Martin C. Winer

http://www.nytimes.com/imagepages/2005/08/21/business/21real.graphic.html

This is a graph of historical housing prices relative to inflation since 1890.  The graph is indexed to inflation so you are seeing the bubble in house prices above and beyond inflation. 

The take home message to this graph is the following.  Take a look at the average home value over the past 100 odd years.  It seems to average somewhere around $112,000.  Now look at the peak which is somewhere around $180,000.  Dividing through we get a ‘bubble-factor’ = 180/112 = 1.6 .  What that means to you is that if you own a house currently valued at $500,000, if the bubble corrects you’ll actually own a $312,500 house (500/1.6 = 312.5).

Will the bubble correct?  Historically bubbles do one of two things:  1) they correct or 2) they flatten and wait for inflation to catch up with them.  What will this bubble do?  I can’t tell you and neither can any of the supposed experts. 

What caused this bubble?  The Federal Reserve lowered interest rates to as low as 1%.  This flooded the market with money which people invested in housing, since the internet bubble had burst. 

Who benefits from this bubble?  This bubble benefits 3 groups of people, bankers, the recently dead, and people with in laws.  Bankers make huge profits on the the inflated mortgages people must now take out to put a roof over their head.  Those who have recently died (since we’re at the peak of the bubble) benefit as their estate sells their property at the inflated price with record profit.  Hopefully they have children to benefit from the heavily taxed inheritance.  Regrettably, if they don’t have children to pass the benefit on to, then it’ll be hard to enjoy their windfall, being dead and all. 

If you’re alive you never benefit from this type of bubble.  People typically want to move up, that is move to a better home.  Thus you have to sell your current home and move to a better home.  Thus, you make a profit on the sale, but take a hit on the inflated purchase.  Basically it’s like borrowing from Peter to pay Paul, and it all ends up even in the wash. 

If you have in laws and can sell at the inflated price and move in with your in laws (avoiding having to buy an inflated property) you may benefit from the bubble by waiting for it to bottom out, if indeed it does.  Living with your in laws may allow you to sell high and buy low, but that assumes the bubble corrects and moreover, living with your parents you may wish you were recently dead.

Who suffers from this bubble?  The most notable group of people to suffer are the first time home buyers.  Entering the market at the peak you’ll be paying 1.6 times what you should hadn’t the bubble occured.  Ultimately all property owners suffer because the bubble leads them to think that they have more money than they actually do.

Glenn Beck has a video railing against printing of money by the US in epidemic proportions.  Beck shows a graph of total money in the system, but should also be showing a graph of CPI, or inflation as in this post:

http://mwiner.wordpress.com/2008/08/19/whats-wrong-with-the-economy/

This graph shows that the problem started back in 1913, not in 1971 as Beck describes.  Beck is however correct in asserting that it is a problem with the US withdrawing from the Gold Standard.  The US withdrew from the Gold Standard in 1933 domestically, and 1971 internationally.

Even before that, the Federal Reserve was able to manipulate (inflate) the currency to a limited degree from its inception in 1913.  It is the Fed which has and always will be the problem.  The Fed has never and will never be able to offer a solution.

For more information, please see:

http://mwiner.wordpress.com/2009/01/15/the-ancient-roots-of-injustice/

The media coverage of the AIG crisis is completely off the mark.  The Fed DID NOT bail out AIG.  It did something better and worse.  The fed had two choices, 1) bail out AIG or 2) let it go bankrupt.  The Fed made both choices.  It bailed them out per se with an $85 billion dollar loan, taking 80% of the company in the process.  However, the loan came with an 11% interest rate.  This effectively prevents AIG from ever getting back on its feet.  Instead the company has been given time to arrange for the orderly sale of its assets to repay the loan, but AIG will not survive the process.    So the correct coverage of this story would  be to say that AIG has gone bankrupt and the Fed has stepped in to allow for a slow controlled sale of its assets.

