Guest Post: Why The Government Is Desperately Trying To Inflate A New Housing Bubble

Tyler Durden's picture

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

The Federal government and Federal Reserve are trying to inflate another housing bubble to save the "too big to fail" banks from a richly deserved day of reckoning.

If we want to understand why the U.S. government is doing its best to inflate another housing bubble, we must start with the Devil's Pact partnership of the government and the "too big to fail" banks. Simply put, the TBTF banks would not exist without the Federal Reserve and Federal government bailouts, subsidies and protection from transparent marked-to-market pricing of the banks' collateral and risk.
The basis if this partnership is simple: the banks' enormous profits and financial power have enabled them to capture the regulatory machinery of the government (the Central State) and the political machinery controlled by its elected officials.
To understand the true meaning of the housing bubble, we need to understand how banks reap outsized profits. In classic capitalism, banks earn profits by maximizing the allocation of capital. In practical terms, this means lending money to low-risk, high-growth, high profit-margin enterprises, and avoiding lending to high-risk, low-margin enterprises.
In the industrial era, banks reaped profits by funding large, centralized industrial corporations. In the post-industrial economy, banks began skimming huge profits from credit cards and other consumer loans. Mortgages remained a low-risk, low-yield business that operated more like a utility than an investment bank.
When domestic opportunities for profit shriveled in the stagflationary 1970s, U.S. banks went international, loaning billions of dollars to South American nations at high rates of interest. The money-center banks assumed that sovereign debt (i.e. loans to governments) were low-risk. These loans generated enormous profits for the banks, until the unthinkable happened: the debtor-nations defaulted on their sovereign debt.
The Federal government and the Federal Reserve had to step in and save the banks from the consequences of their faulty risk assessment and rapacious pursuit of high-risk, high-yield profits.
By the 1990s, the new knowledge economy corporations had little need for bank credit.
Technology companies generated so much cash, they either didn't need bank loans or if they chose to borrow money, they did so via the corporate bond market. Having already tapped almost every qualified borrower with a mortgage, auto loan or credit card, the big U.S. banks had once again run out of highly profitable markets to exploit.
The government and Fed-created housing bubble handed the big banks a new market to exploit: high-yield mortgages to marginally qualified buyers guaranteed by Federal agencies (Fannie Mae, Freddie Mac, FHA, VA, etc.), i.e. subprime mortgages.
Federal agencies loosened lending standards so those who by prudent risk-management would not qualify for mortgages were now able to borrow vast sums with little or no money down, and the Fed pushed interest and mortgage rates down to lows not seen in generations in the wake of the dot-com bust of 2000.
For PR purposes, this vast expansion of bank lending was sold as a high-minded extension of the "ownership society" (i.e. homeownership) to those households who had previously been denied the opportunity to become debt-serfs due to unfairly tight lending standards. In reality, the entire "ownership society" campaign masked the true intent, which was to open new and unexploited territory for the big U.S. banks to plunder.
Even better (from the bankers' point of view), loosened regulations and oversight enabled banks to carve up mortgages into tranches that were then bundled into mortgage-backed securities (MBS) that could be peddled worldwide as "safe" investments for pension funds, townships, insurance companies, etc.
The housing bubble enabled big banks to skim tens of billions of dollars in profits from originating mortgages to marginal buyers and securitizing mortgages into MBS. This is the heart of what I call the Neocolonial Model of Financialization: rather than make risky sovereign-debt loans to international borrowers, the big U.S. banks came home and exploited the low-risk domestic housing/mortgage market.
When the bubble burst, as all speculative bubbles eventually do, the banks were rendered insolvent: their collateral (the mortgaged housing) had lost much of its value, and mortgages that had been sold as essentially risk-free were revealed as defaults waiting to happen.
The Fed and Federal government immediately stepped in to save their treasured partner, the parasitic banking sector, from righteously earned destruction. The bailouts, guarantees and backstops totaled about $23 trillion, roughly 150% of the entire American Gross Domestic Product (GDP), and roughly twice the 2008 value of all U.S. residential mortgages (almost $12 trillion).
The housing index has yet to decline to an inflation-adjusted pre-bubble level: valuations are still higher than they were before the bubble.
To enable the TBTF banks to once again skim billions in profits, the Federal government and Federal Reserve immediately began trying to reflate the housing bubble. Tax credits were lavished to new home buyers, mortgaged rates were driven even lower, and the Fed began buying $1+ trillion of private mortgages.
The first tax-credit frenzy faded once the credits expired, but the Fed's zero-interest-rate policy (ZIRP) gave investors no choice but to put their money in risky assets: stocks, high-risk corporate bonds or residential housing. As we can see in this year-over-year percentage chart of the Case-Shiller Index, these policies have sparked another spike up in housing prices (restricting inventory played a key role in this, of course).
As a result, the housing bubble is alive and well in markets such as Los Angeles:
If you have any doubts that the banking sector dearly loved the housing bubble, take a look at this chart and note that mortgage debt more than tripled during the bubble. For context on the enormity of that $8.2 trillion expansion of mortgage debt:that $8.2 trillion is three times the 2005 GDP of Europe's largest economy, Germany. (The GDP of Germany in 2005 was $2.7 trillion.)
Thanks to writeoffs and writedowns, mortgage debt has declined in recent years, but we need to remember that if pre-bubble growth trends in population and housing valuations had remained in place, total mortgage debt in the U.S. would be around $5 trillion, not $10 trillion. The $1 trillion writedown in mortgage debt is just the start; we only need to write down another $5 trillion to get back to a non-bubble level of debt.
Meanwhile, total consumer debt has barely budged. In other words, that $1 trillion reduction in mortgage debt has been offset with rising student loans, auto loans and other consumer debt. 
The total debt load on U.S. households remains at bubble levels, more than twice the debt owed in 2000. Population growth since 2000 accounts for 9.7% of this additional debt, meaning that if debt had risen at pre-bubble rates, total debt would be around $6.5 trillion rather than $13 trillion.
Recall that adjusted income for most households has declined sharply since 2000.So the Fed's zero-interest rate policy is simply a holding action that enables over-indebted households to keep making their debt payments to the banks.
Many people claim the Federal government and Federal Reserve are trying to inflate a new housing bubble to trigger a new "wealth effect," i.e. people seeing their home equity rising once again will feel encouraged to borrow and blow money like they did in 2001-2008.
But if we look at current income (down) and debt levels (still high), there is little hope for a renewed wealth effect from housing. That leaves us with this conclusion:
The Federal government and Federal Reserve are trying to inflate another housing bubble to save the "too big to fail" banks from a richly deserved day of reckoning.
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Racer's picture

