Tuesday, December 28, 2010

So how to end Great Depression 2.0? Pt 2

Gotta get the housing market running again. The banks, egged on by Fannie and Freddie, have completely screwed up the housing market to the point where no one is building new houses, no one can sell their old houses, no one can sell their new houses, and zillions of people (and their lenders) are taking a bath when they cannot pay their mortgages. Construction workers, and building tradesmen are out of work, building supply firms cannot sell their products, and appliance makers cannot sell appliances. This is a big slice of the economy, and it's flat on its back. Banks and the investors have lost so much money on home mortgages that they aren't lending to anyone.
The key to housing is credit. Nobody has enough cash to buy a house, they have to get a mortgage. The market is a disaster today because lenders gave credit to people who could not afford the house. These people are defaulting on mortgages they never should have signed. Each defaulted mortgage means another house put on the market at firesale prices, driving down the price of houses. For the average Joe, whose savings are mostly in his house, each price drop comes right out of his hide. Price drops in housing hurt more than a drop of the Dow Jones.
To tame this monster, we gotta have rules limiting mortgages to those who have the income to pay them off. To insure the rules are enforced, lenders who break the rules need to loose their money.
Right now, that doesn't happen. The mortgage market has Fannie and Freddie, who buy shaky mortgages from lenders. If the lender can sell the mortgage before the borrower stops paying on it, he is home free. And that is the major cause of Great Depression 2.0. We need to shut down Fannie and Freddie, cause they encourage disasterous loans, loans that hurt the borrower and hurt the housing market as a whole.

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