For years now, I’ve tried to understand how the Federal Reserve (the Fed) lowers interest rates and how it affects inflation. I mistakenly thought that the Federal Reserve was a wholesaler of money. I thought that it was a Federal institution which under the direction of the government could make money available to banks at a certain lending rate. Thus when the Fed lowered rates to say 3%, the banks could get money at that rate and pass the savings along to their customers by lending money at say 3.5%. I was partially mistaken in my interpretation as to how that affected interest rates. I thought that as a result of people being able to get money at a lower rate, people would spend more, and the more they spent, the more the market could tolerate higher prices for common goods. This is true, but isn’t the full story. So let’s get the full picture.

My first mistake occurred when I assumed the Federal Reserve was a federal institution of any sort. This is not at all true. It is a private bank enacted by an act of congress in 1913 to oversee the US monetary policy. I offer the following interesting nugget of information for those who are interested: It was passed on Dec 23 1913 when most of congress was on vacation, in absence of a proper quorum. If that tidbit piqued your interest, please see this post: http://mwiner.wordpress.com/2008/01/25/terrific-documentary-explaining-the-economy/

So how then does the Fed manage to control interest rates? First off, when you hear of the Fed lowering or raising the interest rate, it isn’t directly lowering or raising the interest rates, it is changing the target interest rate. At a high level, the Fed accomplishes this by controlling the supply of money. Money, just like any other commodity can respond to supply and demand. If there is a lot of money in the economy, interest rates will drop because banks will have an easier time of procuring money to loan. However, having more money in the economy encourages inflation because the value of the currency is lowered by increased supply.

If you want to understand how the Fed manages to expand or contract the supply of money, we need to first understand a few key concepts. The first is partial reserve banking. It was long ago that banks discovered that not every person needed their cash at any given time. It was thus that banks could loan money that technically they didn’t have on reserve. In the US, banks are required to maintain a 10% reserve which means they can loan out 10 times the amount they have on reserve. (This is often referred to as ‘banker’s reach’.)

Next you need to understand what a treasury bill is. A treasury bill is a promise issued to the buyer by the federal government to give you the maturation price of the bill on the maturation date. The bill is always sold at a discount rate, that is a rate, less than the maturation date. For example, a treasury bill may be sold at a discount rate of $950, a maturity rate of $1000 and a maturity date which is a year from now. This means you can buy the bill at $950 and make $50 dollars profit when it matures in a year.

So we now have enough knowledge to work a simple example of how the system works. Suppose that the interest rate is currently 8%. Suppose too that there are 100 people who have $10 each. These 100 people each put $2 in the bank. The bank thus has $200 in reserves and due to partial reserve banking, they can make ten times that amount, some $2,000 in loans. This means they can make a loan of $20 per person.

People typically want to buy things that are 4 times the amount they have on hand. In housing the standard financing model is you must have 1/4 the purchase price in capital. So people with $10 typically want to make a major life purchase which would be $40, but as we see, the bank can easily lend everyone $20, but $40 would be hard to come by at a reasonable interest rate. Thus, people stop purchasing, the economy stalls and the Fed decides to step in.

The Fed does some research and discovers that if the lending rate reduces to 5%, then most people will be able to make the payments and will take out loans and start spending again. So the Fed set the TARGET rate to 5%. To reach this level, the Fed offers to buy a treasury bill the bank has on hand with a maturity value of $500. The bank accepts and now the bank has $700 in reserves. Recall that the bank is allowed to loan out 10 times the amount it has on reserve. So the bank can make $7000 dollars in loans or $70 dollars per person. Since the amount to loan out is plentiful the bank lowers its lending rate to 5% to entice people to take out loans.

It’s important to keep track of the total amount of money in the economy while all this occurs. We started with 100 people having $10 each. Thus there was $1000 in the economy. When the Fed purchased the treasury bill, it printed money to do so. So now there is another $500 dollars in the economy for a total of $1500. You may be scratching your head over the previous sentence, but this is the second part of the misnomer “Federal Reserve”. The Federal reserve is not federal and it doesn’t have any reserves. It prints money to make purchases. I don’t want this post to become a rant against the Fed so I’ll cut it short here and explain the other side of the coin: how the Fed contracts the supply of money.