And the same goes for the UK with the latest announcement about housing help

(apart from the poor with added bedroom taxes of course)

DJ Happy Ending's picture

Japan's bond market is the future of the USA.

CheapBastard's picture

I am guessing another 40-50% drop given the trend to lower paying jobs, higher unemployment, continued supply of very cheapo labor ( from across the border at $5/hr) and the massive oversupply still being added to the markets.

For example, there are alreayd many many empty houses -- some with for sale signs, others just plain empty-- and yet I read last week builders were voraciously adding 8,000 more boxes to this area alone, not including the other sections of the city.

I have never seen anything like in before, not to mention the revival of those zero-down mortgages all over the place. It's no wonder the suburbs are turning into slums. When you sell a house to someone who cannot afford it and most likely does not understand the responsibilites involved, slum creation -- broken fences, unmowed lawns, section 8's all over, rentals all over -- slum creation is almost inevitable.

TruthInSunshine's picture

The incredible fact about reflation of the housing bubble, to the extent and in the geographic areas that it is allegedly proving to be successful (to whatever degree, large or small), is that the much heralded "wealth affect" that is theoretically the goal of this monetary policy is very destructive in reality, as it - if assumed to work as advertised - encourages mainly debt-financed consumption based on the nominal, accretive gains in housing values that are unrealized ones.

