Artificial Inflation and the Real Damage
The reason why I call it "Artificial Inflation" is because this inflation is not caused entirely by supply and demand. It is also caused by bad decisions inspired by greed.
Back when the housing boom was in its infancy, it was harder to get a mortgage. The criteria set for obtaining a mortgage was higher than it is today because lenders do not like dealing with foreclosures.
Demand in some areas were well ahead of supply in some areas. House prices started escalating in these areas. This is a natural result of the "supply and demand" curve. Prices leveled off when the demand could no longer be met because people who wanted a mortgage could not get one.
Prices would have stayed level or increased accordingly with inflation if everything was left alone. However, restrictions on borrowing were lowered. People who could not afford to get a $100,000 mortgage were suddenly able to get a $150,000 mortgage. This sudden flow of money caused an artificial extension of the housing boom and prices skyrocketed.
Banks are now realizing that the lax restrictions have hurt them. The people who could not afford the $100,000 mortgage are now having their homes foreclosed because they cannot afford the $150,000 mortgage they are now saddled with. Banks are receiving less money, which means that there is less money in circulation for businesses to borrow to create jobs.
If we end up bailing out the mortgage companies, it will be done with printing up more money because we do not have the money to give them. This will result in further weakening of the dollar and higher inflation.
Back when the housing boom was in its infancy, it was harder to get a mortgage. The criteria set for obtaining a mortgage was higher than it is today because lenders do not like dealing with foreclosures.
Demand in some areas were well ahead of supply in some areas. House prices started escalating in these areas. This is a natural result of the "supply and demand" curve. Prices leveled off when the demand could no longer be met because people who wanted a mortgage could not get one.
Prices would have stayed level or increased accordingly with inflation if everything was left alone. However, restrictions on borrowing were lowered. People who could not afford to get a $100,000 mortgage were suddenly able to get a $150,000 mortgage. This sudden flow of money caused an artificial extension of the housing boom and prices skyrocketed.
Banks are now realizing that the lax restrictions have hurt them. The people who could not afford the $100,000 mortgage are now having their homes foreclosed because they cannot afford the $150,000 mortgage they are now saddled with. Banks are receiving less money, which means that there is less money in circulation for businesses to borrow to create jobs.
If we end up bailing out the mortgage companies, it will be done with printing up more money because we do not have the money to give them. This will result in further weakening of the dollar and higher inflation.
Labels: banks, foreclosure, inflation, mortgage
posted by Vortex at
9:41 AM
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