The Housing Bubble- What really went wrong
So where did it go wrong? Everything looked great. Homes were assets untouched by depreciation. Unlike a car that is automatically worth $5,000 less the moment you drive away in it, your home actually gained value over time. Or at least that’s what people believed. Phoenix was booming long before the rest of the country jumped on board, and into the bubble, the housing bubble that is. It was said that Phoenix, Arizona was a unique market where you buy the “starter house” at $100,000 (for sake of a round #) and by the time you get into the “big shot house” at about $ 250,000 (about 4 houses, 3 promotions , 15 years later), it’s free.
People will explain this phenomenon using all sorts of big words to sound important and smarter than they actually are. But to call a spade a spade, they acquired enough equity through the other purchases to cover the last purchase. So if you bought $100,000 of house in 1990. Then in 2005 through time, buying and selling, you could have a $250,000 house. You would basically get $150,000 of house free, through trading up. It’s sort of like the game bigger or better. And then it all came apart at the seams in 2008.
It turns out this boom was all a lie and a front used to make money. When the crash happened everyone was shocked. It was kinda like that moment when you realize that stripper you gave your tax return check to has no intentions of leaving her coke dealer boyfriend. And this is the #1 reason free-market capitalism doesn’t work. Without regulations, greedy people will manipulate a market to make lots of money. So how did it happen?
Well… the biggest reason was the repeal of Glass Steagall. This bill has been around since 1933 and came about to regulate the banking industry, due to the economic meltdown that caused the great depression. The bill did a lot of things but the most important one was to define banking. Banking- put in the simplest way possible- was an alternative to keeping your money in a mattress. A safe place for deposits, it was defined as an establishment that would operate on a 5 point spread. If you pay 5% for the money coming in you lend it out for 10% interest and that’s how the profit is earned. To protect the consumer most deposits made by everyday people were required to be insured. That is how the FDIC was born. But then something very strange happened. Once the law was repealed you had AIG walking around pretending they were the Building and Loan.
That was the day when George Bailey died. If you don’t get the reference, George Bailey ran the Building and Loan, an honest bank, in the infamous “It’s a Wonderful Life”. If you don’t remember that, what about the quote”Every time a bell rings an angel gets it’s wings”? If that doesn’t work either just go to Blockbuster and rent the movie.
Well, after George Bailey died, Mr. Potter came into the Building and Loan and decided to make a few changes, to act a lot like AIG. That’s why my bank Chase lost 6 billion dollars one day on a bad bet and felt little remorse.
So if I could just say something honestly to someone involved it would be to say, “screw you Mr. Potter, and (Chase Bank) I’d give anything to have George Bailey and (Bank One) back”.