I told you it would happen. I’ve been telling you for years: you can’t pump money into the housing market, and keep lowering the interest rates, without creating a bubble; and eventually the bubble will burst. Water runs downhill. Eventually it reaches bottom no matter what you wish.

Fannie Mae and Freddie Mac were invented to create a housing bubble. I can’t think that those who created those government owned private companies — they used to be really profitable for their stockholders — didn’t know that pumping more money into the housing market would drive housing prices to ridiculously high levels. Surely at least some Congress critters have studied elementary economics? If you make low cost guaranteed loans restricted to investing in Quaker Oats what do you think will happen? I wonder how many Congress critters profited from the bubbles? Either directly or in big campaign contributions from those who did?

The intent of Fannie Mae and Freddie Mac was to make it easier for more Americans to own a house. A noble ambition, and one that the FHA was doing pretty well with; but FHA didn’t insure loans that looked too risky. Not good enough. There were people out there who wanted a house. They had awful jobs, and often they were minority people, and they wanted to own a house. They were tired of renting. Like the chap who is losing his house in Anaheim: he paid $480,000 for a house, but his income is about $700 a month, and now he’s facing foreclosure. Big surprise. Add enough instances of this and Fannie Mae and Freddie Mac own a trillion dollars worth of unsalable housing. Unsalable at anything like the amount loaned on it, anyway. So: something must be done.

I understand that the remedy being proposed is to pump even more money into Freddie Mac and Fannie Mae so that they will have more money to lend, and thus do something about the falling housing prices. Think about that for a while. The remedy is more of the disease that caused the problem. Maybe the water won’t reach bottom for a while. Pump in more money and let a future Congress worry about what to do.

I paid $30,000 for my house in 1968. I’ve made some improvements, and at some reasonable appreciation rate it ought to be worth perhaps ten times that. Make that twenty times what I paid. But I am told that it’s “worth” about one and a half million. Of course that does me no good: where would I live if I sold it? Meanwhile my property taxes rise every year. Fortunately Proposition 13 has kept a lid on that so I can still afford to live in my overvalued house; but in some areas, the housing bubble has been a godsend for local governments, who are really happy about that part of the situation.

The housing bubble, fueled by Fannie Mae and Freddie Mac, inflated at fabulous rates. Little two bedroom houses in our neighborhood sold for a million dollars (to be torn down). People bought houses with the intent of holding on for a year and selling out. There used to be a flock of radio advertisements for courses on how to get rich flipping houses. People were encouraged to be speculators. Loans were made to people who obviously had no means for paying them back. The bubble grew.

And every damned bit of this was predictable and predicted, but that isn’t going to stop the Congress from bailing out Fannie Mae and Freddie Mac, just as the Congress quietly changed the rules to allow Fannie Mae and Freddie Mac to treat the worst of the loans they either bought or guaranteed as if they were assets, not liabilities, and use them as the basis for even more loans until the bubble spiraled out of control.

Anyone who did not understand that pouring more and more money into the housing market while at the same time using Free Trade as a means for exporting manufacturing jobs and other traditional investment opportunities cannot work forever is too stupid to be a part of the US government in any capacity. Those who did understand it and went along with it anyway —

I have considerable sympathy for those who tried to get in to buy a house they really intended to live in, and got caught when the bubble burst. I would not be averse to finding a way to help them keep their homes. But I do not think the government has any business bailing out people who went into the market intending to flip the house and lost everything. I’m sorry they made such a terrible mistake, but it wasn’t me that did it and I don’t think I owe them any tax money.

Is there a graceful way out of this mess? Not too likely. There are some measures that the government can take to make the bursting of the housing bubble a little less horrid, but we built that bubble and pumping in more money isn’t going to do anything to help. I wish I were clever enough to come up with a scheme, but I’m not; I can only show what’s likely to happen if we keep on inflating the currency (i.e. lowering the interest rates). I have a German postage stamp: it was originally 3 pfennig for a first class letter. It was overprinted twice. The second overprint makes it worth 3 Mird Millionen Marks.

I understand that in Zimbabwe they no longer can afford the paper to print their 5 million dollar banknotes: that is, the paper is worth more than 5 million Z dollars…

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About 70 people got their money from IndyMac in Pasadena today. One hopes they’ll be a little faster in dealing with a bank run once they get used to it. Those who have accounts that aren’t FDIC insured are in trouble…

Actually it’s going to be tougher than you know. Most of IndyMac’s assets are in bundles of mortgages so complex that it’s nearly impossible to find out who owns what, and who has the right to foreclose on the house. If anyone does. If this all reminds you of the Lincoln Savings disasters we went through 20 years ago, it ought to. The didn’t deregulate fraud, but deregulation made fraud a lot easier, as buyers conspired to kite property values higher and higher, then stick the final buyer with an over valued piece of land. It’s happening in the housing market now.

And I heard a sad story: a man who put $150,000 into IndyMac; only the first $100,000 is insured. The irony is this chap was putting his money in the bank to save up for a down payment and get an actual loan. Now he’s lost a third of his stake (maybe) because the bank loaned money to people who couldn’t pay — or worse, bought packages of mortgages that contained terrible risks along with good risk mortgages, 0nly it can’t be sorted out as to which is which and who owns what?

It will get worse. Runs on banks. Collapse of the housing industry. Jobs exported forever. In Washington they are afraid of the “R” word. Me, I hope it’s only a Recession. I grew up in the Great Depression, and you don’t want to be there.

Dr. Jerry Pournelle is an American Science Fiction writer, essayist and journalist. Visit his website: http://jerrypournelle.com

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