Posting opinions, letters and correspondence from far and wide. Even some to/from my elected representatives.
Sunday, September 28, 2008
The graphs tell the story of our future. I'm no economist but I understand control systems and feedback loops. Despite what every politician is saying, the science says we are looking at a downturn in the economy and the only question is how long that downturn will be. Assuming all other factors remain static, the bail out presents us with a simple hard truth. The down turn will last longer as a result of the bail out. The underlying basis upon which all of our misery is based is the real estate bubble that just burst. It happened because Congress and the Executive branch allowed Fannie Mae to underwrite loans that should never have been approved. The Banks hedged their risk by feeding loans into Fannie Mae. Dubious real estate agents, mortgage brokers, lending houses such as Countrywide fed into the system. Wall St go caught out because they (knowingly or ignorantly) packaged those very loans into securities and fed them into any outfit that would buy them. No one really knew what they were worth and they certainly didn't know the risk.
Now the Federal government insists that we somehow bail out the Banks and or Wall St. The theory goes that the Banks will suddenly and immediately be able to begin lending again. But the reality is that the Banks will not unlock their funds for very long when they realize that the underlying value of the mortgage backed securities will not recover for the same period of time it takes for the underlying value of real estate (which does grow over time) to reach the break even point (as though the bubble had never occurred in the first place). The Banks will experience a temporary period of money lending artificially propped up by the Federal government tax payer funded program. This period will be brief while the Banks reassess their financial positions. But ultimately and inexorably, the Banks will begin to realize (as they kind of already do) that the recovery in real estate prices will only occur when a) financially irresponsible owners cease ownership (ie: foreclosure followed by renting) and, b) enough time passes to allow the over priced homes to realign with pre bubble real estate values (factoring in the "normal" inflation of real estate value).
The result is as the graph shows. The only outcome of the Federal bail out will be a longer period of time before GDP, real estate values, growth and lending patterns assume normality.
The Government claims that the mess we face will slow down and stop the economy. Main St will fail because Wall St is not lending money. Truth is, money would move as soon as the Government got out of the bail out business. Money would move as soon as the Government announced the removal of draconian regulations such as Sarbanes Oxley. Money would move as soon as Government announced a program to wind down Fannie Mae - permanently!
But no, the current "wisdom" is the exact opposite. We need to regulate more. We need to expand Government programs more, we need to bail out more.
The only guaranteed result of all of this Government hubris is that we'll be lengthening and intensifying the pain of the recession that is about to come.
Posted by Michael at 3:06 PM