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Where Did All the Money Go?

By: Steve Johnson

3/20/2008 - 20 Comments

Last year the world was about 7 trillion dollars richer. Over the last six months, the worldwide stock market capitalization has been reduces by about $5 trillion, while the residential housing value in the United States has lost about $2 trillion.

Reference Article: The Supply Theory of Money is Simple Enough

Everyone is feeling the pinch and saying to themselves; where did all the money go? The money went back to where it came from – nowhere.  You see the Fed created virtual money by lowering interest rates during the housing boom – and every virtual dollar was leveraged (or borrowed against) and loaned out by up to 50 times. 

Reference Article: Why the Rich are Getting Poorer

Virtual Money

The low interest rates from 2003-3005 lowered mortgage payments, mading it possible for millions of people to afford a home of their own.  As more and more people bought homes, the value of all homes went way up – in some places by three times their value. Then, large banks created easy lending standards to let even more people purchase a home and with no money down. The large banks also let people take millions in home equity loans to spend on consumer products that have no resale value. 

The large banking firms had huge financial incentives to sell more homes, because home equity was rated by investment rating agencies like S&P with triple-A.  That meant that the loans could be used as collateral to borrow against or sold around the world as many of them were.  Many loans were borrowed at 50 times their value and invested in other things.  A $200 thousand home loan could be used to borrow $10 million and put into other investments.  This virtual money was how the Wall Street financial firms were able to produce huge gains for many years.

The housing market collapse has been devastating to these large banks that were heavily leveraged in the real estate market – like Bear Stearns who was just sold yesterday for less than their building is worth.  More banks are likely to follow and the foreign banks who bought home equity loans, which don’t have the transparency regulations that we do, have yet to come clean – because of the high risks of triggering a bank run.

America has not yet come to grips with the reality that the economy of the housing boom was a phony.  We were not really as rich as we thought we were.  To make matters worse, we spend a lot of money that wasn’t ours and now we have to pay it back.  It could take years for the economy to adjust and for us to realize what just happen.

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Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worse

In discussions of today's economic meltdown and what to do about it, the Federal Reserve is a stealth helicopter: it never shows up on the radar. With the exception of a few esoteric specialists and those Ron Paul Revolutionaries who burst into chants of "Abolish the Fed!" Historian Thomas Woods notes in this important book, the Federal Reserve bears a large part of the blame for the mess we're in. In the first part of "Meltdown," Woods shows how both in theory and in practice, Fed policy fueled an artificial boom and is now leading us to a much larger meltdown.

The Case Against the Fed

This book, written by Murray Rothbard, an economist and historian of fairly well known repute, is a scathing attack on not only the Federal Reserve, but the interests that created this institution. Rothbard explains how the Federal Reserve is the true source in the destruction of wealth, which has led to the destruction of the middle class and continues to sift money into the hands of the wealthiest.

Crash Proof

Peter Schiff has predicted the economic hardship more accurately then any other economist in the world in this book. Everything from the housing crash to the credit crunch to the stock market. Peter has a plan to help you servive the crash. Peter explains why the Wall Street investment firms are still trying to sell you stocks, and was the house prices are likely to continue to decline for years to come.

The Revolution: A Manifesto

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