Understanding Fantasy Financing
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Understanding Fantasy Financing

This article is a simplification of what I am calling fantasy financing. It is written for the lay person, not the accountant or economist. It is simple, straightforward and should give an understanding as to what caused the financial meltdown, recession, and how one must properly value and protect their assets.

To place a proper value on anything one should have a licensed or trained Valuator who has both feet planted firmly in reality.   This is necessary to avoid insanely inflated values  on items which will not gain 70% of that price.  

I begin with this dire warning as many of you know of homes which were valued at 200k and mortgaged at 100K and on a forced sale net $55K, because no one will pay over that for that property.

Periodically, insanity takes over the market and prices seem to be multiplied by 4 and everyone thinks they are millionaires  until they try to sell.   

The first thing to comprehend is real value.  One can do this by pretending to sell their house and see what the offers look like.  Clearly, if five people come to view your house and the most any will pay is 55K then where the lending agency got its figure must be a hat.

What happened in America is that these ridiculously high figures were mooted, people borrowed and had difficulty paying back and when the property was foreclosed, the lending agencies could not get more than one quarter of their money.

This is an example of fantasy financing.  Many people took advantage of this.  They knew their houses would not net 100k but borrowed the sum and walked away.  Lending agencies, so certain they couldn’t lose, lost big time.

‘On Paper’ one might have thought that loaning 100k on a house ‘worth’ 200k was a sure bet.  But as you can see, it was a certain  loss.

This kind of fantasy financing pervaded the Stock Market and allowed people like Bernie Madden to run a Ponzi.  Persons who had solid investments paying small interest because that small interest was all that could be justified were shunned.  Those who had ridiculous schemes which paid so much per cent per month fleeced their customers to pay returns to new customers who would reinvest and their money pay more suckers.

The overly enthusiastic values placed on many commodities was insane, and anyone who could do simple math had to, if they bothered to investigate, appreciate that the only way these items could hold that value would be if every single one of them sold for more than the market would bear.  

The influx of cheap Chinese goods, made in factories which American’s placed off shore and were subsequently taken over by the Chinese, produced items so much cheaper that Third World markets which had once been almost completely American or English were now Chinese.

In almost every Third World country the appliances sold are made in China.  The cars are from Japan or Korea.   American products are rare.  They are often twice the price of the Chinese item.

Hence, no longer could America or other European nations think to dump the products that do not sell in local markets on foreign soil.  

This, of course, caused a contraction in manufacturing in America, with the subsequent loss of jobs.   And this led to the sudden failure of the housing market where the house valued at 200K and mortgaged for 100K is sold for 55K.

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