Rescession - The Real Estate Co-relation

The whole world seems to be fighting with an invisible enemy these days. One, which refuses to die down and retaliates as an essential example of Newton's Third Law of Motion. The governments world over are trying to figure out strategies to combat this enemy, yet to no rather negative effect. This enemy ain't murdering innocents. Yet there is pain, suffering, fear and uncertainty. Thats what the RECESSION has resulted and make no mistake, its getting worst.

Most of us point our finger to the US sub-prime mortgages, much in demand because of the Real Estate bubble. Here's what i think about the co-relation between Real Estate and Global Economic downturn.

Lets assume 3 inhabitants - A, B and C on a remote island. A and B have 1 coin each and C owns a piece of land.

  • Human wants are more than needs. A buys the land from C for 1 coin, all fine, just an exchange.
    Situation: A- Land, B-1 Coin and C-1 Coin; Price of land- 1 Coin

  • Tempted by the uniqueness of land (2 Coins but land only 1), B buys the land from A for 2 coins, borrowing another coin from C, introduction of credit.
    Situation: A-2 Coins, B- Land and a debt of 1 coin from C, C- 1 coin lended to B; Price of Land: 2 Coins

  • Lured by the trading of land by fellow co-inhabitants, C decides to re-buy the land from B for asked price of 3 Coins. Already lended 1 Coin to B, C borrows 2 coins from A to pay-pff the rest. Still fine, no shortage of phsical money.
    Situations: A- Lended 2 Coins to C, B- 2 Coins, C- Land and debt of 2 Coins from A; Price of land: 3 Coins

  • A decides to realise its loan by exchanging land with C. C asks for 4 coins as the price of land. A borrows 2 Coins from B and acquires the land from C. Still better, rotation of money.
    Situation: A- Land and debt of 2 coins from B, B- 2 coins lended to A, C- 2 Coins; Price of land- 4 coins.

  • Fearful of his loan going bad B re-buys the land from A for a price of 5 Coins- 2 borrowed from C + 2 against loan and 1 DUE. Physical money shortage.
    Situation: A-2 Coins and 1 due from B, B- Land, 2 Coins borrowed from C and 1 coin due to A, C- 2 Coins lended to B; Price of land- 5 Coins

The Price of land when exceeded more than 1 Coin, resulted in introduction of credit, more than 2- increased credit, more than 5- shortage of physical money. All of it gets worse from here, till a point of realisation that no more money exists which will than led to panic selling, resulting in the reduction of price of land. The land will ultimately fall down to its base price, 1 coin, but the credit will still exist. Implications will be bitter fighting for the realisation of borrowings, ultimately leading to war like situations. The disaster could have been avoided if each of them had realised how much money the others had, which would have laid to rest the uncalculated lendings and borrowings.

Its the banks who are at fault, because they got to assert how much money can the borrower pay back. Whatever may be, we are heading for the 3rd World War.