Flipping Real Estate

Debt is a necessary part of economic life. Without it, families would never get a mortgage, and new businesses would never get a startup loan. Interest payments on debt are really just the cost of 'renting' money.

Everyone carries debt. Households, businesses and governments. Every corporation that floats a new bond issue is creating additional debt. Making payments on a mortgage or loan is just another form of paying rent.

But events initially triggered by the dot-com market crash eventually create conditions that favor home-buying, with interest rates near zero. What follows is a housing 'bubble,' which is echoed worldwide. Then chaos.
World debt bomb, 2000s map

  Road to Ruin
The dot-com crash causes a brief, but fairly deep recession, and the Fed slashes interest rates to 1% (center chart). Mortgage rates are cut in half, which stimulates home-buying, and causes home prices to surge (right chart). Soon, even ordinary hairdressers are taking out mortgages on multiple houses, which they intend to 'flip' by selling a little later, for a quick profit.

Global debt meltdown, 2010s map

  Financial Contagion
Meanwhile, foreign bankers have been following the lead set by the US, slashing interest rates and goosing housing. All the big economies now have housing bubbles, and even bankers are becoming gullible. Banks that get farthest ahead of the curve, such as those in Iceland, are in deep trouble. The panic is now global. In America, the Treasury secretary quickly puts together a truly monster bailout package, with an eye-watering price tag.


Lehman Brothers, Big Bank bailout, 2008

  Get-out-of-jail-free
The crisis subsides quickly, as the country's top banks accept a bailout from the US government that totals $700 billion. Congress follows with an even bigger stimulus package. The country is initially stunned by the price tag, but the next shoe never drops. Instead, the smoke clears quickly, as the Fed pushes interest rates all the way down to zero. This defies logic, implying that the cost of renting money is also now zero. Money is essentially free, and America is now hooked on easy money.