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What does this mean for the real estate market??
This plan will solve the credit crisis overnight. There will be an initial 5% to 10% appreciation of US homes virtually overnight.
In summary this plan will:
1. Solve the credit crisis overnight
2. Which in turn cures the housing market
a. Which in turn cures the financial markets
b. Which in turn causes investors to exit commodities and flock to the stock market
c. Which in turn causes oil prices to DECLINE further
3. Which in turn causes this bad debt to turn into good debt
4. Which in turn makes this fund profitable for the government
As a result it will kill about 7 birds with ONE shot!! And at the same time be profitable for the government and therefore benefit the taxpayers down the road!!
and I might add if this gets passed, Whoever thought of this will win the nobel piece prize. The plan is ingenious
It creates capital because it is like a catch 22 in a good way. Banks will be forced to start lending money again because the government will take all their bad debt. It is like a domino effect from there...
I can only hope that someone, somewhere in all this actually took an economics course. You don't just create capital by creating a "catch 22 in a good way".
You see, what is happening is the debt derivatives complex is unwinding. That was levered 30, 40, even 50-to-1. Closing your eyes and clicking your heals together won't magically relever that back up. The government taking ownership of the busted debt won't magically relever it back up.
Keep on wishing though. But prepare for 10-15 years of painfully slow deflation.
You might check on Japan's "lost decade". They did exactly this, and it didn't work out so great for them.
The plan is based on appreciation in the housing market. The housing market WILL stabilize because banks will now be able to lend. ITs a brilliant domino effect. And reverses the cycle we were in
By the way, your children now get to start out "owning" well north of $100,000 of US debt, thanks to this whack-a-mole plan. Hey ho! Why stop there? Let's go ahead and bail out the airlines, the auto makers, my brother-in-law's web consulting biz...our children don't vote anyway, right? I say why stop at $100,000. Let's load 'em up with $1,000,000 of debt each, so we can party on duuuude!.
Its Not a BAILOUT. Think of it as an investment in America. The government will make billions off this plan - in turn the US taxpayer will make billions from the tax cuts it produces.
mjy138, the funny thing is, you don't even understand the resolution trust plan. It is not as you described. It's not the same as the RTC from the S&L collapse.
What you are describing is economically impossible. Growth requires a catalyst, otherwise it's just inflation. Do you think if you suddenly added three 0's to the end of all our money tomorrow it would change anything? Or would our money just be worth 1,000 face-value less, meaning nothing would change except it would be harder to write checks?
God bless the USSA
and Uncle Lenny and Joey....
We can all start singing the "L'International" comrades!
Against my better judgment (and risking this being deleted as it's surely a Zillower's post):
In summary this plan will:
1. Solve the credit crisis overnight
As a general rule of thumb, things which took over a decade to create are not solvable "overnight". There is a deep structural issue within our fiscal discipline, regulatory regime, and capital markets which cannot possible be solved "overnight".
2. Which in turn cures the housing market
That is an unsubstantiated assumption. It is your hope.
a. Which in turn cures the financial markets
Financial markets are reacting to issues of systemic pricing mispricing of risk and a decade of overliquidity. Not to houses going down in price. That is a symptom. It matters, but it's not the root cause.
b. Which in turn causes investors to exit commodities and flock to the stock market
That is nonsensical. Commodities are being driven as much by global demand as by cyclical money flow.
c. Which in turn causes oil prices to DECLINE further
Oil is as much driven by dollar-weakness as by cyclical money flow. Actually, I don't think oil is driven by cyclical money flow much at all.
3. Which in turn causes this bad debt to turn into good debt
No. It doesn't. The debts are bad if they are not being paid. If the debtors don't pay it according to their original terms, then it is bad. Now that the government owns it, and writes it down, only _solidifies_ it's status as bad debt. If the houses increase in value later, it just securitizes those bad debts better, it doesn't help those underwater debtors. They can't afford what they bought. That was the problem. They were banking on selling it for more, and borrowing against the rising value until that day. That was the problem.