In other words, if one believes that there's a causal relationship between housing value reflation and consumer spending, the spending is not prompted by actual realized gains in income or productivity, but unrealized ones that potentially could (and that some would argue will given the structural defects in the current economy) evaporate.

If (or when) this occurs, those buying residential dwellings during the reflationary period will have done double damage by overpaying for their residential unit(s), and then by being induced to engage in taking on even more debt in the form of financed consumer purchases, which means that they will be severely damaged when the unrealized gains of their house(s) evaporate(s), while they are saddled with the very much realized debt of the purchases they made while believing those unrealized gains would endure.

On a related note, the reflation that is taking place, to the extent that it is and in the geographic areas where it is occurring, has been and continues to be fueled in large part by extreme distortion in price discovery due to artificially constained inventories of housing stock listed for sale as a result of:

a)  Banks and other entities carrying MBS getting ongoing subsidies from the fed encouraging and literally allowing them to remain d jure solvent while not foreclosing upon deliquent mortgages or, worse yet, not listing already foreclosed upon residential units for sale,

b) Allowing banks and other financial entities having large portfolios of assets in the form of residential units under mortgage to dramatically mis-mark or otherwise misrepresent the value of such assets (again, allowing many of these entities to continue as ongoing de jure solvent entities even though implementing FMV would render them insolvent),

c)  The GSEs such as Fannie & Freddie being able to capitalize on the fact that they also are receiving massive taxpayer subsidies, allowing them to also not be forced to mark their residential dwelling units under mortgage to FMV and list same for sale (they are actually renting many of these properties in lieu of selling them, in many cases).

As always, the bigger the intervention, and it is massive in the case of the "housing reflation" meme, the proportionately larger the inevitable crash.

sgt_doom's picture

Trust me, I'm a banker.

In your opinion, how many billions of dollars do you have to launder for drug lords, before somebody says, we're shutting you down?”  (Sen. Elizabeth Warren)


cynicalskeptic's picture

depends on whether they're 'good'' drug lords that cooperate with tyhe CIA et al or 'bad' drug lords that don't....

Dr. Engali's picture

I thought we were talking about Cyprus.

madcows's picture

I'd say that we are.  Cyprus and the EU and the FED are all interconnected, or one-and-the-same.  The FED is buoying the EU, who is supporting Cyprus, who is connected at the hip with Germany and Spain and Italy, et al...  TPTB are really the world wide banking cartel, and they are doing the best to not let a good thing go to waste.  The pukes made billions on issuing bad debt, now they're trying like hell to keep it together.

TideFighter's picture

Why don't they inflate jobs?

jbvtme's picture

inflation is caused by government spending. obama has created fewer public jobs than any of his recent predecessors (republican and democrat).  job growth would cause inflation which would kill the housing market which underpins the derivatives which prop up the bonds which are owned by the endowment and pension funds.  bonds would also tank as interest rates rose to combat inflation.  printing money won't cause inflation until it is spent.  i think i'm right but stand corrected.

epwpixieq-1's picture

Actually they do. Just in sectors where there is no competition from outside the country.

Look at the jobs NOT slashed in the banking/financial sector (due to inflated financial assets prices), the sickcare, the "education"/dummification system, the service sector, the (inefficient) drilling for energy, the housing and the government.

All these are inflated jobs, that will be crashed ones the $ finally looses its reserve currency status. It will be brutal and harsh for many to realize that they do useless jobs and have useless skills and the only, power that allows them to receive an income in such economically inefficient way is the current dollar base hegemony ( over the oil ).

El Oregonian's picture

Sounds like one of those jobs where their trying to light 800LBs of Dynamite that only has a 1/2" fuse...

Another occupation where you never tell the powderman to "Blow Me".

