The Bailout of the housing Bubble

Believe what you like but when the ECB injects 300 billion euro does it not cross your mind to wonder where the money comes from and where it goes.

youngdan wrote:

Believe what you like but when the ECB injects 300 billion euro does it not cross your mind to wonder where the money comes from and where it goes.

If the economy runs into trouble then the farthest it can fall back to is certain fundamentals isn't it? People have to eat, wear clothes, warm themselves etc. - this is a sort of wartime state in which the economy could fall to. But isn't it true that an economy could have very slack periods where no one is buying a new car, no one is even driving - maybe they're all at home in bed and growing their own veg and it would be half like a wartime state? Couldn't an economy just slack off like that for a period - is it a natural rhythm that every day has a night, for every intake of breath there is an out-take (?) Maybe then someone will want to stimulate this out of its torpor by injecting a pile of yo-yos in.

But at the end of every up cycle there should be a lot more people better off though (but I wonder how true this is in reality ... )

Auditor #9 wrote:

But at the end of every up cycle there should be a lot more people better off though (but I wonder how true this is in reality ... )

Yes they are, the development of the world has been irreversible from time immemorial. We came from caves and farmed, then we discovered better tools, we explored the world and brought about international trade, the industrial revolution ensued, the service sector boom of the 20th century continued the advance and the 21st century will see something similar when we get over our dependence on fossil fuels and solve climate change. Humanity has been on a journey of constant growth, development, progress and drive towards universally high standards of living. Compare the livelihoods of all the peoples of the world against 10, 20, 50 and 100 years ago, you will find that the vast majority have seen them improved and some to an almost unimaginable degree.

Ard-Taoiseach wrote:

Auditor #9 wrote:

But at the end of every up cycle there should be a lot more people better off though (but I wonder how true this is in reality ... )

Yes they are, the development of the world has been irreversible from time immemorial. We came from caves and farmed, then we discovered better tools, we explored the world and brought about international trade, the industrial revolution ensued, the service sector boom of the 20th century continued the advance and the 21st century will see something similar when we get over our dependence on fossil fuels and solve climate change. Humanity has been on a journey of constant growth, development, progress and drive towards universally high standards of living. Compare the livelihoods of all the peoples of the world against 10, 20, 50 and 100 years ago, you will find that the vast majority have seen them improved and some to an almost unimaginable degree.

This is all true, Ard Taoiseach, but within that we have gone from societies that were more or less equal to horrendous gulfs between a few rich and a lot of poor, and we have hit the roof environmentally. We are too many for the fish stock, which is crashing. Carbon emissions are driving climate changes that are taking out thousands of acres of good land. We have arms stockpiles that would kill everyone several times over. We have to find a way of living in balance with the planet, as well as using all our ingenuity, creativity and productivity.

Still not answering the simple question where does the 300 billion come from and where does it end up. Some here are afraid to find out because to face the fact that they are suckers is too much them to take.

youngdan wrote:

Still not answering the simple question where does the 300 billion come from and where does it end up. Some here are afraid to find out because to face the fact that they are suckers is too much them to take.

Sorry youngdan, but which 300 billion are you talking about? it is small money compared with F and F and Iraq.

youngdan wrote:

Still not answering the simple question where does the 300 billion come from and where does it end up. Some here are afraid to find out because to face the fact that they are suckers is too much them to take.

It comes out of everyone's pocket - it must do. And it must flow around the world too - it leaves your pocket and ends up in the bank where I owe my mortgage some way - has anyone ever traced the ecology of money? I'm sure they have.

What's desperate altogether is that some poor sucker has three mortgages or worse - a mortgage on a house that's worth a third less than what he's paying. At least currently it's worth that much less and sometimes it's more than a third. That house I showed you the other day - how would you be feeling if you were doomed to be paying a 900k mortgage off a house that recently sold for 585k ... ? You'd feel like one of these below



Do these people just swallow it and pay off the bank for the rest of their lives or do they go to Mountjoy for defaulting or what?

Auditor #9 wrote:

youngdan wrote:

Still not answering the simple question where does the 300 billion come from and where does it end up. Some here are afraid to find out because to face the fact that they are suckers is too much them to take.

