BISCHOFF: The "US housing" is not a product whose "price" can be explained by Say's Law. The price of a house is comprised of the cost for the location on which the house sits, and the cost of the physical structure itself. The "prices" of houses did not go up, because the cost of the improvements went up. The cost of housing went up, because of the increase in location cost ...

P:This is nonsense. The housing bubble was a monetary one abetted by bad regulation. Pure and simple.

BISCHOFF: The FED dramatically increased the money supply. It deperately needed debt to monetize. Why did the FED need to increase the money supply... ??? Because, it had to meet the exponentially exploding interest debt.

P: Central banks don't need any rational to print more money. The just need excuses.

BISCHOFF: The systematic reduction of the interest rates by the FED has one purpose, and one purpose only. It is to save the banks from collapse. A reduction of the interest rate by 1/2 doubles the value of the assets on the books of the banks, while at the same time it increases the liqudation value of capital heavy businesses ... As a side comment, the "demand and supply" model to determin market prices to clear markets is way too sluggish and inaccurate. A Real Bills market and arbitrage is the process by which "prices" should be discovered.

P: Here we go again. "A Real Bills market and arbitrage is the process by which 'prices' should be discovered." There's no "should" about it. Let the market decide on what procedures are best.

PAUL: "This important corollary of Say's Law - that markets clear - is critical to understanding the moribund US housing market. In housing, perhaps more than any other good, we see the terrible consequences of government and central bank interference with market forces."

BISCHOFF: Say's Law gives you absolutely no clue to understanding the moribund US housing market. For what it is worth, Say's Law which proclaims
that "products are paid for with products", merely points out the primacy of products over services.

The "US housing" is not a product whose "price" can be explained by Say's Law. The price of a house is comprised of the cost for the location on which the house sits, and the cost of the physical structure itself. The "prices" of houses did not go up, because the cost of the improvements went up. The cost of housing went up, because of the increase in location cost which has nothing to do with Say's "products", because location (land) is not produced.
It is there by virtue of nature.

PAUL: "First, the Federal Reserve Bank relentlessly increased the money supply over the last few decades. Much of this newly created money and credit flowed from Fed member banks into the residential and commercial real estate markets, causing prices to rise dramatically prior to the housing bust of 2007."

BISCHOFF: That is true. The FED dramatically increased the money supply. It deperately needed debt to monetize. Why did the FED need to increase the money supply... ??? Because, it had to meet the exponentially exploding interest debt.

Normal congressional budget deficits to facilitate the central banking system were no longer sufficient. Therefore, Freddie and Fannie were charged to accommodate mortgage lending by the Congress. Banks never owned most of the mortgages for more than a single day, before they had sold it to Freddie or Fannie.

By 2007, the whole game had gone out of hand that as soon as a Bank in Scotland and a Bank in France ran into trouble with MBSs, the whole mortgage backed securities market started to unravel.

Hank Paulson had to save the monetary system from total collapse by talking Congress into passing TARP legislation. TARP swept up all bad mortgages and credit card debts and monetized it. When there was no more debt to be had to monetize, and the Congress wouldn't vote high enough budget deficits, the FED resorted to QEs to keep the system alive.

PAUL: "At the same time, the Fed systematically suppressed interest rates for decades. This led to tremendous malinvestment both by homebuilders and individuals, and encouraged a seedy subprime mortgage industry to make nonviable loans that would not make economic sense under market interest rates."

BISCHOFF: The systematic reduction of the interest rates by the FED has one purpose, and one purpose only. It is to save the banks from collapse. A reduction of the interest rate by 1/2 doubles the value of the assets on the books of the banks, while at the same time it increases the liqudation value of capital heavy businesses.

To believe that an interest rate decision by twelve men on the FOMC constitutes a market decision for the rate interest, is totally ridiculous. Yet, the entire interest rate SWAP derivative business is based on this very concept.

PAUL: "Congressional meddling in the mortgage market also added tremendously to the problem. Inane legislation like The Community Reinvestment Act literally forced banks to make thousands of loans to bad credit risks. Similarly, Fannie Mae and Freddie Mac put taxpayers on the hook for millions of mortgages that never would meet market underwriting criteria. And of course the real estate and homebuilder lobbies made sure mortgage interest debt (unlike most personal debt) remains tax-deductible."

