Posted by
jarhead on Wednesday, February 25, 2009 1:15:03 AM
The market keeps plummeting; the housing market keeps plummeting; public confidence is plummeting. The solutions?
Looks like more of the same-that would be injecting liquidity into the banks and giving the auto industry billions in bail out. Why?
Because the folks are NOT borrowing money to buy cars, refinancing homes, remodeling homes or buying new homes. Why?
Because their 401Ks are going down the toilet and their house price is plummeting. Why is that happening?
One might well ask, were one not too myopic, what started all this in the first place and could fixing that help? Gee-what a thought!
This all got started because a bunch of politicians, Clinton, Rubin and Graham pricipal among them (bi-paritsan), decided that home ownership should be expanded. Great intentions and if you could hold prices of homes at 1998 levels and do a reasonable job of vetting the borrower you might get a few more folks into homes. But as with all things founded in good intentions inside the beltway we are suffering unintended consequences.
You see there is this thing called FAS157, the infamous 'mark to market' accounting rule that had all financial institutions revalue, every quarter, their loan portfolios based on current market activity. The net effect is that many lending institutions are stuck with portfolios of loans that are at or below 25% for original value. Some are bandrupt, some are gone and some got federal money to stay in business.
Net effect-cash flow is steady and on plan for those still in business, but for lending purposes they don't have the assets to lend by law. Well you might ask-why don't these lenders work with their loanees to resolve the problem??
If you still get the same income regardless of loan value AND if you are getting Federal bucks to underwrite your future loans-why would you reduce cash flow by rewriting those current loans that might take a dump in the next 2-3 years? In any one year it is probably not too many, most of these gullible jerks will pay as long as they can - at the current level- and when they don't you can either resell or get federal help to rewrite the loan? Net result??
That home load held hostage will eventually go under-and the neighborhood pricing will go down further. And that means the real estate market will stay in the tank. That means the stock market, dependant on consumer confidence, will stay in the dumper too. Just like what's happening today. So we can continue to pretend that the problem is banks don't have enough money to lend but if there are no borrowers all the liquidity in the world is worthless-unless you lend irressponsibly-and isn't that exactly what got us here in the first place?!
Liquidity is not the problem. Borrowers are the problem. Fix the home loan crisis and you get instant releif. Do what ever both liberals are doing or conservatives propose and you have no success. Deal with those home owners underwater on their loans, without the barrage of recriminations and disgust, and you just might see a quick turn around. But what do I know?
I know commen sense when I see it!