It comes out of everyone's pocket - it must do. And it must flow around the world too - it leaves your pocket and ends up in the bank where I owe my mortgage some way - has anyone ever traced the ecology of money? I'm sure they have.

What's desperate altogether is that some poor sucker has three mortgages or worse - a mortgage on a house that's worth a third less than what he's paying. At least currently it's worth that much less and sometimes it's more than a third. That house I showed you the other day - how would you be feeling if you were doomed to be paying a 900k mortgage off a house that recently sold for 585k ... ? You'd feel like one of these below



Do these people just swallow it and pay off the bank for the rest of their lives or do they go to Mountjoy for defaulting or what?

I went to a party last year in London - a whole generation of people with Thatchernegativeequity in their fourties and thirties living as if they were students for the last ten years. I know people who have dropped their mortages and run to the hills and shores... There are still choices...

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I went to a party last year in London - a whole generation of people with Thatchernegativeequity in their fourties and thirties living as if they were students for the last ten years. I know people who have dropped their mortages and run to the hills and shores... There are still choices...

The banks will hunt them down, though. They do not forget - however, I can highly recommend (for those with debts to UK banks) moving to the West of Ireland and insisting on the Irish version of your name.

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Still not answering the simple question where does the 300 billion come from and where does it end up. Some here are afraid to find out because to face the fact that they are suckers is too much them to take.

As far as I know, it's simply credit created by the central bank - an expansion of the money supply. A bit like saying that everyone in the game of Monopoly can have an extra 500. In turn, that creates inflation (as well as moral hazard).

Is there a darker and more sinister alternative that I am missing? Do they come round at night and force my family to work secretly in the salt mines?

Or are you making the point that inflation is theft, and that therefore by creating fiat money of this kind the central banks, as lenders of last resort, are effectively stealing from us all?

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Or are you making the point that inflation is theft, and that therefore by creating fiat money of this kind the central banks, as lenders of last resort, are effectively stealing from us all?

What else is it? It's a bailout of the incompetent, negligent or corrupt. And what youngdan must be more bitter about is that it's happening in the states in not billions of dollars but potentially trillions.

Speaking of houses and the budget, from the SBP today

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Budget may incorporate home insulation scheme
Sunday, September 14, 2008 By Niamh Connolly, Political Correspondent
A national home insulation scheme, which would cut energy bills and revive the ailing construction industry, could form part of next month’s budget.

Measures to increase fuel allowances for low-income groups and social welfare recipients are also under discussion.

It is understood that a government cash injection of between €20million and €30 million for the first year of the insulation scheme is being examined by Brian Lenihan, the Minister for Finance.

The total cost of the full roll-out of the scheme over the next four years is estimated at around €100 million. The plan being examined by Lenihan envisages that local authority housing and homes of the elderly would receive government grants and be prioritised for insulation.

Sunday Buessiness Post

This could have been happening all along but it's welcome nonetheless. It will be interesting to see how it happens. There was some withdrawal of grants recently from home improvement schemes, I wonder is it going to be replaced by this? And how easy will it be to get these loans or grants. And speaking of interest how much will the interest be.

You know, if they knocked VAT off certain Kingspan materials then that might be the easier for some of us...

The 300 billion was injected by the ECB some months ago. By creating it out of thin air it is indeed theft as it lessens the value of the rest of the money by 300 billion. Everyone with any assets denominated in euros has been robbed. The other side of the question is who was handed the 300 billion. This cash ended up in the pockets of some very happy people.

Somebody lost big(you) but someone gained big as well.

youngdan wrote:

The 300 billion was injected by the ECB some months ago. By creating it out of thin air it is indeed theft as it lessens the value of the rest of the money by 300 billion. Everyone with any assets denominated in euros has been robbed. The other side of the question is who was handed the 300 billion. This cash ended up in the pockets of some very happy people.

Somebody lost big(you) but someone gained big as well.

First, what were the alternatives, exactly? Second, it doesn't end up in any specific somebody's pockets - except that more generally it allows bankers who otherwise shouldn't to keep drawing their pay cheques, and that some traders will succeed in profiting off the injection through other trades. Third, sure, if I kept my money under my mattress in cash, then inflation could be viewed as robbing me by reducing the value of that - but I don't. On balance, I probably don't have any savings at all - instead, most of what I have is lines of credit of various forms. A shutdown in the credit system is therefore a far more real concern to me than the diminution of my sacred private property by very mild inflation. If the governments mishandle the system to the extent of creating galloping inflation, then, yes, I shall be pretty unhappy, but inflation levels in the single digits, no.

