Charles Hugh Smith: Why the Government Is Desperately Trying to Inflate a New Housing Bubble | Economy |

The Federal government and Federal Reserve are trying to inflate another housing bubble to save the "too big to fail" banks from a richly deserved day of reckoning.

If we want to understand why the U.S. government is doing its best to inflate another housing bubble, we must start with the Devil's Pact partnership of the government and the "too big to fail" banks. Simply put, the TBTF banks would not exist without the Federal Reserve and Federal government bailouts, subsidies and protection from transparent marked-to-market pricing of the banks' collateral and risk. The basis if this partnership is simple: the banks' enormous profits and financial power have enabled them to capture the regulatory machinery of the government (the Central State) and the political machinery controlled by its elected officials. To understand the true meaning of the housing bubble, we need to understand how banks reap outsized profits. In classic capitalism, banks earn profits by maximizing the allocation of capital. In practical terms, this means lending money to low-risk, high-growth, high profit-margin enterprises, and avoiding lending to high-risk, low-margin enterprises. In the industrial era, banks reaped profits by funding large, centralized industrial corporations. In the post-industrial economy, banks began skimming huge profits from credit cards and other consumer loans. Mortgages remained a low-risk, low-yield business that operated more like a utility than an investment bank. ...

Via Hal