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Nothing Has Been The Same Since The Housing Bubble Burst

housing bubble
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EDITOR'S NOTE: While most people blame the U.S.’s current economic situation solely on the pandemic, Confounded Interest writes that you can also trace some of the problems all the way back to the housing bubble bursting in the 2008 financial crisis. The author notes that this is when the Fed’s power grab started, with “bank bailouts (TARP) and banking legislation (Dodd-Frank).” The Fed’s power increased even more during the pandemic, leading to “a horrid decline in money velocity (the ability of printing money to increase economic growth … or GDP).” Going back to the Clinton administration, Confounded Interest shows how the government making homeownership easier led to the monetary policy debacle we have today. In summation, the author tells readers, “Be careful of government strategies to make housing more ‘affordable’ because they seem to make housing more expensive and can help crash the financial system.”

I have written numerous times about nothing has been the same since the housing bubble burst and ensuing financial crisis of 2008. The crisis led to bank bailouts (TARP) and banking legislation (Dodd-Frank) giving The Federal Reserve even more power. And then the COVID lockdowns led to even MORE power for The Fed. And a horrid decline in money velocity (the ability of printing money to increase economic growth … or GDP).

But let’s take one step backwards. One the causes of the housing bubble that burst was President Clinton’s infamous National Homeownership Strategy that encouraged “partners” with the Federal government to soften underwriting standards for mortgage lending, particularly for minority households. The intent was to increase the homeownership rate in the US and it worked! Too well. Along with increasing the homeownership rate came rising home prices, culminating with home price growth reaching 14.5% YoY in September 2005. Only to start slowing to a crash.

Photo: Confounded Interest

Of course, the housing bubble was associated with no/low documentation and subprime mortgage lending. But the relaxing of underwriting standards by the National Homeownership Strategy helped fuel the no/low doc and subprime lending crisis. But weakening underwriting standards to increase homeownership rates is a dangerous strategy.

Photo: Confounded Interest

Note the surge in M1 Money Velocity (GDP/M1) starting in 1994. M1 Velocity grew until Q4 2007, then crashed along with home prices. The second and more sudden crash in M1 Velocity occurred with the COVID outbreak in March 2020 and the ensuing economic lockdowns and the intervention of The Federal Reserve in terms of money printing. M1 Money surged 173% from October 2008 to February 2020 and then another 369% from March 2020 to today. THAT is a Fed Storm Surge!!

Photo: Confounded Interest

M2, the broader definition of money, has not grown as rapidly as M1, but it still grew at an alarming rate. Atlanta Fed President Raphael Bostic blamed inflation on COVID but not The Fed’s insane money printing or government lockdowns. C’mon man!

Photo: Confounded Interest

Finally, the banking crisis (and TARP bailouts) along with COVID have made consumer purchasing power of King Dollar even worse.

housing bubble burst

Photo: Confounded Interest

Be careful of government strategies to make housing more “affordable” because they seem to make housing more expensive and can help crash the financial system.

housing bubble burst

Photo: Confounded Interest

Originally posted on Confounded Interest.

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