Hi
I still don't understand a part of it.
Ok lets' take the $120,000 turned into $90,000 house example (by golly, are houses so cheap over there ? I am moving to you guys)
Ok so the value dropped. But the 'silly' buyer B, who took the $120,000 morgage to buy this house at $120,000 a few years back....... Didn't he PAY somebody $120,000 (former owner A)
No - the
BANK paid the guy $120,000, expecting to be paid back over 20 to 30 years.
Buyer B cannot pay his mortgage. But what about smart seller A? He got a good price at the peak of the Bubble. Where is his $$$. Why isn't all that cash in the same banks, so they still have it avaialble...
It is still available... as the mortgage amortizes. A $100,000 house isn't $100,000 - it's $2,000 a month for the next third of a century being paid to the bank!
The bank uses this income to pay their debts (your interest on deposit), and make other loans. Thus, Seller A having $120,000 in the bank doesn't help, either, because, and this is important:
Money is NOT MONEY!
A dollar bill isn't money. Money is what the dollar bill
REPRESENTS.
It's like the following stuff:
5 五 VI
All of which mean five. They are printable characters which represent the numerical value of five.
So - following so far?
Ok - the dollar you have in your hand represents [work / real property / valuable stuff] that someone gave you to repay a debt. You use that dollar to repay your debts. The people you pay use it to repay their debts, and the people they pay use it to repay theirs...
and so on and so on....
THAT is what
MONEY is. The movement of the value through the system.
In what's happening now, the banks are not being repaid in green paper over the next third of a century... they're being repaid, lump-sum, in dirt and drywall!
As they used to say, "Try taking
that to the bank."
Money is
MONEY because it's
MOBILE. You can't transfer dirt and drywall. You can't pay your debts with dirt and drywall. A company with money in that bank can't make payroll with dirt and drywall. You can't buy your groceries with dirt and drywall.
Also: Since the housing market is going down, no one wants to pay today's prices for houses because it'll be cheaper tomorrow. We're right back to why Buyer B couldn't just resell his house when he couldn't make the payments in the first place, right, but on a much grander scale.
The banks' sources of income are being whacked, but the debts they have and the debts that their depositors have still need to be paid, so the assets that are available, the liquidity, is being sucked out as the bank accrues more and more non-movable, non-money dirt and drywall.
A bank with $1,000,000,000 dollars of assets can't do
any business if $999,999,995 of it is dirt and drywall without the liquidity that the billion bucks is
supposed to engender.
That means, among other things, that your Dad can't buy that bass-boat, your sister can't get money to buy a new car, and, at the extreme end of the thing, you can't get money from your boss because the bank can't make payroll, and you can't withdraw money form the bank to buy your groceries.
Or did (on avarage) every seller A, buy a new and bigger house (which also went down in price)
I am asking this, because here in Holland many expensive houses (houses are a lot more expensive here, €500,000 is common and still quite small) are owned by elderly people. Often they sell their house and move into a smaller condo with special healthcare for seniors. So they 'downgrade' in the housing market.... And becaus emore and more people in the population are getting old it happens quite a lot.
That sort of used to be the only reason a bank would sell you a
LESS expensive house: Retirees moving into a smaller place and cashing out some equity for their retirement.
Now, elderly people may not be able to sell a house, because no one is buying. Everyone thinks that the prices for houses will be lower tomorrow than they are today, and, at the moment, they're probably right.
As such, although the house's value is appraised at €500,000, it's actual money
worth is
ZERO because it can't
GO anywhere.
The only way they'll get someone to buy that €500,000 house is to price it low enough to convince someone that the price is low enough that they will have gotten reasonable use from it before they sell it again to make up for the money they will lose selling it.
There goes your €500,000 house, and at bargain-basement prices, and there slips away the housing market index another point, making it so the next house seller has to price even lower.
It may take a while for things to stabilize again. During that time, bank assets will devalue and liquidity will shrink. As liquidity shrinks, it will get harder and harder to do business, and business will start to default, so more and more liquidity will be replaced by non-liquid... mmm... not dirt and drywall, this time... ah.. bricks and mortar (oh - yeah - the high-finance guys even call businesses with real holdings, 'brick and mortar').
When the money stops moving, the Money stops right with it. The banks keep the money moving with cash on hand, or liquidity. When the liquidity drys up, the banks can't do business. When the banks can't do business, pretty much no one else can, either.
Welcome to the 21
st Century. I know
I'm going to hate it.
[ETA] Have I mentioned that I almost flunked Economics? I finally got the hang of it when my the tutor I hired explained things in terms of simple-recursive and chain-recursive functions and local and global variables. I am
SUCH a geek. [/ETA]
[ETA] I mean that you can't transfer dirt and drywall
now. Banks used to bundle mortgages together and re-sell them to stimulate liquidity, but no one will buy that $100,000 mortgage, for instance, that's backed by only $90,000 worth of assets. Another source of liquidity dried up. [/ETA]