So now in our moot world, everyone can take out a $30 loan to get the $40 item they’ve been dreaming of. However, one of the principles of a free market is that prices will rise to the maximum that the market will bear. As a result, since most people can afford the $40 item, the market starts charging $42 or $44. Slowly the price creeps up because the value of money has been decreased by an increased supply. In short we are experiencing inflation.

So the Fed sees this situation and decides to curb inflation by raising the target interest rate. By raising the target interest rate, the Fed makes money harder to get, more scarce and thus the market can’t bear higher prices, slowing spending and curbing inflation. To accomplish this, the Fed sells treasury bills. By selling treasury bills, banks that purchase them are forced to spend their reserves to make the purchase, thus pulling cash out of the economy. Recall that banks can loan 10 times the amount they have on reserve. By lowering the amount of cash banks have on reserve, the Fed restricts the bank’s ability to make loans. Since the bank has less money to loan, it must charge more interest to compensate, and the interest rates rise. The key point here is that the difference between the discount rate and the maturity rate must be paid for at some future rate. When the bank comes to collect on this treasury bill, the Fed must pay the bank the promised maturity price. If you have an eye for catching trends then you may have already guessed that the money to pay the difference comes from, yup, you guessed it, printed money.

In conclusion, the Fed controls the supply of money. It accomplishes this by buying and selling treasury bills on the common market. It’s important to remember that when the Fed buys treasury bills it does so with printed money. Also when the Fed issues treasury notes and those notes are redeemed, the difference owed to the purchaser is paid with printed money. This is called a fiat currency, or a currency based on credit — in this case the credit of the United States. It doesn’t take a Harvard ecomonist to realize that every time the Fed runs through one of these cycles of inflation and contraction, that the amount of money in the economy is increased. It is only a question of time before the Fed destroys the currency it relies upon by making it too common. This process is called devaluation. If you want to see devaluation in action, see this graph of the US dollar vs. the Euro over the past 5 years:

http://finance.yahoo.com/currency/convert?from=USD&to=EUR&amt=1&t=5y

In the past few months we’ve witnessed remarkeable events in the market. First we have the Fed bail out of Bear Stearns. What wasn’t widely covered or discussed was that this was effectively a result of a run on a bank.

Modern banking practices partial reserve banking. That is to say that the bank relies on the fact that not every customer requires their funds in cash at any one time. As a result the bank invests your funds during the intervals where you don’t need the cash in your hands. Banks in the US are required to maintain only 10% reserves. A banker can then invest 90% of the banks funds to turn a profit. This is called banker’s reach.

A run on the bank occurs when customers or investors lose confidence in your banking facility and demand their cash back. If enough customers demand their cash, the bank exhausts its reserve and enters a liquidity crisis. This is exactly the fate that befell Bear Stearns. It is interesting to note that Bear Stearns was a financial institution which survived the Great Depression of the 30′s. Had the Fed not acted as it did to bail out Bear Stearns, we may well have been in a greater depression at this very moment.

Please don’t infer from the previous sentence that I agree with the Fed. I think they served to cure the disease by killing the patient. They’ve borrowed excessively from the taxpayers and the US currency to temporarily asuage the bleeding, but haven’t sutured the severed arteries. The Fed’s own actions of forever creating bubbles and taking hindsight corrective half-measures is the very cause of our current problems, not in any way a solution.

There is no doubt that we live in ‘interesting times’ intended in the confucian sense. Just this week we’ve witnessed a second run on the bank in as many months.  This time we’re witnessing a run on the food bank.  Reports are coming in of rationing at Costco stores of rice, flour and cooking oil.  We’re not talking about Costco stores in third world countries.  We’re talking about the continental United States.

