months’ supply of inventory, which measures the number of months it would take to sell the existing inventory of homes at the current speed of sales. Figure 3 shows that since 2013 the months’ supply has averaged only a couple of months. With such a low inventory-to-sales ratio, upward pressure on home prices is expected to continue.
http://www.corelogic.com/imgs/blog/june2015/bin_sf_fig3_large.png
Even though sales have remained constant, the active listing inventory in the San Francisco area was down 69 percent over the four-year period from Q4 2010 to Q4 20141. This supply-demand imbalance is exerting upward pressure on home prices. Figure 4 shows the median price for both active listings—existing listings that are active during the indicated month—and new listings, which are homes that are added during the indicated month.
http://www.corelogic.com/imgs/blog/june2015/bin_sf_fig3_large.png
Although both listing prices are at their peaks since 2007, properties in the San Francisco area are selling very quickly with sold properties off the market within an average of 30-45 days, as Figure 5 shows.
http://www.corelogic.com/imgs/blog/june2015/bin_sf_fig5_large.png
In spite of recording continued rising home prices over the last few years, the current realities of bidding wars, tight supply and consistently low days-on-market sales cycles all point to home prices continuing to increase in the San Francisco market, at least for the short term.
Pending home sales rise 0.9% in May, highest level since 2006
A sharp jump in interest rates may have deterred some home buyers in May. Signed contracts to buy existing homes, so-called pending home sales, rose just 0.9 percent in May from April, according to the National Association of Realtors, after a downward revision to April’s reading. That is slightly lower than analysts predicted, but is still the highest level on the association’s index since April of 2006. Pending sales are now 10.4 percent higher than one year ago.
“The steady pace of solid job creation seen now for over a year has given the housing market a boost this spring,” said Lawrence Yun, chief economist for the Realtors. “It’s very encouraging to now see a broad based recovery with all four major regions showing solid gains from a year ago and new home sales also coming alive.”
http://ochousingnews.g.corvida.com/wp-content/uploads/2015/02/cheerleading.jpg
Faster job gains are great but bigger paychecks still await
WASHINGTON (MarketWatch) — Like an assembly line, the U.S. has been churning out healthy job gains of more than 200,000 a month for over a year. The pickup in hiring is great, but it’s not enough by itself to push the economy to greater heights.
The next step is for all the new hiring to boost worker pay, and in turn, give Americans more confidence to spend some of their extra cash.
The first may be easier than the second.
Already, there’s widespread signs wages are starting to accelerate. Several key government measures, including the employment cost index, show a clear bump in how much companies are paying workers. Many large firms in sectors such as retail have also raised their lowest wages as competition for talent intensifies.
With another 200,000-plus gain in new jobs expected in June, Wall Street is now mainly looking to see if the monthly employment report due on Thursday offers more evidence of rising wages. The report comes out a day earlier than usual because of the July 4 holiday.
In May, hourly wages rose for the fifth straight month to put the increase over the past year at 2.3%. That’s the highest level since 2009 and many economists predict wages will continue to climb toward the 3% mark that usually prevails as an economic expansion reaches its peak.
What’s putting upward pressure on wages is a dwindling pool of available workers as the unemployment rate, now at 5.5%, creeps toward 5% or below for the first time in eight years. Many businesses complain they can’t find enough good help, and the easiest way to rectify that is to offer higher pay.
“As the job market tightens you should see wages go up,” said Scott Brown, the Florida-based chief economist at financial advisor Raymond James.
The California Dream has Moved Away
Southern California faces a serious middle income housing affordability crisis. I refer to middle income housing, because this nation has become so successful in democratizing property ownership that the overwhelming majority of middle income households own their own homes in most of the country.
The title of the forum was “The Changing Demographics of Southern California and Their Impact on Housing,” however I think that the reverse is more significant — the impact housing is likely to have on Southern California.
My perspective is neither ideological nor tied to any political party. It is a fundamentally pragmatic view that domestic policy should principally seek to better people’s lives, by facilitating a rising standard of living and reducing poverty. These objectives were also referenced in the G20 nations communiqué in Brisbane and adopted a announcing a dedication to improving standards of living and eradicating poverty.
The issue is particularly ripe in California, where public policies relating to housing are having virtually the opposite effect. Housing costs have already increased poverty and reduced the discretionary income of middle-income households.
