By Richard E Walrath

There was great fear that the United States was going to follow Japan into a period of deflation and recession – maybe even a depression. Interest rates were cut to zero while hundreds of billions of dollars were added to the National Debt through tax-cuts for the rich and Bid Business.

As you might expect, this led to speculation in housing – “let’s flip it” became a well known term in the housing industry and millions of people who couldn’t afford to pay their rent bought a house.

Those who own homes will see the value of their house go down. Why? There is now an oversupply due to overbuilding when interest rates were lower and people bought homes with little or nothing down with the idea of flipping the house as soon as possible.

The losers will be:

• Those who are caught with the homes they bought for flipping – you buy the house with no intention of ever living in it, add a kitchen, spruce up the bathroom, and flip it [sell for a profit]. This goes on all the time, but there were more flippers than buyers this time because it cost almost nothing to own a house while you were waiting to sell it. You could buy a house with no money down, no income, no job, and no assets. Those who are caught with the homes they bought for flipping purposes are not going to be able to find buyers. They are going to lose whatever they have invested plus whatever mortgage payments they make. It may be cheaper for them to just walk away.

• Those who bought homes with variable rate mortgages, ARM’s, are having trouble making payments. Many did not even realize they had such a mortgage. Millions are going to lose their homes.

• Beyond this are the murky many – the banks and the hedge funds which ended up with mortgages which were used as collateral for junk bonds which ended up as holdings by French and German and English banks, not to mention those in this country.

Banks are funny places. If you go there and need money-theirs, not yours – you’ll have a hard time getting it unless you can convince your not-so-friendly banker that you don’t need it. Your needs don’t count for much.

But when the banks need money, there’s an indefinite supply of it. When it comes to saving the rich from losing money, no expense will be spared. Damn the torpedoes, full speed ahead. This will make the savings and loan bail-out look like a Girl Scout Cookie Sale.

It gets worse just at the time that the National Debt limit has to be raised again. This was going to be a time for the Democrats to make some hay. With things as bad as they are, it’s going to be interesting to see how this will be handled.

Congress may have to return early to pass legislation to raise it. And then you’ve got all those margin accounts out there with people getting calls to come up with some real money because their stock is down.

Donald Trump’s advice is to just go back and make another deal with whoever holds the mortgage. He says that you’ll get a better deal this time than the one you had before.

Don’t walk away from it, he said. Just go make another deal. The last thing the bank wants is your house. What are they going to do with it? They can’t find anybody to buy it.

We are now engaged in a great battle to see how long this country can endure. We may get out of this yet. Alan Greenspan had some close scrapes, but he was lucky.

Somehow, I don’t think Ben Bernanke is going to be so lucky.

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