AcidRastaHead's picture

Meh, now that 'market forces' are more of a thought experiment/textbook reference, I've learned that 11th hour backroom deals can save the world.

dick cheneys ghost's picture

An economy based on rising house values is NOT an economy

IamtheREALmario's picture

An economy based on rising housing prices is NOT an economy

There fixed it. Value is based on utility or an inflation adjusted return on investment. Price is just price.

sgt_doom's picture

I don't disagree with Hugh-Smith's commentary, but his major thesis is lacking, I believe.

Securitization of mortgages is but a drop in the gallon-sized bucket of ALL securitizations; it was the selling, re-selling, re-re-re-selling . . . ., etc., and those securitizations, re-securitizations, re-re-re-securitizations. . ., etc., or layer upon layer of debt sold again and again and again, of all securitized categories.

Commercial real estate, commercial loans, auto loans, credit card receivables, student loans, ad infinitum, taken together with the largest insurance swindle in human history.

For example:  AIG's selling $460 billion worth of credit default swaps, with the potential payout of from $20 trillion to over $40 trillion (and we know that $22 trillion was pumped out by the Fed, or fundamentally stolen) to pay off John Paulson, who got together with Goldman Sachs, for various rigged CDOs, such as Abacus CDO, which they stuffed with sure-to-fail crappy loans --- bought bunches of CDSes at $1.4 million a pop, with a payout of $100 million per pop per each CDS, giving super-thief Paulson a $3.4 billion payday.

OneTinSoldier66's picture

The cost(not value) of homes are going up. Yea, we should celebrate!


The cost of gas and food are going up. We should celebrate!


The cost of toys and diapers are going up. We should celebrate!


The cost of Government is going up(higher taxes). Yes! We should celebrate!




I got the idea for putting it that sarcastic way from the guy in my avatar, Peter Schiff.

Fuh Querada's picture

Jim Ricktards and Becky QuickAsShit on the Texas Gold depository.


piceridu's picture

Those talking head shills, along with the Krugster, try as they might, can't stop the physical gold juggernaut from breaking the down the castle walls.  Rickards is a very smart cat, and in a real debate situation, it wouldn't be a fair fight.

Groundhog Day's picture

It's always a great time to buy a house


GrinandBearit's picture

It's always a great time for a haircut.

- My barber.

krispkritter's picture


It's always a great time for a haircut.

- My Banker.

toys for tits's picture

If the Fed doesn't stop blowing Bubbles, then Bubbles is going to jizz in the Fed's mouth.

SheepDog-One's picture

'Reflate the housing bubble'...well they can dream on about that actually happening, it won't.


kaiserhoff's picture


Demographics, incomes, household formation, carrying costs..., all wrong.

yabs's picture

the Uk is insane its juyst announced a feddie mac typer deal thus creating a new sub prime

if they wanted to help people afford a house then let the free market work and let house prices fall naturally

but oh no cannot have that can we

Fuh Querada's picture

The average price of a house in the UK is 5.5 times the average annual  income. In expensive areas, 10.8 times.

Nu Yawks hottest club is's picture

Also, please take into account the fact that that many billionaires (no taxes on worldwide income here) and 'City' incomes are dragging the averages skywards.

A barber / hairdresser can expect to earn around max. £14k a year in the UK, for example.

Average house price ? Around £165k

ebworthen's picture

Hey, it worked for them last time.

Create housing bubble, make billions hand over fist selling and then securitizing mortgages - bubble pops, banks/insurers/corporations bailed out on the backs of the taxpayers, banker pay, bonuses, and consolidation continue unabated.

"If it ain't broke, don't fix it."

It's broke for every citizen, but for the elites and their politician lackeys it is a well-oiled machine.

This time around they get to steal depositor savings too.

madcows's picture

A very long article that could have been reduced simply to:

"This is all about keeping the banks solvent b/c they fund the politicians"

The charts and graphs are nice.  They back up what ZHers have been saying for a while.  The TBTF includes the bankers and the polititicians, and they are going to do everything in their power to retain their power and status.  If we had a moral nation; a just nation; we would have let the banks fail.  that's all you need to know.

orangegeek's picture

Philly Housing Index has retraced about 62% from its 2009 lows.