What has happened is that large commercial bakeries and other such chains have panicked at the rapidly increasing price of these staples and snapped up local supply.  Yes, eventually this will all work itself out, but the question is, why is this happening in the first place.  There are a few answers:

• The price of oil.  The price of oil affects the food supply in two ways. First it increases the shipping costs which are passed on to the consumer.  Next, it creates a surplus of money in the Middle East which then funnels its way back into the US economy as speculation.  Hedge funds use this money to invest in grain futures which artificially drives up their price.
• Biofuels.  Biofuels are a useless ‘environmentally friendly’ measure which were put in place by politicians to placate the populace.  Corn and other staples are diverted to be converted into biofuels taking food out of the food supply and putting it into our gas tanks.  There has been worldwide rioting especially in regions where food constitutes a large percentage of the general publics’ expenditure.
• Loss of farmland.  Farmland is being lost to urban sprawl and to environmental measures whereby farmers are being subsidized not to plant crops.  Sure environmentalism is great, but it turns out that humans are animals too, and our suffering should figure into environmental equations.
• Malthus.  Malthus famously argued that populations grow geometrically (2,4,8,16, …) while the food supply grows arithmetically (1,2,3,4,5,..) .  We live in a world of approximately 6 billion which is expected to rise to 9 billion by 2050.  Further the billions of China and India are no longer content to eat simple rice and vegetables but also want cars, beef and the more excessive lifestyle of their North American Counterparts.  As a result, we can expect more shortages of gas and food until we learn to live within our means.

Corruption and collusion are what is wrong with the economy.  The Federal Reserve (Central Banking) is a criminal organization which uses inflation to manufacture debt.  The tax you pay in income tax or retail tax is simply collateral for the vast sums of inflated money that is printed on behalf of the federal government, a willing accomplice in this scheme. 

A picture is worth a thousand words:

(click to see larger version)

What you’re looking at is a chart of inflation from 1800 on.  Notice the blips that correspond to the war of 1812 and the Civil War of 1863.  Note that aside from these blips, inflation was relatively flat for around 113 years.  Then in 1913 the Federal Reserve was created.  In 1933 FDR confiscated all public monetary gold and removed the gold standard.  In 1971 Nixon removed the last vestiges of the gold standard (the foreign currency gold standard) and the results of this are clear.

What does this mean to you?  It means that any money you save becomes devalued.  Money in the bank is no longer a sure thing.  Inflation makes the funds you hold an investment in the currency.  The Federal Reserve was invented to prevent self-financing and financial independence.  As you can see from the graph above it has been quite successful. 

Who let’s the Federal Reserve continue to operate?  You do.  Apathy and lack of education the keys to the success of the Federal Reserve.  They throw bits of cheese at you in the form of 401K’s and fancy beach houses and watch you scurry after them laughing all the while as they devalue the dollars you earn. 

Inflation is nothing other than a tax.  The ‘tax’ you think of as tax is only collateral on the huge reams of printed money that the Federal Reserve pumps out at the behest of Congress’ bloated budgets.  It siphons value out of all your assets and ensures you remain in debt for as long as possible.

Don’t believe me.  Good, you need to be skeptical to survive in this world.  Here are some starting points for more information:

http://video.google.com/videoplay?docid=-515319560256183936
http://video.google.com/videoplay?docid=-8484911570371055528
http://video.google.com/videoplay?docid=-594683847743189197

a fun calculator:
http://www.minneapolisfed.org/Research/data/us/calc/

Growing up I often heard people remark that the “poor get poorer as the rich get richer.”  I was led to believe that this was an unfortunate side effect of a free market economy.  This flaw aside, the free market economy was said to be a much better approach than anything else that had come along.  I spent my time focused on ways of making laissez faire capitalism more compassionate.  We exist in a welfare state and I, living in Canada, live in a society which offers socialized medicine.  Both of these measures are great first steps in assuring the compassion of capitalism however, I was always frustrated knowing that the only true compassion of capitalism would come in allowing everyone to earn wealth.

