There have been assumptions at play here. Let’s take at look at them. You are focused on savings being wealth, ie. real money, being present when it wasn’t and isn’t. Yet Austrian Economics, for the most part I don’t think there are any that think otherwise, focus on the Business cycle involving credit, ie. IOU’s, which was present.
The reason that some people didn’t pay off their mortgages is because they are loans that couldn’t be paid off. The borrowers didn’t have the money, ie. savings. And it’s not only homeowners we are talking about. Many homes, some near me, were built by contractors and never sold to homeowners. And why? Because too many homes were built without any consumers. The loan market via the Fed. Reserve (I can’t remember the exact name of the interest rate that the Fed. directly uses to control home loans but there is one and it was low), was very low in the housing sector. Remember all the house flippers? That was a big thing then. People were buying up houses by the thousands upon thousands (thousands and thousands of people doing the buying) and they would fix up the houses, update the interiors, add paint, etc… and then flip them. They would buy them low and sell them higher as they put all that work into the houses and could make a profit. It was a huge profitable business. Also new homes sprouted up all over the place. Some after about at least five years by me, still sit here with no homeowners. There were never the consumer demand that investors thought there were. But the business was booming. And like all booms it was quick, large amounts of cash. I mean it wasn’t uncommon for some house flippers to buy a house worth $1 million dollars and then flip it and sell at $5 million. People were making large sums of money. But the whole housing sector was off target on consumer demand. Eventually houses became more and more expensive as it was a nation-wide event of selling houses for larger sums of money because the market was there. Yet a market built on loans, mortgages, or contractors buying up loans to build houses that didn’t even get bought - eventually. Because eventually that’s what happens in a boom. It’s credit driven. It’s not built on real savings and not on real consumer demand. Eventually, it’s like the game hot potato or musical chairs, where some people are left holding the potato and they get burnt. They lose a lot of money. The market dries up because it was never built on real wealth by real consumer demand that real savings in the first place. That’s why you are coming at this with false assumptions. It’s not that people have savings, the savings didn’t start to accumulate until afterwards. The whole market was global as housing bubbles not only happened in the U.S. but happened in Europe and some say China and Australia are in one now. China has whole cities that are built with nobody living in them. It’s all credit driven with no real consumer saving demand. Eventually the banks lost out too as they put all this loan money into the housing sector. And what really made this huge were the credit default swaps (CDS), and other derivatives that China and other countries had bought into. They were all Wall Street derivatives that gambled on the housing sector called mortgaged-backed securities (MBS) with the CDS being the insurance taken out on MBS. What this is, are MBS were bought by investors. MBS were derivatives that were backed by what can be called ‘bundles of mortgages’. It is a derivative that is directly applied to real housing mortgages. When investors buy MBS they are getting returns on mortgages going up or down. That’s how the investors make their profit on the mortgages. When a bundle of mortgages (many house mortgages) go up in value, then the investors that has bought that bundle on those houses directly, then such an investor makes a profit. The CDS were insurances taken out on MBS so if there were loses, in other words, if mortgages in a particular bundle dropped in value, then if the investors also had CDS taken out to insure their MBS, then the investor doesn’t necessarily lose money because their MBS were insured (CDS). What happened with these is the MBS and CDS market ballooned into the trillions involving the global market.
For one, it was sold that the U.S. housing market had never dropped in value since I believe it was the 1950s’. So it sounded like a good deal. Profits for everybody. Secondly the CDS further made it seem like a secure investment. Hey because if my particular MBS drops in value, then I have CDS’s to back them up and I don’t lose money. This became literally a trillion dollar industry with the likes of all the big wall street firms involved, ie. Goldman Sachs, AIG, etc… But what happens when mortgages drop in value because people stop buying as many houses as they had been. What happens when the savings dry up and people no longer can afford to pay off their mortgages - on a huge scale. What happens is a housing bubble (credit-driven) bursts. It is unsustainable to begin with because the housing market was mainly credit driven by low interest rates that targeted that market specifically. It then effects Wall Street as they’ve invested in derivatives that were based on housing mortgages directly. Housing mortgages fall in value, as consumer demand was never there to begin with to buy up all those houses being built, and then Wall Street economically collapses too. Investors from around the world lose big. It was a trillion dollar market based on a credit-driven, not consumer driven, housing market. Do you know that when the bubble popped that houses in some areas across the u.s. were simply bulldozed. Poor people, homeless, etc… and to keep the housing market from dropping in value too much (subjectively too much based on what the Fed. and gov’t thought was too much), then they simply destroyed some houses. Therefore it was an effort to curb the demand because now with less houses, the prices of houses were thought to stabilize under such conditions. Meanwhile the housing market is priced too high. Higher than the actual market price, that’s why it was dropping to begin with. So people that couldn’t afford a house or a better house were out of luck because as the housing prices were dropping thereby making life more affordable for people, the gov’t took measures to stop housing prices to stop dropping. Thereby the housing market remains too expensive, meaning, it’s not actual market or consumer driven, it is not being allowed to drop to meet consumer demand were people will spend their money on it. It is being propped up - again.
Credit Default Swaps (CDS)
Mortgage Backed Securities (MBS)
China and it’s Empty Cities
