Comment: Of course it disappears!

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Michael Nystrom's picture

Of course it disappears!

You can't create something from nothing, and expect it not to be able to go back to nothing. That is illogical.

Also, concerning bank credit like mortgages, it does not seem right to say that 'credit disappears' simply because the price of houses decreases. It's not right because for every dollar held in bank capital, banks actually distribute credits worth nine dollars or more. So for every one dollar they receive in stolen money from the central bank, they give out loans worth a lot more than that.

It can all disappear. Including the additional credit they create from the original. What do you think the toxic mortgage crisis was about? Why was the Fed rushing to print? Because the banks made dumb moves and lost all that money by making bad loans.

Secondly, when the price of houses go down, the one who loses value is the house owner, not the bank.

Incorrect. If the house owner put zero down, how does he lose? Even at 20% down, he only loses 20% of the value of the house. The bank gets stuck with a worthless house. Look at Detroit as an extreme example.

When they give out mortgages, good banks make sure that they cannot lose by requiring a sufficient capital commitment from the buyer and a sufficient collateral. Bad banks just expect the state to bail them out. In both cases the only one who can lose is the house buyer. The fact that the buyer may lose money or his house does not mean that the bank suddenly becomes unable to give out loans.

"Good banks" - are there any left? Who? BOA? Citi? These pillars of the American economy are functionally bankrupt. Again - what do you think the credit crisis of 2007 - 09 all about? It was about banks making bad loans and their asset bases collapsing.

To be mean is never excusable, but there is some merit in knowing that one is; the most irreparable of vices is to do evil out of stupidity. - C.B.