InsideTech

While all of the graphs are interesting the graphs are actually very misleading unless you also study the history that caused the public debt.

First we need to lookup the "Community Reinvestment Act" (CRA).  It was legislation passed by the Carter administration in 1977 to force banks to provide subprime loans to low income families who couldn't afford them.  This caused an absurd bubble of activity in the Savings and Loan industry that together with the rising oil prices caused by the OPEC oil embargo caused a 13-18% inflation rate in the late 1970s.  To cool this burst in activity the Carter administration and Paul Volker at the Federal reserve hiked interest rates to an equally high interest rate.  It cooled the economy alright, it also caused a recession in the early 1980s and one of the greatest rounds of savings and loan speculations in the history of our nation and less than 10 years later one of the biggest bailouts of the banking and savings and loan industries in the late 1980s...under Ronald Reagan.

Federal regulations were put into place to restrict subprime loans by the HW Bush administration in 1989 called FIRREA. This curbed the subprime market and to some extent played a part in the recession of 1990-1991 because we had to pay for all the bad money being loaned out to people who had no means to pay for it.  But people don't like recessions so they voted out HW for Clinton.

Now fast forward to 1993: In 1993 President Clinton intiated an extension of the CRA that instructed Fannie Mae and Freddie Mac to allocate a percentage of their annual loans to low income (subprime) loans and created a method of financing of this by packaging and securitization of mortgages to be sold in the stock market.  In 1995 this is extended further by adding enforcement of the 'guidelines' by authorizing legal means to force private banks to meet the given quotas or face loosing their banking licenses or extensions of existing licenses.

Thus ensued one of the greatest real estate markets in the history of the United States and possibly the world.  Real estate began rising at about 15% per year instead of the historical 3% that has existed as far back as records WWII.  The valuations of the real estate had nothing to do with actual property value but was the byproduct of the ability to securitize the mortgages and leverage every dollar up to 40 times the actual value of the property on record.  Banks no longer were concerned with ensuring applicants had assets or ability to pay...not to mention that if they didn't write up to 25% subprime loans the government would pull their license.

Official inflation figures for the 1990s through 2006 are ~4% but real estate and oil during this period was climbing at ~15-20%.

Now we come to 2001: terrorist attacks, stock market plunges, and Congress looks for ways to pump the economy and 'fix' the market downturn.  They pump billions of (public/tax payer) dollars (debt) into the economy and start building for war.  In addition, in 2003, restrictions on subprime loans are further reduced to allow more people to qualify for loans and further pump the economy.

Do you see where all of this is going?  Each jump in public debt is marked "fixing the economy" by huge bailouts of institutions making bad loans on speculative investments...mainly real estate and oil.

Here are some websites for oil prices over the last 30 years: http://tonto.eia.doe.gov/dnav/pet/pet_pri_wco_k_w.htm, http://www.wtrg.com/prices.htm, http://en.wikipedia.org/wiki/Price_of_petroleum. ; Please notice that the spike in oil prices last summer was driven by investors bailing out of the real estate market into the oil market.  Investors by the names of Morgan Stanley, Wachovia, JP Morgan Chase, ..., see the 60 minutes investigation into this here: http://www.cbsnews.com/stories/2009/01/08/60minutes/main4707770.shtml.

Here is a fair history of the CRA and savings and loan, and banking bailouts in a nut shell: http://www.city-journal.org/2008/eon1030hh.html

A couple of notable facts:  Before the CRA the average default rate of mortgages was 1.9%.  As of the end of 2008 we are at 8.9%+ default rate and are still rising.  The ballon that we have been pumping for 30+ years is just starting to burst... and some people in congress think we can buy our way out of this mess.

If we take the average rise in real estate value before the CRA of 3% and project it forward to today's valuations based on 15% increase in values since 1993 most homes are 400% above their real value.

So our choices are: 1) we put regulation back into place and watch the real estate market fall for seveal more years to someplace close to their real market values. Or 2) we pump public money into the banks and go for anothe run in the weeds until we blow another tire.

My vote is to move back to sanity.  It will require about 5-10 years to fully recover.

The alternative is that we keep pumping public money into a system that will blow up again in about 5-10 years...except this time it is the federal government, and possibly the world governments, that will be defaulting on their loans.  And every time our congress votes for another bailout we are just that much closer to that end.

 If you take the allowed 40x leveraging of the mortgages banks have been allowed because of the securitization of mortgages and figure that real estate will have to fall back from the 400%+ above reality that the current market represents...  Congress is up in the night if they think we can buy up the bad debt that will occur over the next 5-10 years while the market comes back to reality.  If they try then there isn't a bank or credit union in the nation, maybe the world, that won't be government owned.

Think about this: If you need a loan for a home you would have to go to the government to get it.  If you need a loan for a car you would need to ask the government for it... Every pay check you will deposit with the government bank, and ask for some money back to pay your bills... 

Does this sound familiar?  Does it sound like someplace we really want to go?

TBH that wouldn't be socialism, it would be communism, and we are going there at a record speed...

Here's my vote for killing the idea of too big to fail.

Let banks fail.  That's what the FDIC is for, right?  The good assets of the bank would be sold to other investors at current market value, the bad debt dies with the bank and/or gets bought by the FDIC...at market value.

The amount of money needed to move forward is a small fraction of what the last two bailouts have already cost us and we don't have to do anything special to recover from the current recession...but it will take some time.  That's what happens when people do stupid things...it takes time to recover.

This would also provide incentive for banks to not make loans to people without means to pay. 

Living on unlimited credit is not reality.  It just postpones reality until payment is due... with interest.

Living in reality is highly underrated.

I wish I had more economic knowledge, I wouldn't be in the state that I am right now. Thanks for the information guys. Although knowing why doesn't necessarily fix the problem. For me at least.

I noticed the chart and it Got bad during the time that Bush was in there.