Buying Gold at a vending machine in the mall

Gold to Go Vending Machine in a Florida Mall

Part 2 of a three part discussion

“Corruption”, “greed”, and “pay backs” are but some of the harsh and descriptive words which come to mind when I try to formulate an opinion on what we’ve gone through and what likely lies ahead.  Casting blame isn’t my style, and besides, as my mother always said, “It’s no use crying over spilt milk”.

The facts are that the population was encouraged to purchase real estate by banks eager to lend, themselves having been encouraged to make those loans by the federal government.

Word spread about the boom, and soon speculators were buying then flipping, which worked to stir the pot and convince first time home buyers to get in now before prices went any higher.  Banks were thrilled to lend to anyone and everyone because at the rate real estate prices were rising, what lending risk could there be.  Besides, they were sending the risky ones to the federal entities, Freddie Mac and Fannie Mae.  In addition, banks’ stockholders wanted a better return than the year before.

There was quite a boom here in Florida in the late seventies when I first entered the real estate industry.  Later as a casual observer in 2006, my thought was the bubble here would burst just as it did back then.  1979 set the condominium market here on its ear for a good fifteen years.  That’s how I thought this bubble would end.  In my wildest imagination, I didn’t expect what has followed.  Normally, price is dictated by supply and demand, but this time there was an accelerating factor pushing the demand,   an unlimited supply of new, easy money a/k/a sub-prime loans.

In October of 2008, when TARP passed, I was stunned.  Immediately, my phone was in rapid dial.  I called each of our children to make sure they realized this was probably a once in a lifetime economic event for all generations living.

A crystal ball I do not have, but recently it has increasingly concerned me that our lives as Americans may change radically, and not for the better.

It has become clear Fed Chairman Bernanke in his attempts to find a path out of this crisis is employing seemingly conflicted policies.  Earlier this year the banking industry was hoarding the bail out funds and carrying excess reserves with the Fed instead of lending money to stimulate the economy.  Not surprising given the uncertainty of real estate market values and the fact the Fed had started paying interest to the banks on those excess reserves.  Why would a bank lend at 1% when it could get 2% on its excess reserves.

The real objective of Bernanke may be to stabilize the rate level at which banks lend in today’s difficult market by establishing a false floor for lending rates.  This same illusion gives a certain amount of credibility to stabilized housing prices for at least short periods of time.  Eventually though, the increasing inventory of foreclosed properties will continue to exert downward price pressures on property values.  Demand level for loans, strengthened lending guidelines, and banks earning interest on excess reserves has the practical effect of curtailing lending, however.

Many in the market strongly believe the Fed will be unsuccessful in the tight rope walk between hyperinflation and a lengthy and deep depression.  Others are saying prayers and hoping it isn’t so.

The Girl Scout in me urges everyone to “Be Prepared” for the worst and hope for the best.  Being prepared means stocking up on staples, and either exchanging some of your money for stable currencies like the Swiss Franc or purchasing precious metals like gold and silver.  Be sure to see Part 3.

God Bless…..    Grandma Pepper

Click link if you missed Part 1

Filed under: ReflectionsYour Money