It's libertarian cant, combined with naive paranoia. I could get an identical answer, word for word, off 20000miles or ILF on p.ie.

youngdan wrote:

The 300 billion was injected by the ECB some months ago. By creating it out of thin air it is indeed theft as it lessens the value of the rest of the money by 300 billion. Everyone with any assets denominated in euros has been robbed. The other side of the question is who was handed the 300 billion. This cash ended up in the pockets of some very happy people.

Somebody lost big(you) but someone gained big as well.

Our wages in Ireland are 30% higher than most of Europe and a fair number of people have negative equity on their homes. If wages are frozen, a bit of inflation across Europe would bring us back closer to the norm or, if wages are not frozen will effectively reduce the size of their mortgage debt.

What you are suggesting is that there should be no bail outs, and very restricted access to business loans. This would push unemployment up through the roof for a very long time. Its likely there would be political upheavals of various kinds and there would be a lot of poverty and a propensity to war. Maybe at the end of the day, the inflationary approach won't be able to prevent this happening anyway, but I find it hard to see why you think the other option is so good.

Auditor#9 - do you really think this is the result of corrupt people and mistakes - is it not that the whole system has built-in instability?

This is not a case of libertarian again socialist or anything else. It is a case of a huge transfer of wealth. At least now everyone should understand one side of the coin which is the theft of the created money and how it robs everyone even the people who owe money because the inflation influences the interest rates higher.

The 300 billion does just not sit there without somebody getting it like you suggest or maybe prefer to ignore. Concentrate on the size of this amount. It is 600 euros per person in the EU. You got a wife and 3 kids then the family share is 3 grand. This money is given to the rich investors who had bought bonds in the instituation about to fail. They have bought an asset that might have been selling for 30 cents on the dollar and presto the government steps in and the bonds are worth 100 cents. The fat cat has tripled his money and drives away in his Rolls.

Leave aside 20000 miles because he is what you would call a far right poster and you are predisposed to ignoring him. Take Cael instead. He is what might be described as a left wing socialist or indeed communist as far as I am concerned. However he is saying more or less exactly what I am saying about the banks and central banks in particular.

Regardless of your point of view, the man on the street is getting the shaft and the Big Knobs are cleaning up.

**ibis posted before me

youngdan wrote:

This is not a case of libertarian again socialist or anything else. It is a case of a huge transfer of wealth. At least now everyone should understand one side of the coin which is the theft of the created money and how it robs everyone even the people who owe money because the inflation influences the interest rates higher.

The 300 billion does just not sit there without somebody getting it like you suggest or maybe prefer to ignore. Concentrate on the size of this amount. It is 600 euros per person in the EU. You got a wife and 3 kids then the family share is 3 grand. This money is given to the rich investors who had bought bonds in the instituation about to fail. They have bought an asset that might have been selling for 30 cents on the dollar and presto the government steps in and the bonds are worth 100 cents. The fat cat has tripled his money and drives away in his Rolls.

cactus flower wrote:

Auditor#9 - do you really think this is the result of corrupt people and mistakes - is it not that the whole system has built-in instability?

What system are you talking about cactus because there are several at work here as far as I can see - you might mean Free Market Capitalism but I might be understanding you as referring to the banking and credit system or even our socio-cultural system...

I think it wasn't a failure of free market capitalism anyway - the market assumes 'normal' items surely - here we are talking about the likes of Bear Stearns possessing a dollar for every thirty three they owed - that's nuts because traditionally it's 1:10. Capital and interest and fiat currency are not normal products like apples and schools and computers and public transport systems - they're not even like holidays which seem to do nothing for anyone except those being entertained. Banking activity like this possesses high risk and is more like gambling so I wouldn't fault the market. I'd take Squire's view that speculation on these things should be restrained in some way. I personally don't consider there should be a market for these things - it's crazy - it's not a real product. It's nothing more than gambling. We call it speculation and credit and at bottom it's GAMBLING.

