The Stick, the Carrot, and The Men Behind the Curtain

by Brian Brady

Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL

Author website

Monday, I talked about how real estate is better described as a store of value rather than an investment, referencing the work Reason’s Anthony Randazzo published.  Randazzo really hit it out of the park because he showed, without a doubt, how the residential real estate bubble started right after 1992.  Look at the second chart (Case-Shiller Real Housing Price Index).  That chart shows the adjusted for inflation index.  It looks like an EKG after a jolt from defibrillator paddles.  Every curious person would want to know what those defibrillator paddles were.:

Only once the so-called 1992 Government-Sponsored Enterprise (GSE) Safety and Soundness Act opened up the floodgates of federal subsidies, later to be caffeinated by the Federal Reserve’s loose monetary policy in the early 2000s, did prices double nationally.

ZAP!!! The 1992 Government-Sponsored Enterprise (GSE) Safety and Soundness Act which turned out to be an oxymoron.

One commenter didn’t buy the results of the EKG and said:

Seems to me that America has had a succession of bubbles, market manipulations and public speculations since the mid 80s. Gold/Silver in the mid 80s, the Saving & Loan scams later, then the tech stock mania, then the real estate bubble and now we’re seeing gold/silver mania again as well as two recent bouts of crude oil speculation.

And these things were caused by activist government planning? No, these things were caused by BIG, BIG money jumping from place to place and “making the market”.

I asked a leading question:

What makes it “jump”?

I should have pointed out that there was a commodities bubble in the late 70s (remember the odd and even days at the pump?) but, let’s add that 70’s commodities bubble, to the many asset bubbles cited by the commenter, and ask “Is that normal?” and, if it isn’t (by the way, it isn’t normal), we must wonder, did anything happen in the 1970’s which would cause money to move quickly in and out of asset classes?  Isn’t there some asset standard to which our dollar could be pegged?

The answer is like a bar of gold, hidden in a big, steaming pile of off-balance sheet financing: Bretton Woods.

The U.S. created fiat money which means we poofed the value of the dollar from thin air.  Actually, we trusted a very powerful man, to manage this nation’s money supply as if there was an underlying reserve.  We gave the man behind a curtain, a stick and a carrot, and said “go get ’em Art, Paul, Alan, Ben!”  The men behind those curtains started dangling carrots and beating with sticks (desperately, I might add) until they could find “sectors” of the economy to inflate (in hopes of pulling the rest of the economy along for the ride.  When the men behind the curtain couldn’t pull the rest of the economy along, they channeled Lord Keynes, through their buddies in DC, and tried to “boost aggregate demand“.

This isn’t a “conspiracy theory”, promulgated by evildoers committed to a New World Order, it was a farce, a scam, a Ponzi scheme, enacted by well-intentioned men with the hubris that they were more powerful than what Adam Smith described as “The Invisible Hand”.  Men who considered themselves…God-like.

What makes it jump?

Big, BIG Money jumps to whichever asset bubble it’s being led to be it by carrot or stick.  To wit:

Today, we’re throwing back the curtain and finding out the results of the arrogant shenanigans:

A newly-released study from the Congressional Research Service bolsters claims that the nation’s largest banks profited off the Federal Reserve’s financial crisis-era programs by borrowing cash for next to nothing, then lending it back to the federal government at substantially higher rates.

Duh!  I told you this would happen two years ago when I pointed out that the BawldGuy axiom (Lenders Lend) was, for the first time, false:

The “government option” makes it impossible for private mortgage financing to make a profit. Certain banks received TARP funds, at a ridiculously low carrying cost (like .25%), and lend that money out, risk-free, at 5.0%.  That’s an awfully FAT profit for a virtually risk-free transaction.  That may sound good to you but it tells me that we are dissuading private lenders from entering a market which so sorely needs them.

If you aren’t having this conversation, with the poor victims of this Ponzi scheme (your underwater clients), you are a hustler, a salesman, a full-fledged, mindless drone, hiding behind your paid-up NAR dues.  If you’re not having this conversation, with would-be home buyers, you are a huckster, a salesman, a debt-pushing pimp, hiding behind your paid-up dues to the welfare queens at the MBAA.

You are not a professional, regardless of the pin you wear on your lapel.

Stand up for your clients !  Eat that carrot, break that stick, and expose the men, hiding behind curtains, for what they are; home wreckers.  Tell your clients how dangerous their actions were so that they have full disclosure about the future of real estate.  It’s still bright but your clients need to know how this mess happened so that it never happens to them again.

Primum non nocere.