Exented And Pretend Is Coming To An End
There is a big economic difference between building and selling a new home vs. selling an existing house. A new home sale drives fantastic economic stimulation. Land must be developed, materials purchased, labor to build, etc....In addition, a new home generates lots of tax dollars to government from profits all the way down the supply chain to generally a much higher property tax valuation on the land and impact fees.
In addition to the above, new home contruction manufactures lots of financial instruments including development loans, contruction loans, mortgages, securitzed loan packages, and credit default swaps. Adding in all the above, for every dollar of new home manufacturing...we were generating much MORE than one dollar of financial manufacturing.
From the financial side, the bankers didn't really care if the loans could ever be paid back because they were "insuring" the debt with swaps. Often times the debt was insured many more times than the loan amount. Incredible profits were driven to the financial firms. At one point, financial services accounted for over 40% of S&P profits.
Since swaps supposedly insured the loans, bankers stopped doing background checks on borrowers. They started loaning large amounts of money to individuals that could never pay them back based on income. People were acquiring the American Dream and bankers were making dreamy profits.
Since anyone with a pulse could borrow, pretty much anyone did, and as much as the banks would deal to them. In the end, the prices of homes across America doubled and tripled, property taxes followed, home owners insurers boomed, all the while incomes remained the same.
During the boom, America was manufacturing over 1.6 million units or about $500 Billion dollars of new homes per year vs. the less than $100 Billion today. The trickle down effect on our entire economy was incredible. In addition to the $500 Billion of new homes constructed, we were creating over $500 billion of financial instruments that were supposedly insured.
As we later found out, the bankers manufactured more financial nonsense than existed in the entire savings of the United States....consequently the taxpayer had to bail them out as millions of families started losing their homes and bankers were rewarded with billions in bonuses.
Since the actual sustainability of the home really didn't matter to the bankers(it was only a conduit for manufacturing financial instruments), millions of homes were built that shouldn't have....millions of jobs were created to support this ponzi scheme, and trillions in taxes were generated.
Today America has over 16 million vacant homes, an accumlated debt burden on its private citizens much greater than the total savings, and a gutted economy as millions in jobs have been permanently eliminated and trillions of annual taxes receipts have evaporated.
If you think about it, during the housing boom, the manufacturing of housing was secondary to the manfacture of debt and credit default swaps. Now the taxpayer is stuck with trillions in toxic financial instruments and government has a budget that is simply unsustainable.
As a nation we are insolvent because our revenues and savings cannot support our current expenses and debt service. Millions are borrowing and/or spending down savings to survive. Some very difficult decisions rest ahead of us...but for now, the policy is bail out the Wall Street banks and bury the citizens.
My guess is that the citizens will not take this for too much longer as distress is increasing minute by minute, hour by hour, day by day. The fallout from any ponzi scheme is painful...this one was the largest as Wall Street and Washington are doing their best to extend and pretend...but from this prespective, extend and pretend is coming to an end.
The above doesn't even address the trillions generated from home equity loans, private equity debt, commercial real estate debt, auto loan debt, and credit card that have now scaled way back.
Once you strip away economic growth from the CREATION of debt and government spending, you begin to realize how small of an economy that actually remains....my guess is much much smaller than many of you think.