4. Which in turn makes this fund profitable for the government
That's the most insane thing I've heard yet. The government will lose trillions on this. The question is whether they'll lose 2tr or 4tr or 5tr. Not whether they'll magically make money somehow. That anyone would think that stuns me. Are they really peddling this as a "profitable" move? If so, someone should be impeached and thrown in jail to rot.
By the way, this plan results in one necessary outcome from two possible futures:
1. Inflation. They will print lots of dollars to pay for this lunacy. That will weaken the dollar even further. That will ***massively increase*** the price of oil, not decrease it. The only thing that will drag on oil prices will be the fact we can't afford to buy it anymore, and 1/5 of us will be unemployed and not driving anywhere.
2. Deflation. Oil will get cheap then. In fact, it may crash in price. But no one will be buying it because 1/5 of us will still be out of work, because so much US wealth will be destroyed. The exports we've regained will dry up overnight. We'll have to enact huge trade barriers to prevent China and India from taking away the other 4/5 of our jobs. By the way, everyone with a home mortgage will get screwed royale. When you own fixed debt (which the resolution trust will transform their loans into) during deflation you lose wealth with every single payment.
Kudos to your analysis, though. It sounded good.
This is such an amazing result! Interesting that it didn't come about a year ago. Otherwise jobs could've been saved, inflation lessened, banks not ruined. But I'm sure it's not the worthless gimmick it appears to be. I mean, it has to be a coincidence they pulled this stunt just when everybody woke up, right?
The catalyst for growth will be all all the people that were held artificially on the sidelines will start to buy houses that are currently on the market. This will in turn create appreciation for the housing market which will in turn make this "bad debt" become profitable. WHy do you think Hedge funds are buying up this bad debt for pennies on the dollar? They know that once housing starts to appreciate WHICH IT WILL, then they will make a tone of money on a mortgage portfolio because the underlying assets of the loan are now appreciating instead of depreciating. FINANCE 101.
Randy,
Why
are
Randy,
THen why are hedge funds buying "toxic debt" portfolios. THey know that once the underlying assets start to appreciate, the debt will no longer be toxic.
Yes in the short term they will take a loss. But the long term benefits of the plan far outweight the short term costs. Trust me if the government wasn't going to make money from the deal then they wouldn't do it.
This is a great idea. I wonder who thought of it. We know Bush and Congress did not. Maybe Paulson and Bernanke pulled an all nighter and came up with this.
This is somewhat amusing, but it's also sad that it might lead people to believe the incompetent govt magically solved the problem. Funny how a couple days ago it was dire, now solved. But whatever, enjoy the afternoon party. We have a long road ahead of us.
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Government just solved the credit crisis - Governmert may create megafund for all banks Bad Debt!!
mjy138
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This plan, if passed would be the greatest thing to ever impact the US economy in this country’s history as it solves all the economic and financial problems in one shot. Let me explain. If all the banks were allowed to unload their bad debt off their books they would be in turn free of the one thing that was hindering them the most and preventing them to lend. This would let the banks and lending institutions have clean balance sheets literally overnight. This, in turn, would make them more liquid and be much more willing to lend. As a result they will be much more willing to lend money and capital requirements would decrease. The real estate markets would once again have access to capital, and therefore, the real estate markets would start to stabilize and eventually appreciate as all the cheap properties get snatched up. Now this is where the ingenious part of this plan comes in. Once the real estate starts to appreciate, all this “bad debt” in the governments fund becomes good debt and becomes profitable. The only reason this is considered bad debt now is because the underlying assets backing this debt are depreciating (real estate). Once the real estate market starts to appreciate again, this debt will at some point turn to good debt and become profitable because the assets backing the debt will once again be worth more than the balance of the fund. This, in turn, could mean 100’s of BILLIONS of dollars in profit for the US government from this fund down the road.
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