Mohamed Ibrahim’s Blog

News have been everywhere today that mortgage defaults are even higher than before. Foreclosure rates are increasing, because home owners give up even before their adjustable mortgage resets. Worse, two days ago a very known investor (Warren Buffet) became the most wealthy person, said that as far as he’s concerned we are already in a recession.

In my opinion, the home mortgage crisis is the outcome of a bigger problem. Actually, in part, people are not finding money to pay mortgages is an outcome of the fact that the money in the system is not enough - for the people to make money to pay their dues. And people are not finding money because the growth of the US economy is based on an ever increasing credit - an ever increasing borrowing, which if slowed the money in the system will decrease.

It all spins from the fact that the federal reserve lends the banks non-existent money. Basically, you go to your bank to get a loan to buy a home. Since your bank does not have the money, they in turn go borrow it from the federal reserve and put down 10%. The federal reserve being a bank for banks, creates the money out of thin air and gives it to them. Well, your bank does not actually get money - it’s just that the amount gets punched in their federal reserve account and in turn gets punched into your bank account through a technology called “the computer keyboard”.

At the end of the day you’ll be happy to have the money, pay interest on it to your bank and in turn your bank pays interest to the federal reserve. Now, one can argue that actually the money that has been created out of thin air can be destroyed by repaying the loan to your bank, and your bank repaying its loan to the federal reserve. This is true - but what about the interest that you paid, and that your bank paid to the federal reserve? See - that’s the big problem, it’s the flow of wealth going from people to the banks. This in turn leaves lesser wealth with the people. Now, for the people to be able to go and buy, they need money and the only way to create money with the people is with going and borrowing — Now I think I clarified my point.

The problem is not the housing market, it is a usury system devised to move wealth to the banks and bank owners from the people, while maintaining both the people and government under continuous pressure to borrow. Borrowing creates money, which makes people happy and covers the government expenses.

Since at the moment people cannot borrow any more and are maxed out, and the government already borrowing as fast as they can because of wars and that’s not enough to create money in the system one outcome is the housing slump.

Of course things will tend to fix itself. The fix happens when those fictitious money get destroyed and some people become free again to borrow. One way for that fictitious money to be destroyed is by people defaulting on their loans, and banks taking homes in lieu of the money, selling the homes and repaying the loans. But, it takes time for the foreclosures and bankruptcies to be removed from the credit reports so that those people can borrow again - around 7 years.

Since the real estate market was getting very hot around 2002, the people who foreclosed at that point of time will start borrowing again sometime in 2009. When people start borrowing again, the real estate market and the economy will start booming as well.

Technorati Tags: loans, mortgages, housing slump, default, fed, federal reserve, fiat money, housing bubble, bubble

Tags: bubble, default, fed, federal reserve, fiat money, housing bubble, housing slump, loans, mortgages

This entry was posted on Thursday, March 6th, 2008 at 8:58 pm and is filed under Real estate, financing. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.