San Diego Housing Market News and Analysis

I'm only aware of three ways that government gets the money to spend on social programs, economic stimulus or wars: it must either tax, borrow or print the money.

When the governement lowers the lending rate, as it did to a low of one percent not too long ago, it creates money without actually printing it. Here is an example: Say you have a bank, let's call it MONEYMAKER BANK, that gave a loan to guy, let's call him Bob for 500,000. Bob was enticed by the low interset rate and mortgage payments. Bob went and bought a house from a homeowner named Joe with that 500,000. Joe takes that 500,000 and opens an account at MONEYMAKER BANK and deposits the 500,000 into it. The Fed allows MONEYMAKER BANK to reserve 20 % of that money and allows the bank to loan the 400000 for another loan. Another customer, Craig comes and takes out the 400,000 loan and buys a house from another homeowner, who in turns deposits that money ... So a 500,000 loan will grow to 900,000 (500,000 + 400,000) which wil in turn grow to 1,220,000
(500,000 + 400,000 + 320,000) and so on and so forth. All this money now exits as numbers in a bank without the treasury actually needing to print money. Actually if you look the actual paper money supply does not grow that much, but the dollar numbers the banks holds does.

Gibraltar, that sounds like a pyramid scheme!

Ok, so just so I'm clear, it sounds like a good way to pump up a tired economy; simply lower interest rates so people borrow, and then pretty soon everyone's borrowing (and hopefully spending), and it stimulates the economy.
The problem is people are borrowing to obtain assets that are overvalued, so they actually have to borrow more than is really needed. Wouldn't banks want to make sure home appraisals are indeed based in reality, else they (the banks) are also overextending themselves? Or is there something to be gained by the banks for lending bigger loans? Yes, maybe they get to post bigger 'sales' or loans, but that seems really risky to me. MONEYMAKER BANK is really making it's own money.

Where does MONEYMAKER BANK get the $500K? Remember that few banks hold their loans. They are sold on the secondary market, and there is no fractional reserve system there. Most of the money lent for mortgages came from investors, who purchased bonds and MBS and CMOs.

My question is still unanswered: from where comes the money to invest in these mortgage market at the end level, at the MBS level? What did the investors who are purchasing mortgage debt buy before there was so much mortgage debt to buy? Were they buying stocks? Were they buying bonds?

The point is that billions, if not trillions of dollars have been pumped into the housing market, and not by banks, but by the secondary mortgage market, such as Fannie, Freddie, and others. Where did that money come from?

I'll tell you where its coming from and you won't like it. The first thing you need to know is that your IRA and 401k or 403K are not Federally insured. There are a few execeptions, Union Bank has a FDIC IRA that I got a pamphlet on yesterday.

Your retirement savings are being invested by mutual fund managers that have never seen a bear market. The last one started in 1968. These people are buying the Fanny Mae and Freddie Mac bond packages. They are not federally insured and probably never will be. It is implyed that they are Federally insured but they ain't and probably never will be without an act of Congress.

So what you are looking at is a repeat of the S&L fiasco from 10 years back.]

The only problem with it this time (if your 60 years or older), you may be dead before you can collect what you put in.

The other irritating thing, the losses are not tax deductable. Go figure!!!

My husband's company lets us direct our retirement funds into a brokerage account (Vanguard), so we are not at the mercy of any fund manager or limited by the choices of a plan administrator. We are very fortunate; we can get out of GSE holdings completely. I need to review all their fund and index options, to pick the right one. Anyone who is limited in their company's offerings, can probably do a transfer to Vanguard, and those who are reliant on a pension fund are pretty much stuck and have to hope for the best.

Mr. Brubaker - Are you saying that the mortgage loan money is coming from investors? Yes, but there are trillions of dollars involved. Where were these trillions invested before 1995? Unless new money was printed, there would be a shift from one asset class to the MBS/GSE bond market. Which asset class has suffered a loss of investor interest?

We agree on the enormous size of money involved. The only people not to be hurt by this fiasco will be those with their money in the bank, its FDIC insured. And if you remember the government even bailed them out in the S&L massacre.

There are mutual funds out there that are privately insured. Failure of any one of them would bring down the private insurance that backs them up.

Take your Vanguard fund, if one of the units of that fund goes bankrupt, is the rest left intact? At that point, what happens if there is a run on the fund, and everyone wants to move their money?

6 Trillion dollars worth of real estate is going to be marked to market. Thats about 12 times the size of the Savings and Loan disaster of the '90's.

Since we are dealing with such fantastic amounts of money, I feel, the mutual funds have to be considered a prime suspect.

On the issue of the government printing money, they have to spend it to get it into circulation. The Democrats have been doing that for years :>).

I had hoped we were going to stay out of political bashing, so I will refrain from pointing out the sheer hypocrisy of your last sentence.

