Latest news headline states: "Housing market stirs, but holds economy back".
"The housing recession – now entering its third year – has recently shown some signs of abating. But with economic growth still feeble in many parts of the country, analysts say any meaningful housing rebound is still years away"
http://www.msnbc.msn.com/id/41180293/
Home building is down. Job creation is not happening. Home prices are still on the decline. Further declines are expected. State and local governments are going towards bankruptcy. So, why do we need housing to fix all of our problems?
That is the ponzi scheme we are running. Home prices need to go up. Showing their homes as collateral, consumers need to borrow form their home equity and spend it to keep the consumer economy running. Wishful thinking. Even if it happens, it is a dead end that digs us deeper into debt!
How does it all work? Banks create money when we borrow:
http://www.tradingstocks.net/html/banks_create_money.html
This debt becomes our money supply. It has principal + interest to pay. Principal exists because we borrowed it. But interest is only created with further borrowing! When borrowing stops, there is not enough money to pay outstanding total debt! This is why banks are in trouble. This is why FED triples the base money supply and inflation is nowhere to be seen. This is why home prices are down, unemployment is up. The money to pay old salary levels does not exist. Employment numbers will get worse. A new recession will be declared well into the stock decline. An entire nation cannot borrow for decades, inflate the money supply and the prices with borrowed money, and then hope that all will be fine when the pay back time arrives!
We cannot borrow and recover. Borrowing is the cause of the problem. More borrowing will not solve it. I wish the Keynesians would understand common sense economics. Consumer economy is a myth. It is a way to put the American public to sleep while the multinational corporations pillage and plunder their wealth until there is nothing left.
From a banks perspective, lending to consumers is not ideal as well. Banks went all out to hand out consumer loans instead of business loans. Lending to small business has been declining. This is a trend of the past 30 years. It is not a new thing. The banks have been lending to the consumer instead of the businesses. These deflationary trends are part of the banks troubles now.
http://www.tradingstocks.net/html/signs_of_deflation.html
In the past, the banks used to hold their money mostly in US treasuries. That is why in past crisis they could remain solvent even if other assets lost their value. Their US debt would still be secure. Loans to consumers are backed by an asset such as an house. Today the banking industry is invested 95% in consumer loans and mortgages. This is why the banks were insolvent when the housing market collapsed and required a bank bailout.
The loans made to consumers are non-self liquidating. The consumer consumes. The consumer does not create value. Their ability to pay mainly depends on their job. Consumer loans are not put to use to create new value in the economy. On the other hand, loans to businesses are used to produce new value, to employ people, and to earn money so that the debt can be paid. These are self liquidating loans. And we have very little of them left now.
Banks see this as a deflationary collapse and they do not want to lend. Deflation occurs when total debt reaches it's growth limits and borrowing stops. Here is the private debt problem in the United States:
http://www.tradingstocks.net/html/inflation_deflation_credit_bub.html
Meanwhile home prices are still a bubble. We are still 20% above long term average prices according to Case Shiller index. We can fall much more. Housing collapse is a result of deflating money supply. With less money available, it becomes impossible to sustain current prices and salaries:
http://www.tradingstocks.net/html/housing_market_bubble_bust_cyc.html
If we end up with a Japanese style deflationary crash, housing market crash may continue for decades.