As I continued to study the problem, imagine my shock and dismay when I learned that we do not live in a free market system.  We live in a central bank monetary system (ie, the Federal Reserve) which has an invisible, moreover, malevolent hand in conducting the nation’s monetary policy.  This may sound like a conspiracy theory however if it was, it’s an awfully dull one given that the chairman of the Federal Reserve openly admits this.

http://www.youtube.com/watch?v=x56MpWZh88s
http://broadband.thecomedynetwork.ca/comedy/?vid=19058

Through the Federal Reserve’s mucking with the money supply and the resulting inflation, those with savings saw their savings erode silently falling into the hands of the nations richest few.  In order to escape inflation, you must own debt free assets which index to inflation.  Only the richest few of us can accomplish this and thus evade the silent erosion of our savings into the hands of bankers and the financial elite.  Here are a few graphs showing the effects:

source : http://lanekenworthy.net/2008/03/09/the-best-inequality-graph/

source : http://sociology.ucsc.edu/whorulesamerica/power/wealth.html

Central banking (The Fed) is an age old scheme of mob rule over the money supply. 

“Give me control of a nation’s money and I care not who makes the laws.”
– Mayer Amschel Rothschild

It has origins dating back to the temple days when Jesus drove out the money changers.  (The word ‘bank’ comes from the Latin ‘bench’ from which the temple money changers made their predatory exchanges.)  The only way to restore justice and equity is to restore the issuing power over money back to the people.  For more info, please see:

http://inflationtax.blogspot.com/

Being foreclosed on?  No worries if you follow the example of Jerome Daly, a lawyer and political activist of sorts, who successfully had his mortgage declared null and void. 

In order for a mortgage agreement to be legal, the bank must put up legal ‘consideration’.  That’s a fancy lawyer word for ‘money’ or some such other tangible asset.  The Federal Reserve System creates money for lending as bookkeeping entries and as such, the bank fails to provide any real consideration in the contract.  As a result, the whole thing is null and void and you can’t be foreclosed upon. 

Don’t believe me?  Read it for yourself here:

http://www.lawlibrary.state.mn.us/CreditRiver/1968-12-09judgmentanddecree.pdf

This decision has never been overturned and Daly was able to keep his house.

In 2001 Alan Greenspan at the Fed (Federal Reserve) lowered the interest rate to try to rejuvenate the economy after the fallout of the .com bubble burst. History will record that Greenspan went from the sublime to the ridiculous when he cut the interest rate to 1%. This set off a spate of irresponsible borrowing and lending the effects of which are still being dealt with today.The banks took advantage of this by starting to offer mortgages to subprime borrowers. Subprime borrowers are borrowers with a poor credit rating (specifically a FICO (credit) score of < 620). Typically these are individuals who habitually are unable to make credit card payments, or those who have suffered a foreclosure or bankruptcy. In the past they wouldn’t be able to get a loan, but thanks to the low interest rate, some could now afford the payments. With great fanfare out went the ads: “Send us your poor, your homeless, your great creditless masses!” Lured by the prospect of home ownership and lulled by the chimera of ‘buy now, pay later’, loans were issued as fast as the printers could print them.

Banks noticed that the default rates were lower than they expected. This led them to think that there was an untapped market in subprime lending. They developed many products, of which 3 were common 1) Variable rate mortgage with a higher rate due to the risk, 2) An interest only loan where they would start paying off the capital after an initial period and 3) low fixed rate initially, resetting to market rate after a few years.

The people who took these loans did so for two principal reasons 1) they hoped their income/credit would improve during the initial period of the loans and 2) the housing market was so hot, they hoped to use the newly gained equity in their homes to refinance the loans with more agreeable terms. Regrettably, Alan Greenspan, noting the now uncontrolled inflation, agressively started to increase the interest rates in 2004 right back up to around 5% and beyond.

For people with loans of type 1) and 3) above, the loans were typically huge so these interest rate increases made the payments impossible to cover, leading to defaulting. Those with loans of type 2) were pushed over the edge when the capital component of their loan kicked in.

Now, were it not for the avarice of the bankers, this crisis would have ended there; that is, a large number of repossessions but no further economic upheavel. However, bankers are weasels and behind the scenes they were pulling more ridiculous stunts.

