The Big Black Hole Expands As Asset Values Collapse
Not even a month in office, Mr Obama has spent trillions on bailouts, stimulus plans, bank recapitalization and loan guarantees. The markets have spoken with a resounding lack of confidence. The asset destruction caused by recent world wide drops in stock and bond markets exceed and effectively negate the government’s desperate spending and borrowing efforts to put Humpty Dumpty back together again. The continued destruction of consumer confidence is being caused by the whacko “plan a day solutions” coming out of Washington.
The markets are bigger than any government’s ability to artificially prop up all asset values, as the example of Japan demonstrates. The destructive self reinforcing cycle of deleveraging will continue until debt levels decline to the point where debtors have the cash flow to service debt payments. The process of achieving equilibrium between income and debts will be especially difficult as massive job layoffs, salary freezes and pay reductions make debt repayment more difficult. Expect a long and painful deleveraging. The debt bubble that has been building for decades will not be quickly reversed.
Source : Barrons
Some Further Insight From The Web Worth A Read
The feeling that the government has no idea how to proceed has created palpable panic. In response, pragmatic investors are seeking the ultimate store of wealth. In 2009, as has occurred countless times throughout history, that store will be stocked with gold. Thus, whether the Federal government’s interventions will succeed or fail will be anticipated by the price of gold. Right now, the market is screaming failure.
Despite massive Government spending on rescue and stimulus, the American consumer clearly is becoming increasingly nervous, and the credit markets show few signs of recovery.
Not only have gold spot prices risen in the face of such selling pressure, but the price of physical gold is now some $20 to $40 per ounce above spot. This would indicate that investors are now so nervous that they are insisting on taking physical delivery.
Make no mistake, the economy will not turn around soon. When the recovery fails to materialize, look for governments around the world, and especially in the U.S., to send another massive wave of liquidity downriver. When it does, the value of nearly everything, except for gold , will diminish. Don’t be intimidated by the recent spike in gold. Buy now while you still can.
It almost seems amusing that we are still discussing the “coming” depression because of the fact that it is already arrived and settling in. Really, what this entire new “era” is all about is watching our dreams deteriorate right before our eyes.
It seems that the majority of us are just not destined to move forward. How many thousands of thousands of heads of households are looking at the devastation of their 401K portfolio? It’s not easy to forget the glory days of the past as they lose their home and lose their savings. I see eventually Hooverville shacks lining vacant lots. Made up of cardboard and bits of old trash taken from local garbage. This is our future?
Day of Reckoning
The day of reckoning comes when asset prices start falling, defaults soar, and the value of credit on the books starts plunging. That day of reckoning has arrived.
Is there anything more heartless than foreclosing on a home and throwing a family out on the street?
How about taxing the family next door into penury to pay for the reckless borrowing of its neighbors?
Welcome to the Obama Homeowner Affordability and Stability Plan — a complicated wealth redistribution scheme dressed up as a cure for the nation’s housing woes.
It is almost certainly bound to fail.
Now, there is no doubting that Obama’s heart is in the right place. With foreclosures at record highs, the American white picket fence dream is crumbling.
And the impulse of any caring President must be to do something, almost anything to keep the dream alive.
But the experience of politicians tinkering with the U.S. housing market is not a happy one. Fannie Mae and Freddie Mac, anyone?
Real estate is simply too complex to be manipulated by anything but the “invisible hand” of the market.
When times are good, some people still struggle to keep up with their credit and debt payments. In a downturn, bad gets worse because for some, there’s less money to devote to debt.
President Barack Obama’s new foreclosure-prevention plan is already sparking outrage from some Americans who won’t qualify for federal aid — and from those who resent having to foot the bill for those who do.
“What do you expect from the government?” said David Newton, 46 years old, proprietor of DJN Management LLC, which owns 232 rental apartments in the Atlanta area. “The government isn’t out there to help people who obey the law and follow the rules.”
Mr. Obama “told everybody, ‘I’m going to spread wealth around,’ and that’s what he’s going to do,” Mr. Newton said.
The housing measures have also upset a range of homeowners who say they shouldn’t have to subsidize those who bought more than they could afford. “We’ve lived a conservative life,” said Tim O’Brien, 61, a retired CPA from Los Angeles. “We’ve paid our house off and saved our money, so you kind of find yourself on this issue not agreeing with everything.”
Brenda Gilchrist said she feels like she is being punished twice, first by watching foreclosures depress the value of her three-bedroom condominium in Santa Rosa, Calif., and now by subsidizing borrowers who bought more than they could afford.
Others are skeptical that the plan will work. “Twelve months down the road they’re going to say, ‘We’re going to need to throw another $50 billion at the problem,’ ” said Mr. Newton, the Atlanta property owner. “They should just foreclose on the properties, auction them off on the courthouse steps and see who buys them.”
Common Sense Eludes The Government
“You cannot legislate the poor into freedom by legislating the wealthy out of freedom. What one person receives without working for, another person must work for without receiving. The government cannot give to anybody anything that the government does not first take from somebody else. When half of the people get the idea that they do not have to work because the other half is going to take care of them, and when the other half gets the idea that it does no good to work because somebody else is going to get what they work for, that my dear friend, is about the end of any nation. You cannot multiply wealth by dividing it.”
The president’s new mortgage-relief plan contains clever elements that might indeed help homeowners. However, the superfluous threat of inviting judges to rewrite contracts must dilute the collateral behind troubled mortgage-backed securities. That, in turn, would jeopardize the endangered capital of banks, pension funds and other holders of such securities, including the Federal Reserve, Fannie Mae and Freddie Mac.
In sum, allowing conforming loans to be refinanced without a big equity position seems promising. Trying to bribe lenders to trim monthly mortgage bills to 31% of income would help those lucky enough to get in on the deal before the money runs out. But all of this potential good could be undone by the systemic risks to mortgage-backed securities caused by the unpredictable legal risks of a judicial cramdown.