Declawing Inflation and Deflating the Housing Bubble…
I just finished reading a proposal by Jared A Brock in Surviving Tomorrow — it was an interesting read, but there were a lot of false flags and erroneous points made there that I feel need to be rebutted…
I will preface this by saying I am *not* a financial authority or economist. I have the benefit of hindsight having lived rather painfully through the 2001 tech crash, the 2008 housing and mortgage crisis, and all the ripples of the economy between 2008 and now, including the 2020 Covid crisis.
All the crises above have one thing in common — they were all caused by greed and excessive profit taking.
2001 and the .Com crash — the new world promised by technology and the availability of the PC/Mac to home users such as Mom and Dad. Companies sprung up, boasting great new ideas and then finding giddy firms pumping huge sums of money into them based on insane and in some cases fictional valuations, with ridiculously ludicrous valuations and multiples. Microsoft was one of the most valuable companies back then, and their multiple was reported at almost 40x their earnings. Their stocks split 2 for 1 every 14 months on average between 1986 and 2001 — just check out the table below:
09/21/1987. 2 for 1
04/16/1990 2 for 1
06/27/1991 3 for 2
06/15/1992 3 for 2
05/23/1994 2 for 1
12/09/1996 2 for 1
02/23/1998 2 for 1
03/29/1999 2 for 1
If you bought 1 share of Microsoft stock in 1986, you would have held 144 shares in 2000.
This was behavior that happened across the board at all tech companies. Some tech companies though really had no product, but investment still found their way into giving money to them and of course these startups took it.
First Microsoft, then many more of the companies started to collapse as investors began asking what they were getting for the money. Most turned out to be equivalent to junk bonds (another scam that led to a market crash), resulting in the tech companies with strong fundamentals staying alive (eg: Amazon, Intel) with those ones swallowing up the smaller companies that had products of value.
Fast forward to 2008.
Mr Brock refers to the Housing and Investment Bank crash as the Obama crash. Laying the blame at the feet of Barack Obama is a fallacy that anyone with any knowledge of history and the events of the time would call bullshit on.
The banking industry was first regulated through legislation called the Glass-Steagall Act back in 1933 — a reaction to and something intended to stave off another Great Depression. Investment banking and Commercial banking were one and the same prior to this, and many many banks collapsed when the markets crashed, seeing the sum total of their value (essentially their customers’ savings) investments evaporate to nothing. Glass-Steagall separated the Investment (high risk) from the Commercial (essentially savings) and then required Deposit Insurance for the Commercial banks to ensure that people wouldn’t be losing their entire life savings ever again through commercial’s wreckless speculation. All was fine and dandy in the world…
Then starting in the 1960’s and finally being repealed in 1999 — Glass-Steagall was defanged. Congress bowing down to pressure from the bank lobby worked to remove the regulation — and succeeded when in November 1999 Bill Clinton declared Glass-Steagall unnecessary and let the leash loose on the banks.
Between 1999 and 2008, it was no mystery that the housing market started to boom. Around 2004, Investment banks began taking sub-prime mortgages, bundling them into “exotic” investment vehicles and then selling them to investors, including 401k, hedge funds, etc… People’s retirement funds were now becoming stakeholders in high risk sub-prime mortgages that promised big returns. And the lenders wrote a nice deal for themselves, charging the investment companies who now owned these homes a nice figure to service the mortgages — collect payments, etc.
Then the housing market died, due to overheating and a preponderance of high risk mortgages that defaulted. You can only make money on these if the people are paying off their mortgages and not going into foreclosure. But even in foreclosure, at the beginning the banks were able to turn the homes over for a profit as the housing market was so hot — they could take one sub-prime mortgage and foreclose, and the write and approve another sub-prime mortgage, package them up and sell to the same investors — thereby milking the same cow multiple times.
A few banks collapsed under the weight of their own greed. Greed that was fueled by their employees taking bonuses and commissions for writing more mortgages regardless of the validity of the paperwork. Several investment firms were bought by the bigger fish — Chase being one of them. Washington Mutual died though, with many retirees and fund investors losing everything. Keep in mind, much of this happened in 2008 on G.W. Bush’s watch, not Obama… Bush passed the first of the financial institution rescues by the USG, and Obama passed the second in early 2009. Those were absolutely needed, as the American financial framework would have collapsed and we would have seen another Great Depression — as it was we only had a Great Recession that took almost 8 years to dig out from.
We dont learn from our mistakes though — banking regulation legislation was passed, but it was just a shadow of what Glass-Steagall was. Banks were more careful, and lending was made more stringent due to more supporting documentation needed to approve of loans, but the infrastructure that still allows Commercial and Investment banking to interoperate is still there.
We’ve just gone through a short but severe contraction in 2020, and are experiencing the after-effects of supply chain burdens and inefficiencies due to lockdowns and reduction in manufacturing around the world. The scarcity of goods due to the slowdown, plus fatal flaws in the shipping and receiving of these goods are the primary driver for inflation *around the world*. Russia invading Ukraine and embargos disrupting the flow of Natural Gas and oil to the EU further exacerbated this, causing the commoditized price of oil to spike due to increased demand from a limited supply. This was further exacerbated because of a short sighted request from the USG, specifically Pres. Donald J Trump in April 2020 to the Saudis to reduce the production and shipping of oil by roughly 15M barrels per day — in an effort to “save” US domestic oil production.
If you dont remember — here’s one of the articles that discusses this:
https://www.politico.com/news/2020/04/02/trump-calls-on-russia-and-saudi-arabia-to-cut-oil-production-161368
So let’s review — most market downturns and recessions/depressions are caused by greed. In each instance of a recession or market correction, one sector of the market/economy has been overheating and hit a saturation point after which investors turn pessimistic, and a ton of people lose a shit ton of money.
This will repeat itself ad perpetuum until the point when humans are no longer selfish greedy creatures willing to take huge profits off of the backs of those either not fast enough to bail, or not rich enough to participate in this reaping.