The next leg down should take us below 2009 lows.

IamtheREALmario's picture

The new housing bubble is designed around creating "investment funds" for the specific pupose of buying housing, propping up prices and renteing to people who would otherwise have purchased if housing prices had fallen to their free market value. Yes, it props up the banks, but it also gives the banks the opportunity to lend money, at interest, to these funds who use the properties as collateral ... and leverage themselves to the hilt.

To compliment and augment this banker strategy, there has been a propaganda campaign designed to brainwash people into believing it is better to rent than buy. (Oh really? one asks. How do the investors make money if they do not charge more than it cost them to buy?!? ... so how is renting better? Maybe it is simply better for the banks and their pet asset pumping crony funds. That is how.)

ziggy59's picture

I think they will need a bigger washing machine

GrinandBearit's picture

And a few more wash and rinse cycles.

Eventually TPTB will own it all... either by taxing people into oblivion, or by outright confiscation.

DutchR's picture

Fucking around on one little blue marble







econature's picture

The Fed couldn't keep home prices up forever, but they'll keep interest rates low forever, right? I mean, if the Fed is the only buyer or bonds, then China will still export goods to us right? And Venezuela will still accept dollars for oil, right? Everything is fine!

yogibear's picture

Housing bubble #2 inflates. The big pop is coming.

Plenty of financial  companies now involved, Localities will just raise taxes and fees.

Upkeep and rental upkeep should drain these corporate entities.

Perhaps Blackstone will get burned by it's  speculation in housing bubble #2.

22winmag's picture

I sure hope Blackstone get burned... neofedual scum lords that they are.

TruthInSunshine's picture

They're an absolute too-big-to-fail, best friend forever of Timmay & Jack Lew, and dominatrix of Bernanke & Crew.

Taxpayers, present and future, will inevitably pay for whatever losses they rack up speculating/gambling with free fiat.

digalert's picture

Excellent pictures, it's why I read ZH.

bnbdnb's picture

Housing is only rising because the rich are buying all of it.

yogibear's picture

Municipalities are looking for a bigger sugar daddy.  These corporations have deep pockets so local taxing entiies can suck them dry.


Miffed Microbiologist's picture

Rich Chinese in my neck of the woods. Paying cash for $700,000+ homes. I guess their own housing bubble isn't good enough and felt like participating in ours as well.


hooligan2009's picture

some great charts in here plus an interesting commentary from Dudley (do right?)

Pactyas's picture

Sure, the TBTF banks always want to make money.  So do the Too Little to Save banks.  Big deal.

Yes, the Fed seems to be bailing out the banks, using "stimulate the economy" as a cover.  But the issue is cui bono?  Why is the plea--"bail us out!"-- effective when made to a populist-inclined political class?  It is because the banking system as such is captive to the political class--not its boss.

Just as bodyguards owe allegiance to dictators, so do bank executives (who could be jailed virtually at whim by the regulators) have to please the pols.  They do this by being their very loyal financial lifeline.  (And sure, they do get paid for it.)

The first duty of the banks and their primary function (especially in the last few years) is to keep the government afloat--not to keep the government from suppressing their profits.  Yes, it's mutual backscratching, of course, but the power center is on the side of the law-making, prison-running group.

Nu Yawks hottest club is's picture


Gordon Brown (UK Prime Minister in 2008) saved some of the world's biggest banks and now can't show his face in public without being booed, hissed and generally disparaged.


Lordflin's picture

I couldn't agree more... everyone with a brain understands the jig is up... now all that is left is the plunder. Sad isn't it... folks buy their dream... simple dreams really... then find the value gutted in a deflating market. Worse yet, the revaluation is in depreciating currency... guess the joke is on them. That is the people are pressed to the point they have nothing left to lose... then there will be hell to pay...

Thank goodness HLS is buying ammunition, automatic rifles and light armored vehicles...

22winmag's picture

True that, the jig is up... just make no mistake about the Dept. of Fatherland Security. It's hoplessly outgunned and outmatched.