I think
this article is fascinating.
Long story short --
The reporter who covers the Federal Reserve for the New York Times, a guy that covered the asian fiasco of the early 1990's, the russian financial meltdown, the dot.com bust, etc., etc... lept into the middle of the mortgage fiasco and now finds himself bankrupt. He and his wife had a combined take home pay of about $5k/ month (he was shelling out big bucks to the ex and kids). Realistically, they could afford a 150-$200k home at the most, so naturally they bought a half a million dollar home. The money quote, from an austrian perspective at least, is this one:
Quote:
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I had just come up with almost a half-million dollars, and I had barely lifted a finger. It had been so easy and fast. Almost fun. I couldn’t help feeling like a high roller, a sophisticated player who could lay his hands on big money at a moment’s notice...I had whipped through the pile of loan documents in less than 45 minutes.
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Take away from this story how
easy, fast and fun it was for this guy to come up with a half million dollars and there is no story--it's as simple as that. This story (and so many more like it) absolutely depend up on the ability of people to easily borrow amounts of money which are beyond their means.
It is not possible to have any kind of grasp on the present financial meltdown without first pondering this question -- 'how'd a 50ish year old dude that's bringing home $60k a year borrow $500 grand?' (note, the monthly payment on a 500k, 15 year loan probably runs more than 4k per month -- the family Andrews would have been living on $12k per year -- poverty level practically -- after house payments).
The problem lies not in lax lending standards, poor analysis, greed on the part of lenders or credulity on the part of the buyer, but instead it's something more basic and more fundamentally economic -- it was easy fast and fun for the family Andrews to come up with half a million federal reserve notes because the supply of federal reserve notes was abundant....or perhaps I should say infinite.
Economic laws, like the law supply and demand, are just that -- laws. The law of supply and demand can no more be repealed by fiat than the law of gravity.
It's an important first point to understand, and one worth repeating.
When it comes to Federal Reserve Notes, there is no scarcity for all intents and purposes. Hence, when the Federal Reserve pushes their notes into the market, those notes are fast, easy and fun to pick up. No amount of regulation or income redistribution can counter this economic law.
Once this is clearly understood, the rest of the fiasco becomes comprehensible.