Behind the scenes, bankers were looking to mitigate the risk of this subprime debt and also to make more profit on profit by creating and selling subprime mortgage bonds. To accomplish this they pooled together all subprime debt. Next they broke the subprime debt into levels. Suppose there were 3 banks involved in a given mortgage. The banks that would get hit by a default first were put into the lower levels and the banks that would be hit last were put into higher levels. By doing so, each level bore a reduced amount of the total risk. Now, many financial institutions that cannot purchase subprime debt were able to get around this limitation by purchasing bonds in the higher levels (less risk) of these mortgage bonds. Now, subprime debt was distributed all around the world to various institutions in this masked mortgage debt trading instrument.

So when the debt hit the fan, the big institutions which normally make loans to one another on a regular basis to keep the economy rolling, suddenly mistrusted one another. No one knew who held what amount of subprime debt. As a result the overnight lending rate went sky high and the Fed had to step in to push cash into the economy to help stave off a liquidity crisis — a crisis where cash flow starts to freeze.

At the time of this writing (Dec 2007) we are beginning to see the end result of this crisis. The large financial houses are beginning to crumble under the weight of their own stupidity. Just yesterday financial giant Morgan Stanley reported its first quarter loss in its 73 year history. Even more alarming, in seeking to assuage their woes, not only are they turning to the US government for help, but have successfully enlisted the help of the Chinese Government.

What may not be obvious, but should have the reader seeing red is that as the result of the irresponsibility of US financial institutions, we’re witnessing a wide scale buy out of US assets and institutions. What’s more, who speaks for the countless duped masses who have lost homes, equity and security as the result of this mass irresponsibility? There can be only a partial answer in paraphrasing Herbert Hoover who said: “Older men declare war. But it is the youth that must fight and die.” In this situation it is the financiers who tinker with the economy. But it is the working class that must work and suffer.

Dumb:

Project Lifeline is a Bush administration initiative to give distressed mortgagees an additional month before their homes are foreclosed upon. This reprieve goes not only to subprime borrowers but to all distressed borrowers. The subtext to this move is that not only are subprime borrowers in distress. One month’s grace is dumb because the amount of debt that we’re dealing with coupled with the loss of equity from falling housing prices is not something that is going to resolve itself that quickly. This is akin to giving a starving man a rice cake. We all know that rice cakes are good only as coasters, so too is Project Lifeline.

Dumber:

Interest rate cuts are an even dumber idea. Last month the Fed cut rates by a staggering 1.25%. There is strong rumour that more cuts are coming. This is a dumber idea for a few reasons. First interest rate cuts are the cause of debenture spending. The reason we’re in the mess we’re in is because people are/were spending money they didn’t have. Next, lowered interest rates cause economic bubbles such as the housing bubble which is just in the process of bursting. Finally, interest rate cuts increase government debt. The way that the Fed lowers interest is by buying treasury bills with printed money. This devalues the currency and increases government debt. Thus, interest rate cuts are the cause of the current economic quagmire, and certainly aren’t the cure.

Dumbest

The US Stimulus Package is the dumbest possible idea. Under the package, people could see $600 to $1200 in tax rebates. First off, the amount itself is a pittance. Next, where is the money coming from? The money is being borrowed from China to be repaid with interest. Where is the money going? The money, it is hoped, will be spent into the economy to buy ‘stuff’. Where does all the stuff come from? The stuff comes from… China. The real underlying problem is that the US economy has shifted from a production based economy to a consumer based economy. Until you address that problem, any attempts to throw money at the problem will simply throw money in other people’s pockets. I’ll give the government some credit though, the US Stimulus Package does manage to stimulate an economy; perhaps the government will fund moving its citizens to Beijing where the positive effects can be felt.

As I continue my studies of the Economy, I’m continually shocked and horrified to find more evidence of mass corruption.

http://www.gata.org/node/wallstreetjournal

The Gold Anti Trust Action Committee has taken out a full page ad in the Wall Street Journal asking, where is all our Gold?

