Sunday, February 17, 2013

Fictitious Capital - American HGTV Style

Fictitious capital is an old Marx concept used in his many attacks on the economic system of the 19th century that he needed to smear in order to install his system of rule. Fictitious capital pops up in bubbles, and formerly had been confined to speculator markets, banks and what not. Part of the problem of our current mess is just how widespread the credit bubble was and how big the bubble was blown. Through the process of securitization of home mortgages, sliced tranches of CDOs, derivatives, transnational sales of fixed income securities, and countless financial innovation in the last 25 years, the financial system reached a point where simple psychology and human behavior of common people created our mess. Fictitious capital in our era is illusory wealth that does not exist except in the coding of banks and the minds of the little people. Here it is in a nutshell.

Sequence in any home in an area that experienced a property bubble after 2000

Husband: "Jeez, the Hendersons sold their house for $350,000. Smith sold theirs in the divorce settlement for $300,000 a couple months ago. Wasn't ours appraised for $200,000 when we used the HELOC in '97 for the furnace?"

Wife: "Yes, and our home is the same size, plus we added those chic, granite counter tops that no one else has in the subdivision after I saw them in my Martha Stewart mag. Our house better be worth what their homes are worth."

After a 15 minute phone call to bank...

Husband: "Honey, I refinanced at 5% + cashed out $100,000 of our money. Vegas baby!"

Wife: "That's good, right?", husband bulges eyes + nods, "OMG! I can update my wardrobe!"

Multiply that conversation by millions.

That equity bump from the neighbors selling inflated assets was created out of thin air. No one is really richer. There was no capital or deferred spending that created the investment. This was phony money from Greenspan's credit bubble which was misallocated by banks to consumption. The modern Housing ATM concept. Fictitious capital turned into real debt. Today, the debt still exists but the capital evaporated. By hook or by crook, more deleveraging is needed.

Spot the historic bubble.

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