BicCherry wrote:Hi wat0n,
Think if u think of it, properly, the FED is as much to blame for the "deflation", as it is to be blamed for the sub prime great recession (2008 Lehman brothers collapse).
Same game plan they used, then as they do now.
Lots of cheap money at low interest rates, few/no checks to borrow, ends up there is so much dead wood, zombie equity with very very high paper values which when the bubble bursts, is not even worth the paper that the ownership title deed is printed on.
So by printing money and distributing it irresponsibly, the FED is not solving deflation but instead inducing it.
Money is a highly addictive drug (like alcohol) which makes people do bad things, but somehow giving more in higher dose can make people somewhat behave, but only for a short while before they misbehave again.
Never mind if confused by last paragraph. Just imagine, would 2008 Lehman crisis have happened but for FED printing money and giving out cheap loans (ostensibly to achieve their inflation targets iirc), likewise, why would goods be scarce in a deflationary setting but for the reason that they were produced by zombie companies which were unproductive and loss making to begin with and only surviving vz cheap perpetual securities and loans and the use of disgusting accounting tricks, such that once the easy access to money dried up, they were sued by their own employees whom many owed significant wages at the false promise of business upturn, only achievable by even easier and cheaper access to 'free money' corporate loans.
I don't think we have the same understanding of what happened in 2008.
Here is my take:
What happened in 2008 is not "because the FED had a trigger finger on the interest rate and/or messing around with inflation". The government has plenty of blame, but not in the way you are picturing it. Deregulation is the main sin of the government in that case.
Again, even though in layman terms people use the term "inflation" (perhaps because it already lends itself to the use with the bubble analogy), I think the correct term you are looking is actually appreciation. If inflation were to be the reason for the housing crash... then there would also be a crash on car values, on bicycle values, on boats, on pepsi and on crackers, because inflation applies to the economy as a whole, not just houses.
The main issue with the 2008 crash is that banks were getting greedy.
How so?
Well, banks realized that they could start lending money to people that did not truly qualified for loans, and then get those loans and put them together as a package and sell it to someone else. Incidentally, those packages were also "rated" much higher erroneously/fraudulently which in turn hid the real risk of the asset class to those that bought the packages. How did this lead to bubble? Well, it is the classic scenario of supply and demand. By banks lending to large numbers of "sub-prime" lenders, they are increasing the demand for houses. However, the supply of houses is roughly stable, or perhaps increased slightly but not to keep pace with the newly created demand for houses... therefore you get the appreciation of the asset class (houses/real state). However, to add insult to injury, banks started luring people with introductory rates that were very attractive, which of course only lasted for a while and when shit hit the fan, the dominos started falling. Bunch of people could no longer afford their houses so they defaulted and were foreclosed, this leads to an increase in supply of houses (more houses to sell in the market) but at the same time, the demand is also low (banks are now afraid due to the defaults and are not lending, or worse, cannot lend at all). This means that depreciation issues (high supply, low demand) and houses start falling sharply in prices. Meanwhile, you have people that can actually afford to pay their houses, but realize that it does not make finantial sense. For instance, say that you bught your house for 500k at the peak of the market, and you gave 20% down, you have 100k equity, own 400k... But now, houses prices fell sharply to roughly about half of what it was at its peak. So your nightboor is now selling the exact same house as yours, with about the same size, in the same zone, similar contruction, similar year, etc... for 250k. Now suddently you realize that despite having 100k in equity in your house you would end up paying 400k for a house that is worth 250k now, essentially you already wasted 100k, and are about to waste 150k if you continue with your mortgage... so now... do you save your credit score and bite the bullet for those extra 150k?
And this goes on, and on, and on, further fueling the problem.
Search NINJA loans.
The role of inflation and/or the fed's interest rate has very little influence if any at all as far as I understand it. Unless you have something to add. For instance, in the period of 2000 to 2010, the highest interest rate by the fed was ~5%. Not even close to the ~20% in the early 1980's or the ~10% in the late 1980's and even through the 1990's interest rate was around 5%.
Now... certainly the banks are "the bad guys" but they are not the only ones employing this dubious method of luring people and then sticking them in the skewer. Take for instance car companies... zero down, no payments until next year... does it sound familiar? Seriously, do you think a person that cannot afford any money at all down payment and/or payments for 3-6 months is in good financial shape to be buying a fucking new car?
What about furniture? They lure you in for a sofa with "zero % interest for 36 months". People still get fucked on those things all the time and ruin their finantial future because they have little understanding of basic finances/economics. It is not quite the "cnn/msnbc 24/h housing crisis non-stop" spectacle, but at the end of the day, the results are similar. Debt that accumulates faster than you can pay it off, bankrupcies, repos, etc.