For readers’ information… how did the gold get into Fort Knox in the first place? In 1933 Roosevelt passed a bill mandating that all citizens hand over their gold at base price. This gold was then melted down and stored in Fort Knox.

The last time a civilization was asked to hand over all its gold, they built a golden calf such that they could return to slavery. This time, there was no Moses to save us from our own stupidity. We don’t tromp in mud pits making bricks, but we do tromp to 9 to 5 jobs each day churning out contributions to our 401 K’s.

Fort Knox has never been officially audited. Moreover, strong rumours exist that the Federal Reserve has procured this gold as collateral against the US national debt. If there is no gold to be found in Fort Knox, perhaps with an open and honest audit, we may again find our liberty.

GATA has a video of a symposium they held. A summary can be found here:
http://www.gata.org/goldrush21

Here are the links for Ron Paul’s speech from his Rally for the Republic:
(1/3) http://www.youtube.com/watch?v=QGONDUxUxc4
(2/3) http://www.youtube.com/watch?v=MbzdOFhDydc
(3/3) http://www.youtube.com/watch?v=PPO9mPCqG70

I’m 100% behind his commitment to restore the power over issuing money back to the government.  His monetary policy is a breath of fresh air with promises to eliminate income tax and abolish the Federal Reserve.

As for his policy of non-interventionism, I’m not convinced that we live in a world where we can simply detach from the rest of it and hope for the best.  While I agree that the US is overburdened by its subsumed role of world police, I don’t think that turning a blind eye to the affairs of the world will result in a better tomorrow for America.  Of non-interventionism I will say this.  When the oxygen masks drop down in a plane as a result of depressurization they tell you to put on your mask first to make sure you’re getting enough oxygen to help others with their masks.  It makes sense to mend fences at home before mending fences elsewhere.  Just the same after we’re in better shape, we can’t simply ignore the rest of the masses and assume they’ll be happy for us as we live better lives than they do.

“Brent T. White, a University of Arizona law school professor, says that it’s in the homeowners’ best financial interest to stiff their lenders and that it’s not immoral to do so.”

– http://www.latimes.com/classified/realestate/news/la-fi-harney29-2009nov29,0,3801270.story

This story, suggests that mortgage holders politely flip the bird to their debtors when they come to collect on underwater mortgages.  The argument provided is that when times were good, the banks were negligent and irresponsible in handing out loans.  As such, now that times are bad, it’s fine to simply walk away, and you should do so with a clear conscience.  I agree with the message but not with the reasoning.

The real reason is that you may think the bank has offered real money to the previous seller of your home; not so.  The bank instead paid the former seller of your house with money it conjured into existence from another mortgage.  The fractional reserve banking system allows the bank to ‘leverage’ 90% of its deposits, reserving only 10% for those who make periodic withdrawals.  So the money that the bank put up for the house is actually someone else’s deposits which theoretically could be called in on a moment’s notice?

Confused?  Good, you should be.  Suppose your neighbour lent you 5 DVD’s on condition that he might ask for then to be returned at any time.  You then turn around and rent out those 5 DVD’s for a dollar each for 1 week.  If your neighbour doesn’t ask for his DVD’s back during that week, you just made 5 bucks.  But suppose your neighbour comes back 2 days later to reclaim his DVD’s – what then?  Legally, in either case, the DVD’s weren’t yours to rent; the agreement between you and the people you rented the DVD’s to is null and void.  The only difference in the two scenarios was whether you got caught or not in the fraudulent activity.

Believe it or not, the banking system, worldwide, is currently this fraudulent.  The loans a bank issued are from the unwitting depositors funds’.  Only due to the Federal Reserve Act (and similar acts worldwide) is this fraud considered ‘legal’.  Even so, the bank never puts up its own assets for a loan.  As such a successful, yet rarely mentioned case, makes the argument that having failed to put up legal ‘consideration’ (hard assets) for a mortgage, the mortgage is null and void.

Here an article about this decision including links to the actual decision on file.
http://www.martincwiner.com/a-fast-way-out-of-the-mortgage-crisis/