"Yet Another Bailout: Housing's Hair of the Dog"

There has been a lot more broad questioning of the government's overall plan to keep the economy from falling into great depression like scenarios. There is a common theme in the Great Depression, and our current "Great Recession" (and probably most bubbles/recessions) --too, too much leverage. The US economy grows on the back of credit, but what will it take to get Washington to realize when they give incentive to take on debt, people (even unqualified people) will take it. Under no circumstance should the government be using tax dollars to provide incentive to under capitalized individuals or businesses to take on more debt. Barry Ritholtz at "The Big Picture" has taken notice of this in his September 8th posting on the FHA.

"As the WSJ reported last week, the number of loans backed by the FHA has soared, and "its market share reached 23% in the second quarter, up from less than 3% in 2006, according to Inside Mortgage Finance.

Even worse, the FHA is now insuring mortgages with as little as 3.5% down...The downside? The FHA delinquency rate has soared...Oh, and the FHA reserves are being seriously depleted."

Comments

  1. Ben HoganSeptember 21, 2009 at 4:23 PM

    I understand it would probably take many lifetimes to get back to a financially healthy position for the US, but what would a "good" move look like?

    Could the government act as a debt consolidater for qualified individuals to relieve their expenses but still require payments? This would not increase debt but help them pay current debt down. The government could also charge a fair interest rate to recooperate some funds.

    Or...who would have to give up on leverage first? Credit card company's or the government? if that makes sense...? I just often wonder if anything will help at this point, but time.

    ReplyDelete
  2. M2 Stewardship GroupSeptember 23, 2009 at 10:09 AM

    In general a good market move is a slow period of growth with minimal volatility. This market move is built on sand. There is a lot of credit flowing to the banks that allows them to hold on to their non-performing assets (e.g. households that are not paying their mortgages, but are not being foreclosed on), but on the street things are still fundamentally bad.

    There a couple of problems with the government acting as a debt consolidator: 1. The government's ability to tax or take on infinite amounts of debt seems to eliminate their ability to operate anything profitably. 2. The size of such an organization and the scope of their power would have to reach in to private businesses too far for my comfort level.

    Businesses much like people must feel the pain of their mistakes. The government cannot take responsibility for private institutional mistakes.

    Credit card companies have already cut down their leverage. They are extending less credit to less people. And that is exactly what we need. This will mean an extended period of time with slow economic growth.

    Less volatility = Less emotion::Less emotion = More rational decision making

    ReplyDelete
  3. Ben HoganOctober 2, 2009 at 4:33 PM

    Ahh yes... emotion. The investment specialist where I work says that there are two things that drive the stock market and most people... fear and greed. I would agree with that.

    And, like you said, feeling the sting of a bad decision is how we learn and the financial institutions (corporate banks mostly) are really taking a hit because of it. Greed influenced the bad loans and now they have to pay for it (along with other financial institutions who had to contribute to the bailout).

    Thanks for the insight... I'm enjoying the posts!

    ReplyDelete

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