And the bookie never loses as youngdan rightly points out above. (He should lose in this case though)

youngdan wrote:

This is not a case of libertarian again socialist or anything else. It is a case of a huge transfer of wealth. At least now everyone should understand one side of the coin which is the theft of the created money and how it robs everyone even the people who owe money because the inflation influences the interest rates higher.

The 300 billion does just not sit there without somebody getting it like you suggest or maybe prefer to ignore. Concentrate on the size of this amount. It is 600 euros per person in the EU. You got a wife and 3 kids then the family share is 3 grand. This money is given to the rich investors who had bought bonds in the instituation about to fail. They have bought an asset that might have been selling for 30 cents on the dollar and presto the government steps in and the bonds are worth 100 cents. The fat cat has tripled his money and drives away in his Rolls.

Sure, speculative investors will have made some money there - and others will have lost money by being forced (for one reason or another) to sell as the shares initially slid. That's a given, because if nobody sold when the shares started to slide, there'd be no shares to buy at the low price that the government rescue pumps up again. So, fat-cat-wise, it's pretty neutral. And just who are these fat cats, exactly? Take the Royal Bank of Scotland, for example - 80% of its shares are owned by institutions - which means pension funds, insurance schemes, etc. To put it another way - not fat cats. Ordinary people. Little old ladies who rely on their savings being invested wisely. When BCCI went down the tubes in 1991, most of the ordinary people on the island of Lewis got hurt - fair enough, the government couldn't realistically have bailed out that bunch of crooks, but the point remains - when banks go down, ordinary people get hurt. When the government bails those banks out by injecting liquidity into the system, they get hurt a lot less - profoundly less.

youngdan wrote:

Leave aside 20000 miles because he is what you would call a far right poster and you are predisposed to ignoring him. Take Cael instead. He is what might be described as a left wing socialist or indeed communist as far as I am concerned. However he is saying more or less exactly what I am saying about the banks and central banks in particular.

Regardless of your point of view, the man on the street is getting the shaft and the Big Knobs are cleaning up.

Almost exactly in proportion as the latter have more, and more diversified, investments, they are better placed to survive, and sometimes even benefit from, market turmoil. Some of them get wiped out, even so. It's a percentages game, not a black and white cartoon.

Auditor #9 wrote:

I think it wasn't a failure of free market capitalism anyway - the market assumes 'normal' items surely - here we are talking about the likes of Bear Stearns possessing a dollar for every thirty three they owed - that's nuts because traditionally it's 1:10. Capital and interest and fiat currency are not normal products like apples and schools and computers and public transport systems - they're not even like holidays which seem to do nothing for anyone except those being entertained. Banking activity like this possesses high risk and is more like gambling so I wouldn't fault the market. I'd take Squire's view that speculation on these things should be restrained in some way. I personally don't consider there should be a market for these things - it's crazy - it's not a real product. It's nothing more than gambling. We call it speculation and credit and at bottom it's GAMBLING.

Exactly Auditor, what happened at Bear Stearns wasn't a failure of market but a failure of people. Indeed if the market had been allowed to work and Bear Stearns put out of business, it would act as a warning to others to modulate their behaviour accordingly and that would bring the market back towards equilibrium. Markets are incredible mechanisms for resource and income distribution and for acting as a channel towards the best result.

Ard-Taoiseach wrote:

Auditor #9 wrote:

I think it wasn't a failure of free market capitalism anyway - the market assumes 'normal' items surely - here we are talking about the likes of Bear Stearns possessing a dollar for every thirty three they owed - that's nuts because traditionally it's 1:10. Capital and interest and fiat currency are not normal products like apples and schools and computers and public transport systems - they're not even like holidays which seem to do nothing for anyone except those being entertained. Banking activity like this possesses high risk and is more like gambling so I wouldn't fault the market. I'd take Squire's view that speculation on these things should be restrained in some way. I personally don't consider there should be a market for these things - it's crazy - it's not a real product. It's nothing more than gambling. We call it speculation and credit and at bottom it's GAMBLING.

Exactly Auditor, what happened at Bear Stearns wasn't a failure of market but a failure of people. Indeed if the market had been allowed to work and Bear Stearns put out of business, it would act as a warning to others to modulate their behaviour accordingly and that would bring the market back towards equilibrium. Markets are incredible mechanisms for resource and income distribution and for acting as a channel towards the best result.

