Saturday, January 31, 2009

Anonymous Asks

Despite the change in presidency, it appears as if Obama and company are following through with his predecessors mistakes, and may just make them on a grander scale. The "bad bank" idea has failed in the past (Japan), and numerous economists have repeatedly pointed at how all of this won't work. One of those economists, Michael Hudson, had this to say of the plan:

"How many families would like a “give-back” on every bad investment they’ve ever made? It’s like a parent coming to a child who has just broken a toy, saying “That’s all right. We’ll just go out and buy you a new one.... There is a simple way to think about what has happened – and why it won’t help the economy, but will hurt it. Suppose the new $4 trillion “bad bank” works. The government shell will give away Treasury bonds for bad bank loans and derivatives gambles, without the government “marking to market.”

"The government’s solution, placed in its hands by the financial lobbyists, is to bail out the bankers and Wall Street while leaving the “real” economy even more highly indebted."

Also pending, and this will lead to Anon's question, is a bill that will allow bankruptcy court judges to reduce principle on a mortgage to avoid foreclosures for the small penalty of paying any capital gains to the lender in the first 2 years if the house is sold. So Anon asks, "Why not just reduce capital on any mortgage of a primary residence house (no flippers) bought between 2002/3-2006/7 to its current market value, kind of a like a housing mark-to market?" There would be no credit score penalties for those homes not already in delinquency or foreclosure.

I say it's a much better idea than letting bankruptcy court judges reward those who bought houses they couldn't afford. I also say the 2 ideas may have the same net effect. Why should I pay my mortgage if my neighbor, who bought the same house as me with no money down, hasn't paid, and is now rewarded with $100K reduction in principle? Two things would happen. I would take a huge credit hit, yes. But, it may take 12-18 months for my home to go into foreclosure. It may take another 18 months for my case to make it to court. Then I might get a reduction anyway. If I go 3 years without paying my mortgage, I might be able to buy my own house (or the equivalent size, community) for half of what I originally paid, and be able to put closer to 40%-50% down, leaving my new mortgage at a pittance of what I currently pay. I don't know, I'm beginning to see why people have pulled a dine-and-dash on their own homes and rolled into a new one before their credit had a chance to implode.

By the way, kudos to CNBC, Blackrock, Pimco, and all of the other market pimps who told their clients we're poised for a huge rally. Memo morons, it already came and went, and you just lost your clients another 9% in January. Nice work.


Tiger Coach said...

The best-laid plans of mice and men often go awry...

No matter how carefully a project is planned, something may still go wrong with it. The saying is adapted from a line in “To a Mouse,” by Robert Burns: “The best laid schemes o’ mice an’ men / Gang aft a-gley.”

Ax... Have no fear, at this point, it is nothing but stabbing in the dark... I hope you can appreciate a little Robert Burns...

DCNorth said...

Up is down and down is up.

Hasn't it always been, that the guy with the good credit score gets the good rate? That the guy with the good credit score lives within his means and saves for those rainy day? Why is it that the village idiot is not only given the gun but more bullets to go crazy with?

How do people feel about that "Buy American" plan down there? It has some people nervous up here!


AX said...

I think people know Obama is panicking and that for the sake of looking busy, he's making things much worse...