Southern California’s biggest crisis relates to housing. Housing is important to the standard of living and alleviating poverty. It is the largest element of household budgets. When housing more expensive, it leaves households with less discretionary income to purchase other goods and services. This will, other things being equal, reduce economic output from levels that would be otherwise attained.
This has been developing for more than four decades as house price to income ratios (such as the median multiple, the median house price divided by the median household income) have doubled and tripled above historical levels and well above those of other metropolitan areas. Attention is often focused on lower income affordable housing, a problem virtually everywhere, but most parts of the country do not suffer so severe a middle-income housing affordability problem. Low-income housing affordability is important and one of the best ways to minimize it is to ensure that there is middle-income housing affordability.
Sadly, affordability has diminished greatly in many metropolitan areas around the world. House prices relative to incomes have doubled or tripled in virtually all of the metropolitan areas of Australia and New Zealand, some metropolitan areas in Canada as well as in some key metropolitan areas in the United States, with the worst in California. In each of these places, this house price escalation occurred after implementation of urban containment policies (also called smart growth or growth management), which seriously reduce the amount of land that can be used for new housing.
Today, California house prices are far higher than in the rest of the nation. This is taking a toll on the standard of living and increasing poverty. The Census Bureau’s supplemental poverty measure, which adjusts for housing costs shows California’s poverty rate to be the highest in the nation. It should be of concern that California’s poverty rate is 50% above that of perennial poverty leader Mississippi (Figure).
Because so much poverty is concentrated among minority ethnic populations, California’s urban containment policy is particularly disadvantaging Hispanics and African-Americans. The Thomas Rivera Institute at USC published a detailed examination of California’s land-use regulations and found that “Far from helping, they are making it particularly difficult for Latino and African American households to own a home.”
The Problems With Easy Debt And More Debt—-It Destroys Financial Discipline
Cheap, easy credit has created moral hazard and nurtured magical thinking throughout the global economy.
According to polls, the majority of Greek citizens want the benefits of membership in the euro/EU and the end of EU-imposed austerity. The idea that these are mutually exclusive doesn’t seem to register.
This is the discreet charm of magical thinking: it promises an escape from the difficulties of hard choices, tough trade-offs, the disruption of vested interests and most painfully, the breakdown of the debt machine that has enabled the distribution of swag to virtually everyone in the system (a torrent to those at the top, a trickle to the majority at the bottom, but swag nonetheless).
If we had to summarize the insidious charm of magical thinking, we might start with the overpowering appeal of using credit to ease all difficulties.
Need money to fund various healthcare/national defense rackets? Borrow the money. Need to keep people employed building ghost cities in the middle of nowhere? Borrow the money. Need to keep buying shares of the company’s stock to push the value of each share ever higher? Borrow the money.
The problem with cheap, easy credit is Cheap, easy credit destroys discipline. The lifetime costs of debt taken on to fund bridges to nowhere, healthcare/national defense rackets, ghost cities, stock buybacks, etc. are never calculated. The opportunity costs are also never calculated.
When credit is costly and hard to get, marginal borrowers can’t get loans and nobody dares borrow at high rates of interest for low-yield, high-risk schemes.When credit is costly and hard to get, what doesn’t pencil out doesn’t get funded.
When credit is cheap and easy to get, every scheme and racket gets funding because hey, why not? The cost is low (at the moment) and the gain might be fantastic. But even if the gain is unknown, the kickback/campaign contributions make it worthwhile even if the scheme fails.
Professional economists are duty-bound to claim national economies are not merely extensions of households. But this is just another falsity passed off as sophisticated truth by a profession that is being discredited by the reality of its failed policies, failed theories and failed predictions.
Since human psychology remains the dominant force in all economics, the household and national economies can only differ in scale.
Ask yourself this: if you could shift risk and losses to the taxpayers, how would that affect your investing/gambling? Wouldn’t you take much higher risks, knowing that losses would not fall to you but to abstract taxpayers? Of course you would, and this is the essence of moral hazard–the disconnect of risk and consequence.
Cheap, easy credit has created moral hazard and nurtured magical thinking throughout the global economy. The heart of magical thinking is that consequences have been disappeared or shifted onto others by financial enchantment.