Hope you had a Merry Christmas for all the right reasons.

In the pursuit of getting everything that we need, we’ve all been asleep for the past several years working to live and living life with faith that our elected officials were taking care of our best interests.

Obviously, they were not and you seriously have to wonder if all of the “bailout” orchestration taking place by the exact same people who got us here in the first place is just the latest cover up for what some people would call the greatest Ponzi scheme to ever take place. Ponzi schemes work great until the end when people start losing money and questions start being asked. When everything is going great.. we just tend to go along with no questions asked.

Why is Real Estate in such a Mess?

From the Austrian Business Cycle Theory:

According to the theory, the business cycle unfolds in the following way. Low interest rates tend to stimulate borrowing from the banking system. This expansion of credit causes an expansion of the supply of money, through the money creation process in a fractional reserve banking system. This in turn leads to an unsustainable “monetary boom” during which the “artificially stimulated” borrowing seeks out diminishing investment opportunities. This boom results in widespread malinvestments, causing capital resources to be misallocated into areas that would not attract investment if the money supply remained stable. A correction or “credit crunch“ – commonly called a “recession” or “bust” – occurs when credit creation cannot be sustained. Then the money supply suddenly and sharply contracts when markets finally “clear”, causing resources to be reallocated back towards more efficient uses. The main proponents of the Austrian business cycle theory historically were Ludwig von Mises and Friedrich Hayek, both of whom predicted the Great Depression.

According to the theory, a sustained period of low interest rates and excessive credit creation results in a volatile and unstable imbalance between saving and investment.

Now… go to this link and take an hour out of your day to listen and learn about The Giant Pool of Money.  (Click and listen to the “Full Episode” that you can find on the left hand side under the picture of the dollar bill.) You’ll see the relationship to lending practices and what this had to do with home prices.

At the beginning of the year back in February, I had a reporter from Bloomberg contact me with some questions about real estate in Las Vegas and how people were changing their spending habits due to falling Las Vegas real estate prices that you can read about with my article on the Real Estate Solution to Improving the Economy. Some of the opinions in that article have changed since new things have come to light including the great podcast given above but the overall message to that reporter was:

Massive wealth was made with the run up of real estate prices, homeowners refinanced, spent more and money flowed through the economy like there was no tomorrow. (Face it, somebody made money when somebody bought a home in 2005 and 2006. The money did not just disappear — it went somewhere.)

This was created by cheap credit and lax lending standards with the pushing of the “American Dream” where everybody should own a home and renting became a dirty word. For some reason, owning a home changed from being a privilege created from hard work and saving for a down payment to an entitlement. Throw in all of the mortgage fraud that took place and some practices by new home builders and you have the perfect recipe for disaster.

Regardless… it’s real estate history now.

When the bailouts started, the big question by some of the more savvy economists that I follow who predicted this mess would happen years ago began to ask the question of where is it going to end? Everybody’s hands are going to start being held out to make up for the short falls of decreased revenues when the cheap and easy money stopped flowing. Banks, Insurance companies, Credit Card companies, the Auto Industry and now Commericial Real Estate Groups are asking for $200 Billion.

As the marketing continues to take place as to why they need the money… I would personally have more respect for the CEO’s of these same companies if they would just come out and say they screwed up by getting into a bunch of debt and they need the taxpayers money just to pay their bills to stay open instead of trying to make it sound like we need to give them money to make it all feel better.

Honestly, that would create much less confusion then what is being created today with people who think that the magic pill is a few trillion dollars being printed up somewhere and this is going to magically turn around all of the ills that have been created. When spending outpaces earnings, the money runs out eventually. Much like when money stops flowing into a Ponzi scheme somebody ends up footing the bill and it generally ends up being by people who have no clue of what took place to begin with.

Hopefully you took the time to at least listen to the podcast which will certainly enlighten you as to how the giant pool of money had an effect on real estate and eventually the economy. You can then certainly form your own opinion about what happens when wealth is created by credit and what happens when the credit runs out.

In case you missed it, here is Santa Claus with his recent plea for a $25 Billion dollar bailout. While humerous and it might seem ridiculous, replace Santa Claus with the CEO of a major corporation who rode the wave of massive earnings created by credit and it’s really no different.

Paul Francis, CRS
Las Vegas Real Estate
702.592.3058

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