The lack of the housing bust in... Vermont

[phej]

From the WSJ (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.):

BURLINGTON, Vt. -- In plenty of other states, Andrea Todd would have been a homeowner years ago. Here, she bought just this month -- a difference that helps explain how Vermont avoided the housing bust, and shows the possible pitfalls in President Barack Obama's plan to tighten mortgage regulation.

For the past five years, as home loans went to even Americans with poor credit and no proof of steady work, Ms. Todd couldn't get a mortgage in spite of her good credit and low debt. Vermont banks told the self-employed landscaper that her income stream was unreliable. The 32-year-old changed careers, taking a permanent job as a teacher, to boost her chances.

Vermont's strict mortgage-lending laws largely prevented the state's residents from signing the types of dubious home loans written in other markets across the country. Its 1990s legislation made mortgage lenders warn customers when their rates were relatively high, and put the brokers who arranged loans on the hook if their customers defaulted. Now, by at least one measure, the state has the lowest foreclosure rate in the U.S.

It came at a cost. The rules also kept some Vermonters like Ms. Todd from buying homes, keeping this rural corner of New England on the sidelines of the housing boom and the economic bonanza that came with it. Vermont's 10-year growth trails the national average.

So the tighter lending standards (and to whom the lenders have fiduciary duty to: the borrowers) prevented sub-prime loans from originating in Vermont. Vermont's leaders say this is a good thing, but it helped dampen economic growth in Vermont.

Is this the desired future for the financing of homes?

[RBM]

Is this the desired future for the financing of housing?

You mean home ownership, don't you ?

Sounds like a reasonable trade off to me.

[Visum]

One of the leading reasons for home ownership as a store of wealth, is the growing loss in faith for value retention in the currency. I propose risk being returned to the loan issuers and a return to sound banking instead of the current fraudulent fractional reserve system in place.

[phej]

One of the leading reasons for home ownership as a store of wealth, is the growing loss in faith for value retention in the currency. I propose risk being returned to the loan issuers and a return to sound banking instead of the current fraudulent fractional reserve system in place.

So if not a fractional reserve system, then what in its place? We could replace the money supply with gold, but considering that the first bankers were gold smiths, I doubt that switching to gold would solve anything.

[Visum]

So if not a fractional reserve system, then what in its place? We could replace the money supply with gold, but considering that the first bankers were gold smiths, I doubt that switching to gold would solve anything.

Notes, or representation can be used, but its the fractional reserve part that is fraudulent.

From wiki-


Fractional-reserve banking (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.) is the banking practice in which banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all these deposits upon demand

I’ll go over this for clarity, but recognize you may already understand it.
This is where the issue lays. It is a system where not only is our property being loaned out and at risk by the bank’s ability to return our property on demand, but also the system increases the money supply, in effect destroying our property via inflation. The property that is returned to us has been devalued. Now we are paid interest, but interest is just another form of increasing the money supply = devalue. Interest originated in Roman times when gold holders were fraudulently loaning out their holdings and not able to return it on demand. To satisfy the gold owners, the gold exchangers would pay the owners to rectify breaking the contract. Originally, the gold holders were providing a service where they received a payment for holding the gold, but with the explicit obligation to return the property at any time.
It is the ability of a bank, or even a commodity holder for that matter, to lend without having %100 reserves at all times.

[phej]

You didn't answer my question. What is the alternative? Yes, fractional reserve banking allows bankers to lend out money that's not theirs. If a "bank" is required to hold all of its reserves at 100%, then it just becomes a storehouse: account holders will be required to pay an ongoing fee to store their money. Banks serve a useful purpose in society: they match savers (which demand their money on a short term basis) with borrowers (which usually can only fulfill their debt obligation on a long term basis) by becoming investors. The fact that they create money really doesn't bother me. What bothers me is poorly managed monetary policy (independent of what "money" is). The Great Recession of 2007-2009 (and maybe 2010) is an example of monetary and fiscal policies that lead to an asset bubble in housing. How do you fix it? I dunno, but maybe Vermont's example will lead the way. Although, their example contradicts the federal government's goals for housing for all, even for those with crappy credit. (As a side note, the creation of cheap credit fueled rising house prices, so I never quite understood how the goal and what was actually done matched)

I think that your sources about the history of interest are wrong. The Code of Hammurabi (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.) (ca 1750 BC) mentions a regulation in interest and the Old Testament has a rulings against usury (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.) (certainly before the Romans). Interest is the only incentive for lending and I suspect that wherever money has formed in a society that lending (and interest) will soon follow.

[sonofone]

Go Vermont!!! That's right, I'm a Vermonter!

"Vermont's 10-year growth trails the national average."

This is somewhat misleading. Vermont has seen huge growth over the past ten years, but more concentrated in tourism and new residence who buy existing homes. As a consequence of no great "housing boom" the homes that are here have seen considerable increase in value.

[Trivani]

In the place of the fractional reserve system would be a fixed supply of money. The fractional reserve system creates boom and bust cycles in our economy. First the supply of money increases as banks begin lending out money that they don't really have. Banks continue to take on more and more risk as profits flow in from the risky behavior. Eventually the banks become insolvent, as they have recently, and the supply of money suddenly and drastically contracts. People lose their jobs and we go into a recession.

To prevent this from happening, the supply of money must be constant and fixed. Of course the supply should be allowed to grow as the population grows or we face deflation.

In place of usury, banks should only be allowed to lend money that is set aside for investing. Banks would be motivated to lend (invest) because they would be promised a portion of the profits from the investment.

[phej]

Questions...

