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by datadata
1310 days ago
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> The Fed printed money to prop up the price of derivatives, not the price of house. I'm not sure your point here. Derivatives absolutely are a driver on the price of the underlying assets. Derivatives are what inflated the housing bubble prior to 2008. I generally agree with you that homes have an intrinsic value, and that currencies do not necessarily have that. But that intrinsic value of homes was probably around the bottom of the 2008 housing market, not the top. On either side of that, home values exceeded the fundamental value due do manipulation or excessive leverage. In my mental model, fundamental value merely establishes a price "floor" of a market, but beyond this price floor every market is subject to mania and bubbles. For housing, the fundamental floor is non zero, for crypto, you could argue that it is zero. > The only reason it's price would go up is people speculating that someone else will want to speculate on it in the future, and will pay a premium to do so. This is true for housing also. Having a intrinsic value does not mean that housing prices should be expected to go up forever. As a clear counter example, deflationary goods like computers have a clear intrinsic value, but are not a good investment as they will almost certainly lose value. |
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Yes derivatives are a big part of what inflated the bubble prior to 2008, but the fed purchasing them didn't do anything to maintain home prices.
The combination of (ARMs + low interest rates) and lenders being able to immediately flip mortgages to other to be combined in CDOs and other MBS derivates inflated housing. Lenders could make loans that they knew borrowers could not repay, but because it would be off their books before that time hit they continued to make them. Derivatives inflated the bubble.
But as rates continued to rise, ARMs began to reset, and buyers at the new prices dried up, prices began to crash and people began to walk away from homes. This immediately dropped home values and caused MBSes to devalue quickly. Demand for MBSes dropped immediately. Lenders stopped making loans because they realized they could no longer flip to loans to others to securitize them. As nobody wanted to buy a MBS now. This dried up the demand side, plus foreclosures added to supply side.
The fed stepped in and began buying close to worthless MBS for way above value not because of any impact on the housing market (overall MBS demand was still enormously down), but because they were buying them above their value to prop up the market so financial companies could still price them to "market" on their books and (via façade) maintain their capital requirements. They also purchased them to help inject capital into the markets and take more MBS off their book. The fed purchased these to prop up the financial system - it had nothing to do with home prices and had little impact on home prices. Lenders stopped pushing unviable loans to borrowers because they now held the risk. And they would hold the risk regardless.
The fed didn't prop up the housing market in 2008, they propped up the financial markets because so many people tried to get rich quick off mortgage backed securities and the bubble burst.
The bubble is now bursting in crypto. As you said, the floor for crypto (with little to no intrinsic value) is zero. The only question is how close to it's intrinsic value will it fall.
Wall St. pushed hard to keep MBSes unregulated, they formed a bubble and then fell back to close to their intrinsic value. Their intrinsic value was maybe 30% off of their peak value. (Maybe a bit lower, but due to the illiquid nature of housing the market never fully fell to it). So now crypto also unregulated has pushed a bubble, how far does it have to fall to hit its intrinsic value?