Agreed. Some of them should be allowed to fail but could the credit system suffer if all of them were allowed?

I also think it might have been a failure socio-culturally in that how the hell can someone think a 3-bed semi-d house in south county Dublin is worth 890k !! This example is going through my mind ferociously but it one example of how prices on the market deviated crazily from the cost of the materials and labour - I don't understand how the eejits who bought those houses thought they'd actually appreciate in value from that point. Dublin is mad busy and all but that's short-sightedness. I'd be doubtful that that house will be worth the 2 million they will have paid for it by the end of the mortgage. That's a big fecking gamble.

Auditor #9 wrote:

Agreed. Some of them should be allowed to fail but could the credit system suffer if all of them were allowed?

Well, the government has to judge that for itself and it is pretty hard to know where to draw the line. Bear Stearns was after all one of the smaller investment banks, Northern Rock was one of the smallest of all UK financial institutions. However, there is an argument that certain companies have to be supported since their failure would threaten the whole market's viability. I'd be of the opinion that that argument should be narrowly defined and the government should, as much as possible, restrict itself from bailing out companies.

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I also think it might have been a failure socio-culturally in that how the hell can someone think a 3-bed semi-d house in south county Dublin is worth 890k !! This example is going through my mind ferociously but it one example of how prices on the market deviated crazily from the cost of the materials and labour - I don't understand how the eejits who bought those houses thought they'd actually appreciate in value from that point. Dublin is mad busy and all but that's short-sightedness. I'd be doubtful that that house will be worth the 2 million they will have paid for it by the end of the mortgage. That's a big fecking gamble.

It's simply a classic asset price bubble and it has happened in virtually every country since time began. Government did encourage the excess by inappropriate fiscal stimulus and we were unfortunate to have such a damaging era of easy credit. That said, the market is correcting itself nicely and it should be back to equilibrium once it reaches 2001-02 prices in real terms. That means perhaps another 20% off the average value according the the PTSB/ESRI Index. It's painful but very necessary and, in the long run, very rewarding.

Quote :

It's simply a classic asset price bubble and it has happened in virtually every country since time began. Government did encourage the excess by inappropriate fiscal stimulus and we were unfortunate to have such a damaging era of easy credit. That said, the market is correcting itself nicely and it should be back to equilibrium once it reaches 2001-02 prices in real terms. That means perhaps another 20% off the average value according the the PTSB/ESRI Index. It's painful but very necessary and, in the long run, very rewarding.

Another 20%? So, a lot of people got burned in this and the upshot is that they'll be paying the asset bubble price for the rest of their lives... Is that what happens in all classic asset bubbles? What happened in England do you know? People grin and bear it and lie to the loss of it is it?

Do you think we've learned from this bubble or does anyone ever learn (it happened in England this time again too didn't it?) Another upshot is that those people who are paying forever at inflated prices are fine once they're happy with that, going back to ibis' view of price, but for every one of them there must have been a heap of suckers who got caught up in the frenzy and now cannot afford to pay that back and are potentially facing a lifetime of 'working poverty' as rockyracoon has pointed out, with possible restrictions on what parents can afford for their children because they have to pay for their 1.5 million semi-d. That's neglect of social responsibility by the Finance Ministry during the bubble. Wasn't the regulator pushed into the fray only lately?

Another upshot is there's less money floating around because people are tied up paying their mortgage (i.e. financing the yacht maintenance bill etc. of some speculator, banker or builder) which goes to a 'clump' as cactus has referred to it. Clumping is not good - not in the pelts of cats, the manes of crusties or the wealth distribution system out there.

Auditor #9 wrote:

Another 20%? So, a lot of people got burned in this and the upshot is that they'll be paying the asset bubble price for the rest of their lives... Is that what happens in all classic asset bubbles? What happened in England do you know? People grin and bear it and lie to the loss of it is it?

Yep, they're just going to have to suck it up.

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Do you think we've learned from this bubble or does anyone ever learn (it happened in England this time again too didn't it?)

Ha, not likely! These madnesses afflict us every once in a while. It's a function of the flawed human condition. If we were all AIs like ibis I'd say we wouldn't have asset bubbles and everything would be all perfectly aligned. I however find that a bit dull and boring and sure asset bubbles keep economic historians in business and are the spice of life.

