Living On Borrowed Time: More Doom & Gloom About The Debt Bubble

Starting in 2001 not long after 9/11 (or maybe to distract us from it) the Fed began lowering interest rates. Unemployment was reaching record numbers for many more quarters than the Labor Dept. was comfortable with... so to produce the illusion of full employment (factoring in the 5% permanently unemployable) thus offsetting the disaster of the tech bubble bursting, Alan Greenspan began printing more money. This, of course produces debt and invisible inflation... in turn offsetting the decline in interest rates. This is what caused the housing bubble.

When people saw that they could borrow money at very low interest, they borrowed and bought that dream house (which most couldn't afford). However, the very wise among us (Wall St bankers and speculators) didn't see this as a setback. Neither, for that matter did loan officers at lending institutions. They offered no down payment mortgages and NINA (No Income, No Assets) loans. Basically, all you needed to get a housing loan was a pulse. After all, Fannie Mae and Freddie Mac were there to make sure everything was OK. Now Fannie Mae and Freddie Mac are GSE's (Government Sponsored Enterprises): that is they're private lending (or loan guaranteeing entities) insured by the government. Of course, the elephant in the room that nobody wants to talk about is that the government doesn't actually have money. It's you and me, the taxpayers of America, that are insuring these risky loans. Fannie Mae and Freddie Mac contribute heavily to political candidates thus ensuring their own existence... this might logically lead some cynical observer to see them not so much as GSE's, as much as ESG's (Enterprise Sponsored Government).

Banks, no longer having to concern themselves with risky loans because the government is insuring them, are making home loans left, right and center. Some entrepreneurial individuals were taking 5&6 mortgages at a time... which worked OK as long as housing prices kept rising. However, should the prices of houses begin to fall... so too would the housing (and mortgage) market. The aforementioned cynical observer might surmise (and rightfully so) that the housing bubble was the result of greed. Sure enough, in 2007/08 housing prices began to go down and the effect was devastating... as well as precipitous! What everybody saw as a great investment- after all people always pay their mortgage- quickly became a calamity.

Along came George Bush and the cavalry (the Fed) to the rescue! To offset the disastrous effects of the housing bubble bursting, they created a new bubble- the bailout bubble. The Fed started printing more "funny money" and forced it on banks whether they needed it or not (that way an unwary public wouldn't know which banks were really in trouble). Of course the money from the bailouts didn't actually go toward bailing out any banks... the money was used to give huge bonuses to the CEO's that had caused the problem. Isn't America wonderful???

Well, the auto industry saw what happened and didn't want to miss out on the fun. Cries for help from Detroit rang out across the land. Without help from the taxpayers, the American auto industry, a mainstay of our economy for decades, would surely cease to exist. Enter Barack Obama and his stimulus package. Cash for Clunkers was so successful that it ran out of money in its first week! What to do... print more! Prior to Obama the taxpayers footed a stimulus package in excess of $10 Trillion.

Similar to the housing fiasco, the debt bubble was about to be born. That sounds confusing so let me explain. As long as housing prices kept going up, the housing/mortgage market stayed fairly stable. Similarly, as long as interest rates stay low and static, the debt market is fairly stable as well. However, if interest rates go up (even 1%) interest payments go through the roof. For all intents and purposes, buying uncollateralized debt is economic suicide. The following video is from 2012 and things have gotten progressively worse. It features Peter Schiff and Gerald Celente, both notable economists who also predicted both the tech and housing bubbles. It also features David Walker, former Comptroller General of the US, who makes this excellent point... This is a moral question- whose future are you willing to mortgage for your own prosperity?