Re-Inflating the Housing Bubble-if they can

During the last few months the Federal Reserve has lowered home mortgage interest rates to under 5 percent. The Tresury Department has purchased tens of millions of dollars of long-term T-bills, and put downward pressure on long term interest rates in doing so. And Congress has passed and the president signed another bailout package to save Wall Street investors.

Obama has set his heart on raising the value of the investment bonds backed by subprime, alt-A and liar loans. That's why the government is willing to loan (at low interest rates) 85 percent of the purchase price of these bonds. Of the remaining 15 percent of their cost, the government will split the difference with the investor. In other words, the government is subsidizing rich investors to the tune of 92.5 percent of the price of these nearly worthless bonds. The cost of this program means the risks are mostly socialized and the profits largely privatized. In other words, this legislation is another entitlement program for the rich.

In 1933, President Franklin Roosevelt issued an appeal to Congress to initiate a government program whereby distressed homeowners could readjust their mortgages to reflect their current values, extend their payments and lower their interest rates. These actions would be subsidized by the U.S. Treasury. And this is precisely the kind of program the government created back then.

It would be most helpful for the economy to have such a program now, but that's not on Obama's agenda. Providing this kind of help to average Americans would undermine the prices of the bonds because the values of the homes would drop, monthly payments would fall, and both actions would cause the yield of the bonds to plummet. In other words, the value of these investor bonds would drop, and Obama has no intention of allowing this to occur.

There are two kinds of credit markets: One is where lenders such as credit unions and banks loan money to people and keep receiving interest and holding their loans on their books. That's why these institutions won't loan money to people who have bad credit ratings. This is called the old fashioned way of doing business.

The other credit market, the one favored by rich investors, is where banks and other lenders lend money so that people can buy houses, cars, boats and cheap plastic crap from China, and then the lenders sell these loans to investment entities, such as Citigroup and Goldman Sacs. And then these firms issue bonds with the homes as collateral.

The latter credit markets provide opportunities for billions of dollars of fees, and they also provide incentives for lenders to give credit to people that are unworthy of it in the old fashioned credit markets, because the old fashioned lenders kept those loans on their books and derived their income from the repayment of these loans. In other words, Obama wants to save the credit markets in which the standards for borrowers is, at times, virtually nonexistent.


This is why the federal government appears to be trying to reinflate the housing bubble; and that means government officials have no intention of dealing with the real problems the economy faces: the re-distribution of income and wealth from the lower income classes to the extreme upper class, and all of the governmental policies that have brought this about: Nafta, Cafta, The Financial Services Modernization Act, among many others.

Obviously, the United States should extract itself militarily from Iraq and Afganistan, and the government should follow the letter of the 1986 law granting illegal aliens amnesty. These three things have been nothing but big income re-distribution mechanisms in favor of the rich as they suck, and have sucked, the working people of the United States financially dry.

And this means inflating the housing bubble is short sighted policy destined to fail. It is possible this policy might cause the economy to lurch out of the recession, but unemployment will remain high without immediate real remedies to what ails us. And this suggests any positive impact of the Obama and Federal Reserve policies will fail in the short and the long term, and a recession far worse than the current debacle will soon follow, or this one will continue to get worse.

Campaign finance reform is a necessity if only because the rich and their corporate lobbyists are the only entities with enough money to purchase the favors of legislators.

Obama does not look like the next coming of Franklin Roosevelt; instead he more closely resembles the second coming of Herbert Hoover.