Understand the Financial Crisis: Part 3

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Then, on a strikingly beautiful fall day in 2001 two airliners hit the Twin Towers and another flew into the Pentagon. September 11th kicked the real estate binge into high gear.

Though the real estate fad was maturing, September 11th convinced many that they needed to have something they could hold. Real estate was something one could invest in, and live in. It served two purposes. It would offer better returns than the market had recently, and one could also erect a cocoon around oneself and one’s family safe from the newly uncertain world of terrorist color codes, anthrax, biological warfare, duct taped doors, sleeper cells, dirty bombs, etc.

It wasn’t that long ago that existential fear ran through the American populous from a political perspective, as opposed to the economic existential fear that runs through the veins of Americans as of the writing of this article. People were in personal retreat. The world was scary and basement rec rooms offered some semblance of peace.

Another factor that drove the McMansion phenomenon was the fact that baby boomers who were now in their peak earning years felt the specter of death staring at them from the shadows. The Me Generation knew that they had only so many years left to achieve their dreams of a mansion on the hill and so they went out and built them with cheap money made available by the Federal Reserve. Though mortality has been ever present for the baby boomers, September 11th really brought it home. So to speak.

So the real estate fad that started as government and the Fed trying to grow home ownership in poor areas quickly morphed into a bonanza of credit for the middle and upper class. As is typical, once the government gets involved in something it mutates the market and creates problems that must be dealt with down the road.

And a bonanza it became. An army of real estate agents spread out into the suburbs. Shows such as Trading Spaces and Flip This House sprouted up on cable television almost as quickly as siding covered 4 bedroom colonials sprouted up on cow pastures surrounding the great metro areas of America and beyond.

It was all built on credit. What’s worse is that the Federal Reserve, which is a cartel and sets interest rates for the United States and really the world, kept rates low for too long. They allowed the market to get to hot and before they knew it there was a real estate brushfire.

What must be remembered always as one analyzes the reasons for the current economic predicament is that the Federal Reserve sets the price of money. Interest rates are the price of money. Is it not odd that we recognize that the market does the best job of setting prices for nearly everything, but yet the price of money, the key component of the economy is not set by the market?

Price controls always create bizarre distortions in the market. Contemplate for an instance if the government forced all t-bone steaks to be sold at $1 a pound. What would happen? First all the steaks would disappear off the shelves and then they wouldn’t return because cattle farmers couldn’t afford to raise cows that they would then have to sell to the consumer at less than a dollar a pound. The end result would be no more t-bone steaks for anyone.

Money is a little different than steaks granted, especially since the Federal Reserve can print as much money as it wants. Cattle ranchers can’t “print” cows out of thin air like the Fed can dollars. But what does happen is that with all this inexpensive money pouring out into the world it creates other strange distortions…


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