Josh

I didn't mean to get political both sides do it. The Republicans tend to spend printed money into the system with government purchases in the private sector that trickle down to the individual. The Democrats on the other hand are more into social programs like Social security, health care, food stamps. That part of the system can deliver printed money faster to more individuals. These are broad generalizations.

Since social programs are only transfer payments that consume and produce no product, they tend to be more inflationary.

Both party's are pushing this hand basket to hell, I was (tongue in cheek) accusing the Democrats of pushing a little harder. I guess my "smily" before the period is not so obvious--:>).

The mortgage market is $8.7 trillion, and is double the size of the U.S. Treasury market. One fourth of that is due to reset in the next 2 years.

I get Rich's answer that MBS investments are purchased by foreigners. What were they buying before 2000? Is it the Central Banks, like the BOJ mentioned in today's Credit Markets report? Did the BOJ use their printed money to buy MBS?

There was an article in a Dallas newspaper (check the RSS link at the side bar) about a possible systemic risk to the financial system from the MBS fallout. The writer explained that a systemic risk means the entire financial system is affected, and you cannot escape its effects by diversifying.

I'm still awaiting a response from Vanguard about which bond funds don't hold MBS, and a response from 4plexowner about how he pictures gold used as currency.

I'm pretty sure I'm going to spend the next 2 years on the sidelines, moving my money to CDs, Tbills, Berkshire Hathaway stock, and maybe 5% in various stocks and index funds. Regardless of the economy, people still need to eat. Kraft foods has a P/E of 14.

My brother, who is really smart and well read, thinks I should invest in resources, like metals, and in chinese funds. I told him that once Americans cut back on spending, the Chinese lose their largest customer, and their stocks won't do so well.

Any comments? Anything I've missed?

I really appreciated seeing your original question, powayseller. In my opinion, America is doomed economically until people understand that we are living in a monetary system that is dishonest and rigged in favor of the bankers and politicians. Asking the question, "where does the money come from?", is an excellent first step.

There is only one true statesman serving America right now. This man is Representative Ron Paul. He is the only person who questions the financial games that people like Greenspan, Bernanke and Snow play. If you pay attention, you will notice that when Mr. Paul asks a question of any of these people in public, the station takes a commercial break or cuts away to something else (why is that? - don't want the sheeple to question the status quo like Mr Paul does?).

Mr Paul constantly talks about the perils of fiat currency and how America is on a slippery slope financially. Read his latest missive which is entitled, "Perils of Economic Ignorance".
http://www.house.gov/paul/tst/tst2006/ts...

Gold as currency - unfortunately, I don't see this happening until after the economy collapses (or at least until the US dollar is rejected by all players). My pessimistic view of human nature tells me that we will continue to do everything we can to maintain the status quo. This is easier than making painful changes now. Unfortunately, all we are doing is postponing the inevitable.

Our government will do everything it can to supress the price of gold because rising gold prices indicate economic problems (and/or monetary debasement). Prior to the coming collapse, we will probably have another period when gold and silver will be illegal for US citizens to hold. The government will tell us that terrorists are using silver and gold bullion to support their evil activities and therefore they have to make silver and gold illegal. The reality is that confiscating silver and gold will just let them maintain the status quo with the US fiat dollar for awhile longer.

Since you are in a questioning mood, here are some things for you to research and question:

> the Federal Reserve is a private corporation and IS NOT part of the US government - the owners of this private corporation are the other reserve banks
> We The People pay the Federal Reserve interest on all the money they create out of thin air (please let that sink in - we are paying a private corp interest on something that they created out of thin air!)
> our founding fathers were students of history - they understood the perils of fiat currency and central banking and they tried to protect us from them (that's why the Constitution says only silver and gold will be legal money)
> there have been several trillion dollars in new loans made by banks since 2000 but overall reserves held by banks have DECREASED since 2000 - and people think their money in the bank is secure!!! - FDIC is just another underfunded agency (like PBGC the pension guarantee program) that will ultimately be overwhelmed as the economy collapses
> information about how the monetary system works has been intentionally removed from the education system of all western countries - don't teach the people about something you don't want them to understand or question

I don't know what we as individuals can do about our dishonest monetary system. I believe this is the root problem underlying most of the issues in America today. I am trying to educate people when the opportunity arises but it is frustrating as hell.

Part of the challenge is that most Americans are living paycheck-to-paycheck so concepts like 'store of value' and 'intrinsic value' have no meaning when I try to educate them about money. We have also been fed a load of BS from the central banks and our government that inflation is necessary and even a good thing. Americans buy this BS because they don't know any better. And who is the typical American going to believe, Alan Greenspan or 4plexowner?

Q: How do you know when a banker or politician (with the exception of Ron Paul) is lying?

A: Their mouth is moving.