The
citizens of the United States will be paying to clean up the collapse of the
real estate bubble. It doesn't matter if one participated in the housing boom
or not - we are all going to pay and pay dearly for this mess. Renters, owners
and speculators are all equally on the hook if they are taxpayers (did you
know that 40% of people living in the U.S. pay or owe no federal income tax?).
Now it is
true that those who go through a foreclosure or bankruptcy will have much
stress and will take a big hit on their credit score. Those who avoided the
bubble, have paid off their house in full and/or don't look at their home as
an investment but rather a place to live won't have to deal with these
stressors, assuming they don't become a victim of unemployment in the months
ahead.
But make
no mistake about it, a big chunk of the losses from the housing bubble are
going to be put on the taxpayer's tab. The first round of the "bailout
ball" was forced upon the unsuspecting American citizenry by Hanky Panky
Paulson and his crew to "save the world" from a certain and
horrible economic death. The second and third rounds will involve similar
sums of money but will come from different angles.
First and
most obvious is the number of bank bailouts that the FDIC, and thus the
American people, will need to fund. The FDIC will absolutely tap its new $500 billion line of credit from the U.S.
Treasury. To pretend otherwise is silly and/or
dishonest, as hundreds of additional banks are going to fail before this
fiasco is over. In the linked article above, Sheila Bair is quoted as saying:
"Marking
banking assets to market prices doesn't make sense."
No, of
course it doesn't make sense. Telling the truth and doing the rational and
responsible thing would immediately bankrupt our entire banking system
overnight. It is much better to pretend that you haven't lost any money on
any of the assets you have and instead tell people that they are still worth
what you paid for them, even if their value has been reduced to zero. This is
our government-banker keiretsu hard at work discouraging reality, honesty and
integrity. If the head of the FDIC feels this way, there is no hope for
improved transparency of bank balance sheets and no realistic way to fairly
value these banking firms (Stay away! Sell!).
In the
mean time, these bank "assets" are trending towards zero or less
than zero (in the case of some derivative instruments and homes that have
gone through severe "trash outs"), which means that
when the FDIC finally does step in, it will cost U.S. taxpayers much more
than biting the bullet and bailing out these banks now. All the profits for
bankers are and will remain privatized but any and all of the big losses will
be put on the taxpayer's tab as much as possible. The larger banks are not
stupid and have found a way to try to salvage some extra profits out of this
mess (in addition to being able to stay in business) by asking their
pre-bought bureaucrats to jump into the shark pool.
This is
where the second of the two remaining big components of the government
housing bailout comes into play. This is even more nefarious than the direct
bank bailouts. It has to do with Freddie Mac, Fannie Mae, the FHA and Ginnie Mae. These institutions are now guaranteeing 90% of new home loans
generated in this country, including the refinancing and modification of
loans gone bad. Why make lots of loans in the middle of a real estate
collapse? Oh yeah, I forgot - it's because all the inevitable losses will
just be put on the taxpayer's tab, so who cares?
This is,
in essence, a transfer of toxic loans from private
balance sheets to the government balance sheet. Underwriting standards have been subprime and lax for
these new government-sponsored loans. Private mortgage originators are going
hog wild signing up anyone with a pulse who still wants to buy a house (Don't
buy - rent!) if they can meet the government standards because these
originators know they can turn around and pass the hot potato onto the
government, making a profit/commission in the process.
In the
mean time, these loans are already going bad at a alarming rate akin to
subprime loans. Capital reserves are dangerously low at the government
sponsored entities and rapidly declining, which means more taxpayer money
will be needed down the road to bail these quasi-companies out (don't believe
articles like this where officials say they won't need extra
funding - they will). The low down payments and lax lending
standards required for many home loans are what helped get us into trouble in
the first place and I would hazard a guess that many of the home owners partaking
of these new toxic government loans are going to be close to underwater by
the time the ink dries on the final loan documents.
This
scheme is also why private banks are ignoring
overdue debtors for up to 2 years without finishing
the foreclosure process. Not only have Sheila Bair and other apparatchik ilk
encouraged private banks to avoid taking losses by allowing banks to keep
home loans on the books as assets with an inflated and unrealistic value to
bolster their balance sheet and make them look vaguely solvent, but the other
part of the plan for banks is to stall while trying to find a way to get
their toxic loans onto the books of Uncle Sam and the American taxpayer. They
will find a way, believe me.
The
private, non-federal, for-profit federal reserve corporation is warming up to
the scam and moving things along nicely by purchasing large amounts of commercial and residential mortgage
debt. This, of course, will all be foisted onto the taxpayer
tab at the opportune time. When this occurs, it will sold as "an
investment," but this will be yet another cruel joke on the American
people.
So, in
the end, it's all coming together for many bankers. The housing and
commercial real estate collapse continues unabated and the bill is
increasingly going to be put on the U.S. taxpayer's tab, allowing many
bankers to get off scot-free and pocket some dough in the process. This moral
hazard Uncle Sam is creating ensures more risk-taking and speculation in a
real estate market the government has no business encouraging people to
speculate in right now. It also absolutely guarantees an even bigger disaster
down the road for Uncle Sam's balance sheet. Privatizing gains and
socializing losses - damn it feels good to be a banksta!
Such
moral hazard also encourages debtors to just walk away from any bad housing debts. When people
aren't paying their mortgage, they rarely will make property tax payments, so
this federal government interference/moral hazard and willful banker neglect
of past due loans will also impact local governments tremendously. It is
likely that these local governments will try to squeeze some blood out of a
stone by asking those left standing who either own their homes or still pay
their mortgage to pay higher property taxes. Being financially responsible
increasingly means being asked to bend over and accept higher taxes and/or
currency debasement while feeling "left out" of the debtor party.
Many
citizens support the government "stabilizing" housing prices based
on self interest. Yet such folks don't realize that government can only waste
money while making things worse for the whole country and not doing anything
but prolonging the pain that has to happen to allow the market to heal. Bad
debts must be liquidated, not hidden or subsidized. Government cannot
"stabilize" housing, but they can put lots of toxic liabilities on
the taxpayer tab while the real estate market proceeds lower to the same
levels it was going to go anyway.
Unfortunately,
all of this government interference does mean that housing will take longer
to find its true bottom - I think we're looking at 2014 or later. It also
means that the government debt load is going to increase astronomically over
the next few years (what's a few extra trillion, eh?), almost ensuring a
serious currency dislocation at some point down the road. Be sure to watch
with feigned amusement when the apparatchiks tell you in a year or two that
no one saw it coming as the next bailout is announced or a currency
crisis/capital flight rears its ugly head. Home sweet home, my ass. We're all
going to pay for the housing mess - one way or the other.
Adam Brochert
GoldVersusPaper
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