BISCHOFF: Yes, Congress had to meddle. It needed to funnel debt to the FED to be monetized. Barney Frank and Chris Dodd were the legislative point men for the central banking system in charge of legislation to create debt by encouraging "real estate speculation" through "easy" loans purchased by the two GSEs.

The whole scheme can be described as two people selling each other a can of sardines back and forth. They drive the price up to $50, borrowing the money to do so. When one of the two parties refuses to buy the can of sardines at $51 the whole house of cards falls apart, and the other party is stuck with an ordinary can of sardines possibly worth a $1. The example applies to selling the location back and forth, and because "location" is completely inelastic, location "prices" are totally artificial. The house itself deteriorates due to normal wear and tear while the location "price" is driven up by speculation. Deductability of mortgage interest only encourages real estate speculation.

That's the story in the nut shell and Say's Law has no application.

As a side comment, the "demand and supply" model to determe market prices to clear markets is way too sluggish and inaccurate. A Real Bills market and arbitrage is the process by which "prices" should be discovered.

Ron, at any other time in history, we(Israel, by the seed of Joseph & including Judah(Gen. 48:16) would have either "you" or "your" son, "Rand" become our next President & save our Republic, but unfortunately, NOW it's time to pay the pipper, as they say: I'm talking about the very first, first-born blood-covenant of DEATH made 6,000 years ago, involving our first murderer & DEATH! Did I mention that it also included his MOTHER & LUCIFER, STILL the ANGEL that RULES over this world, unless you "personally" are taken out of it. P.S. Hebrew remains the ONLY SPIRITUALLY INSPIRED LANGUAGE, NOT EVEN TRUE OF GREEK, UNLESS IT CAN BE VARIFIED IN THE HEBREW(Zeph. 3:9, Acts 26:14, 1 Cor. 4:6). Did I hear & understand correctly that Obama's promise of a coming MARXIST(ANTI-CHRIST)TAKEOVER of our Republic was approved "ONLY" by our WOMEN ALONE? p.s. Welcome to Adam's world all you men out there, AGAIN: even BEFORE the 1ST murderer was born! Just saying...

In 1987, our farm went through a clearing exercise. It was this situation that made me read and research what had gone wrong. Our government offered to rewrite our 16% untenable mortgage to 9 %. However... .the underlying collateral value had dropped in half. It was when I demanded that the face value of the loan be halved to represent current value... .and it was refused... .that I realized that this was a bailout for the banks... ..not the farmer. If every homeowner in the US was to renegoiate their loan based on current value... ..problems would be reduced to bookkeeping ones. I wonder if the lawsuit started by the people in this link goes anywhere.

Click to view link

I wish the term 'too big to fail' would be thoroughly dissected. I will attempt to give it a start.

It is commonly said that if markets were allowed to clear, the entire financial system would collapse. I disagree. What would collapse, are the financial manipulators, con-artists, those who wantonly support them and the innocents who unwittingly support them. I believe or at least hope they are a minor sector of the overall economy. 'Big' meaning higher up in the pyramid, but few.

First, the unwitting exemplified by pensioners. Stupidity has its price and hard lessons learned serve as an example of what NOT to do for a better future.

Second, the wanton manifestations of greed exemplified by certain corporations like GM. Though I do not believe greed is immoral, natural economic law regulates it. Let those who overextend themselves be regulated naturally. The job losses would be temporary. Let them serve as an example of what NOT to do for a sound future.

Third, the con-artists exemplified by a minority found at the top of large investment banking houses like Goldman and at the top of governmental agencies like the Treasury, at the top of the legislative body and in the administrative office and financial advisors. Here we have culpability insolated by a blanket of deceit. These are the authors of 'too big to fail'. They deflect blame with rhetoric. Bailouts and borrowing are designed to 'ease' the pain, but to prolong it. That way the shock is minimized and the sheeple do not rise up on their hind legs.

Finally the manipulating central banks are the enablers, the lenders of last resort, the currency hijackers and the ultimate benefactors collecting world assets and resources leaving a tsunami of paper in its wake.

Well, what else can I say except 'too big to fail' really means too big to jail. Again, 'big' only means higher up the pyramid.

Reply from The Daily Bell

Very good!