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Another upshot is that those people who are paying forever at inflated prices are fine once they're happy with that, going back to ibis' view of price, but for every one of them there must have been a heap of suckers who got caught up in the frenzy and now cannot afford to pay that back and are potentially facing a lifetime of 'working poverty' as rockyracoon has pointed out, with possible restrictions on what parents can afford for their children because they have to pay for their 1.5 million semi-d. That's neglect of social responsibility by the Finance Ministry during the bubble. Wasn't the regulator pushed into the fray only lately?

Yep, there was a failure on many levels during the housing boom which will take quite a while to unwind.

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Another upshot is there's less money floating around because people are tied up paying their mortgage (i.e. financing the yacht maintenance bill etc. of some speculator, banker or builder) which goes to a 'clump' as cactus has referred to it. Clumping is not good - not in the pelts of cats, the manes of crusties or the wealth distribution system out there.

It's tied up paying the increased risk premium around international money markets. Banks have to pay far higher amounts in order to access liquidity because they are perceived to be riskier institutions nowadays. Very little goes towards paying yacht maintenance. Most goes towards those who control the bond and capital markets of this world.

Auditor #9 wrote:

Quote :

It's simply a classic asset price bubble and it has happened in virtually every country since time began. Government did encourage the excess by inappropriate fiscal stimulus and we were unfortunate to have such a damaging era of easy credit. That said, the market is correcting itself nicely and it should be back to equilibrium once it reaches 2001-02 prices in real terms. That means perhaps another 20% off the average value according the the PTSB/ESRI Index. It's painful but very necessary and, in the long run, very rewarding.

Another 20%? So, a lot of people got burned in this and the upshot is that they'll be paying the asset bubble price for the rest of their lives... Is that what happens in all classic asset bubbles? What happened in England do you know? People grin and bear it and lie to the loss of it is it?

Pretty much. After all, you have to consider it's usually temporary. If you bought an overpriced property at the end of the 80s, you'll have had to sit out the dance for most of the 90s until it came back up again. Alternatively, you could suck up the loss and move on.

Auditor #9 wrote:

Do you think we've learned from this bubble or does anyone ever learn (it happened in England this time again too didn't it?) Another upshot is that those people who are paying forever at inflated prices are fine once they're happy with that, going back to ibis' view of price, but for every one of them there must have been a heap of suckers who got caught up in the frenzy and now cannot afford to pay that back and are potentially facing a lifetime of 'working poverty' as rockyracoon has pointed out, with possible restrictions on what parents can afford for their children because they have to pay for their 1.5 million semi-d. That's neglect of social responsibility by the Finance Ministry during the bubble. Wasn't the regulator pushed into the fray only lately?

Another upshot is there's less money floating around because people are tied up paying their mortgage (i.e. financing the yacht maintenance bill etc. of some speculator, banker or builder) which goes to a 'clump' as cactus has referred to it. Clumping is not good - not in the pelts of cats, the manes of crusties or the wealth distribution system out there.

Sure - that's the asset bubble hangover. Both for the people and the economy, that's why you don't do it - you regulate the heck out of it, unless you're looking for an easy ride through the next election. The funny thing is...

Forget about shares, that is peanuts. It is not some money as you think it is 300 billion. The money lost in share fluctuations is chump change. Take Freddie and Fannie. The value of the 2 companies was about 8 billion when it croaked. The value of the bonds is 5300 billion. If Lehman goes bankrupt tomorrow the shareholders will lose less than 3 billion. Again peanuts that nobody cares about. The panic is not over 3 billion believe me. The big money is the bondholders. Regular people buy shares billionaires buy bonds.

youngdan wrote:

Forget about shares, that is peanuts. It is not some money as you think it is 300 billion. The money lost in share fluctuations is chump change. Take Freddie and Fannie. The value of the 2 companies was about 8 billion when it croaked. The value of the bonds is 5300 billion. If Lehman goes bankrupt tomorrow the shareholders will lose less than 3 billion. Again peanuts that nobody cares about. The panic is not over 3 billion believe me. The big money is the bondholders. Regular people buy shares billionaires buy bonds.

Regular institutions buy bonds. Who cares about the billionaires?

You are getting robbed and you don't care. You are an unusual man.