“The problem, of course, is that the assumption that this asset would maintain or even increase its value over the life of the loan was incorrect.”
Exactly, and the difference between the assumed value and the actual value of the asset represents money that “disappears” - this is the point I’ve been trying to make to Soliton. It most certainly is not a zero-sum game.
The money that “disappears” has a great economic impact - and not just on the former holder of the mortgage - multiply times a million or two, and you get real money disappearing!
RFEngineer: “The money that “disappears” has a great economic impact - and not just on the former holder of the mortgage - multiply times a million or two, and you get real money disappearing!”
The money doesn’t disappear. Let’s say I take out a $500K mortgage on a house. The seller gets $500K from my lender (who gets the $500K from owners/investors). Total cash involved is $500K. No actual money is gained or lost. If the house subsequently drops to $350K, it’s irrelevant so long as I honor my debt. I will still pay the bank $500K plus amortized interest (approximately $1.5 million if I pay off the loan). If I default, the bank loses the difference between the loan and the amount it can recover from foreclosure, or $150K in this case. However, I’m still liable for the difference, unless (I think) I declare bankruptcy, and the original owner still has the $500K. Either way, money was neither created or destroyed in the process.
Another example, let’s say I buy stock at $10 a share. The seller pockets that $10. If I subsequently sell the stock for $5 a share, I have a loss of $5, but that $5 was transferred to the original owner. It didn’t simply vanish. If I sell the stock for $20, the new owner transferred the extra $10 to me. Again, it didn’t actually create or destroy money. It simply moved money from one person to another. Short of the federal government creating more dollars, no new dollars enter the market.
It really doesn’t matter if a stock I purchased for $10 is presently priced at $1 or $1000. Until I actually sell it, I haven’t gained or lost anything.
Do you guys read your own posts? The difference between assumed value and actual value is simply a faulty assumption, not the loss of real money. Edie Murphy assumed that the prostitute he picked up was a woman. When he looked under the skirt and there was a winky under there, didn't mean that the universe was suddenly bereft of one bagina. He made a mistaken assumption.
For money to be truly "lost" it must be destroyed. Otherwise it just moves from one person/ entity to another.