Our leaders do care about us: right or wrong? We only have an opinion about it, and can only encourage people to look at that fundamental question in a very thorough and truthful way. The following questions go a bit deeper; they touch the core of our value system:
- We are taught at school that we should trust our leaders. We assume that the governing parties are defending us as we voted for them.
- We rely on the financial institutions as they are taking care of our money. Who else do we trust more than our own bank when it comes to our money?
- We trust that the media is telling the truth, every day again, in the daily news updates and talk shows.
The IMF just published a research paper in which they analyze how (asset) bubbles are created. They describe on page 30 the real reason of the latest bubble, the housing bubble, which crashed and destroyed an immense wealth from ordinary people.
The origins of the recent real estate bubble can be traced to the low-interest-rate environment that followed the collapse of the dot-com bubble and a number of financial innovations and policies that made housing investment seem more attractive than an investment in stocks and bonds. In particular, a newly popular two-tier securitization process, which involved pooling mortgage loans into mortgage-backed securities and subsequently pooling into collateralized debt obligations, allowed investors to diversify away the idiosyncratic risk of regional real estate price movements, further lowering mortgage rates. These developments are some of the reasons behind the initial rise in house prices that was subsequently amplified by further capital inflows into the housing market, consistent with feedback trading models.
The IMF research paper concludes with some possible solutions from their desk research in how to prevent future bubbles:
- One suggestion is to, whenever possible, remove short sale restrictions.
- Another suggestion is to provide better financial education in order to reduce the adverse influence of investor irrationality.
- Finally, the literature suggests the need to mitigate the limited liability incentive structure and expose all agents to the downside risk of a bubble.
A couple of thoughts here while connecting the dots. The IMF clearly and without any ambiguity states that the central bank policy was the reason for the biggest financial collapse in history. If even the IMF is saying it, we can rely on it as a fact. Now what does the central bank has to say about it? Zerohedge brought an interview to our attention from July 2005, in which the central bank chairman answers the question: “What is the worst case scenario if housing prices come down substantially?” His answer was the following “I guess I don’t buy your premise, it’s a pretty unlikely possibility. We have never had a decline of house prices on nationwide basis.” The government either has no clue, either knows but does not want to tell in order to have only a minority benefit from the bubbles they are creating. That’s more than a dangerous situation; it is unethical and irresponsible towards all the people out there that suppose the government cares about them.
Fast forward to today. We are in the fourth straight year of almost zero interest rates, exactly the same cause of the last bubble. The US Fed has confirmed their intention to continue this policy for another 2 to 3 years. That’s seven years of extremely low interest rates! A couple of days ago, Bloomberg quoted the chairman of the central bank Ben Bernanke when he talked about the creation of a new bubble. His opinion: “There’s a lot of disagreement about what role monetary policy plays in creating asset bubbles. The first line of defense if bubbles emerge needs to be regulatory and supervisory actions rather than changes in monetary policy.” Really? So it is a fact that the current policy will create another bubble, and a lot of citizens will be hurt again, but the root cause monetary policy should not change?
What more evidence does one need to come to a conclusion? Whether it is disinformation in the era of overinformation, delusional leaders, bribery, or anything else … one thing is clear, you need to protect yourself and spend enough time to research the real facts. Don’t expect our so-called “leaders” to tell you.