How do you fix the money supply? Once you introduce conveniences like checks and other notes, the money supply just went up and we returned to partial fractional banking because of the float. Or if the money is gold or some other precious good, people will eventually switch to something else if the official money supply gets too small, relative to the economy. (The WSJ has a cool article / slideshow of promissory notes (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.) used during the Great Depression)
Where do banks get this money set aside for investing? If a bank is a storehouse of money instead of lending out their reserves, then where does investing money come from? From the storehouse fees? (If so, then that would take a long time to build investment capital because depositors will find the cheapest fees possible.)

[curiousgeorge01]

From the WSJ (To view links or images in this forum your post count must be 2 or greater. You currently have 0 posts.):



So the tighter lending standards (and to whom the lenders have fiduciary duty to: the borrowers) prevented sub-prime loans from originating in Vermont. Vermont's leaders say this is a good thing, but it helped dampen economic growth in Vermont.

Is this the desired future for the financing of homes?

Wow I envy this. Why is this a bad thing? It prevented foreclosures at the cost of economic growth but I would argue that's not the kind or growth that you would want. That sort of growth makes living difficult as housing costs spiral out of control and makes it more difficult for lower income folk to get affordable housing. The money is transferred from those who were fortunate to get out sooner from those who were not making the transfer somewhat inequitable. In Vermont, the housing increases are probably more stable and follows and predictable trend.

I guess it depends on how you would argue it, it probably makes it worse for most people while it benefits those who can see the trend (which isn't most people). Depending if you were on the losing or receiving end is what makes you think if its good or bad. I tend to favor what is in the benefit of most people rather than a minority.

[phej]

I never said it was good or bad. Relative to other states Vermont didn't grow as much. So, imagine it's early 2007 / late 2006 and you look at the economic growth data. You would probably say that Vermont is growing too slowly (boo on Vermont). If you look from today (Aug 2009), you would probably say that Vermont had better regulation in place (Yay for Vermont).

(Yes, I'm well aware that this decade's real estate bust was the Greater Fools kind of investing)

[curiousgeorge01]

I know I was just answering your question on whether its the desired future of financing; it depends if you gained or not.

[Visum]

I was referring to the basic roots of our modern day banking system in Roman times as I think you are referencing in post 4. Interest was paid because the storage houses could not make good on their obligations to provide the owner with their goods, at demand. Interest was issued to satisfy the storage house default and breach of contract, illegal. The problem of default is obviously skirted with the private entity, the FED, origin of the FUBARed US economy and historically certain future sovereign default by fiat records.

The base of this argument comes down to how we define “irregular deposit contract” and the “loan contract”, and to what extent property rights are transferred respectfully per contract. In an “irregular deposit contract” the fungible good could be anything, such as oil, corn, money, etc in any quantity. The storage house is allowed to mix my goods with others’ goods of the same and equal quality in return for a holding fee. Upon demand I will be returned my quantity of goods, but not necessarily the exact same barrels of oil, ears of corn, or exact dollar bills. Ownership is transferred in terms of only holding my units, as in the units are in the care of the storage house, but it is a physical impossibility to identify specifically what units I deposited. Some would even classify the ownership of the depository as only in an abstract sense.

In the loan contract, or credit, one gains possession and complete use of the loaned item. There is an exchange of a present good or service against a future good or service and usually the return is greater. Generally speaking we loan, give up our control of our property, for a return or gain such as interest.

The two contracts are different. The “irregular deposit contract” is not classified as a credit contract as there is not a good or service being exchanged for a future good or service. There is no obligation for gain, but only the return of the quantity and quality of the item or tantundem.

There is an obvious dilemma with our current financial system where the depositor of an “irregular deposit contract” has the right to withdrawal at any time, and many times is even paid interest as if the deposit is a loan contract with the bank.

Fractional reserve banking in the US, with the proposed benefits of an “irregular deposit contract” can only exist if there is a lender of last resort that can instantly create money, and null all defaults. I might add, at the expense of the irregular deposit owners as a whole. Fractional reserve banking almost completely compromises the wealth of the original depositor, AND holds him responsible for all risk taken by the banker via taxes and inflation.

Surely there is a better way, if we classify our banking system as a credit system, that supposedly benefits the final and default loaner, i.e., taxpayer. How about a system where I am not liable for the promises of others, and a system where my wealth is not piddled away by inflation? Oh, but then that would mean that the loaners would be responsible for their risks, novel idea. And, a system that does not grow the money supply via defaults being insured. Banks could exist and still match borrowers and lenders via a national system. I agree there would be a limit to the quantity of notes available, but could this be offset by increased value as proposed by Austrians? Still the problem of hoarding.. I am trying to be creative and here, and not except the norm.

Gold, yeah we can put our savings into it, but who says the government won’t steal it from us again………

It is a nasty cycle. The government wants a fractional reserve system and fiat money as it can then freely manipulate economies and wage war on demand. You mention regulation. What good is it with a fractional rsv sys? We will still have cycles, albeit at a slower rate.





Visum added to this post, 1172 minutes and 27 seconds later...


It is a nasty cycle. The government wants a fractional reserve system and fiat money as it can then freely manipulate economies and wage war on demand. You mention regulation. What good is it with a fractional rsv sys? We will still have cycles, albeit at a slower rate.

I could be wrong with the cycles being slower. It may actually be that they would be smaller, and more frequent, as the ability for economic inflation is limited. I would classify this closer to stability, if that is something to strive for in economics....

[Nameless]

I live in Vermont. I kind of wish it happened. At least we'd have cheaper houses. Everything here is too expensive.