December 30, 2024

Archives for March 2009

HUD Imposes Dramatic Restrictions On FHA Cash Out Refinances

March 16, 2009 by Leave a Comment

FHA Tightens Rules Again

First there was an increase in the required credit scores to be eligible for FHA financing.  (See FHA Increases Minimum Credit Score Requirement).  Now comes a major tightening of the rules on FHA cash out refinances.    HUD Mortgagee Letter 2009-08 announced that the maximum loan to value for any cash out FHA loan has been reduced from 95% to 85%, effective April 1, 2009.

HUD is taking this step due to the continued deterioration in the housing market and to limit their exposure to “undue risk”.

HUD Mortgagee Letter 2009-08

Effective for case number assignments on or after April 1, 2009, the loan-to-value (LTV) of any cash-out refinance to be insured by FHA may not exceed 85 percent of the appraiser’s estimate of value.

Given the continued deterioration in the housing market, and FHA’s need to limit its exposure to undue risk, this reduction to the maximum LTV for cash-out refinances is being instituted on a temporary basis while FHA further analyzes the housing and mortgage industry as well as its own portfolio to determine whether permanent measures should be taken.

Considering that the default rate on FHA loans exceeds 12%, this announcement is not surprising and  long overdue.   It is interesting, however,  to examine the conflicting signals from the government in regards to mortgage lending, as follows:

1. There is constant talk about the need  to increase the flow of credit and politicians from both sides of the aisle are encouraging the banks to lend money.  At the same time the “we need more lending talk” is going on, the government controlled agency lenders have dramatically increased restrictions on lending – see Few May Benefit From Lower Mortgage Rates and Banks Restrict Mortgage Lending To A+ Customers Only.

2.  Fannie Mae and Freddie Mac have imposed huge “delivery fees” on their mortgages, which has greatly increased the cost and reduced the benefits for many borrowers –  see Fannie and Freddie – The New Subprime Lenders.

3.  The Federal Reserve has already purchased mortgage backed securities.  Chairman Bernanke has stated his intention to dramatically increase such purchases in the future in an attempt to lower mortgage rates.  Since so few people are eligible for mortgages, he might as well save himself the trouble of printing the money that would be necessary to purchase mortgage backed securities.

Sound Mortgage Underwriting Essential

The banking system should have strict underwriting guidelines for approving a mortgage loan.  If proper underwriting guidelines had been adhered to in the past, we would not now have a major banking and housing crisis.  The question is, has the pendulum swung too far in the other direction?

Filed Under: Banking Industry, FHA, Interest Rates, refinance Tagged With: , ,

Loan Modification Searches Go Parabolic – Making Home Affordable Guidelines

March 16, 2009 by 2 Comments

Loan Modification Enters Mainstream Vocabulary

If you had used the term “loan modification” six months ago, most people would have given you a blank stare.  With the passage of the Homeowner Affordability and Stability Plan, the term loan modification has now entered the mainstream vocabulary.  News coverage of the government plan to help homeowners with their mortgage problems via loan modification has generated  huge interest in this topic as can be seen by the increased Google searches on “loan modification”.

Loan Modification Assistance Programs

HUD’s website provides details on the modification program and also warns homeowners to beware of foreclosure rescue scams.

  • There is never a fee to get assistance or information about Making Home Affordable from your lender or a HUD-approved housing counselor.
  • Beware of any person or organization that asks you to pay a fee in exchange for housing counseling services or modification of a delinquent loan. Do not pay – walk away!
  • Beware of anyone who says they can “save” your home if you sign or transfer over the deed to your house. Do not sign over the deed to your property to any organization or individual unless you are working directly with your mortgage company to forgive your debt.
  • Never make your mortgage payments to anyone other than your mortgage company without their approval.

    • Need urgent help? Contact the Homeowner’s HOPE™ Hotline: (888) 995-HOPE

Making Home Affordable Refinance – General Features & Eligibility

Some of the features of the new loan modification program include reducing the interest rate to as low as 2%, increasing the mortgage term to 40 years and possibly reducing the principal balance of the mortgage loan.  Note that after 5 years, the interest rate could start to increase each year.

Some of the basic guideline qualifications are:

1.  applies only to a first mortgage on a principal residence,  2. income verification is required, 3. there must be a financial hardship, 4. the mortgage must be owned by Fannie Mae or Freddie Mac, and 5.  the current mortgage payment must exceed a specified percentage of monthly income.

HUD has an easy to use program on their website that allows a homeowner to determine program eligibility –  see Do I qualify for a Making Home Affordable refinance? Answer these questions:

Home Mods Get Complicated

In theory, a loan modification is a simple concept.  The reality of loan modification is that it has become ever more complicated, involving multiple parties and numerous financial, tax and legal issues.  The government has become deeply involved with loan mods and government programs tend to become complicated, confusing and bureaucratic.

At a minimum the following questions should be asked and the answers understood by every homeowner before deciding on a particular course of action.

1. Exactly what would be the terms of my proposed loan modification?

2. Are there tax issues involved?

3. Is the benefit of owning my home outweighed by the costs?  In other words, would I be better off renting after considering my income and all the numerous costs of home ownership?

4. What is the impact on my credit score?  It will be difficult to obtain any type of future loan with a low credit score.

5. If I decide home ownership is not the best option – do I let the home be foreclosed or attempt to negotiate a short sale with the bank?  What are the pros and cons of each option?

6. If I accept a loan modification but receive no principal forgiveness, does it make sense to stay in the home if the loan balance still exceeds the value of the home?  Any sale of the home under this condition would mean bringing money to closing that may not be available.

7. Is it cheaper to rent than to remain in the home after the loan is “modified”?

8. Will housing prices increase going forward?  Keep in mind that real estate prices in Japan are still far below the peak prices reached in 1990.  There is no divine rule which mandates an increase in housing values.

9. Are there legal issues involved with the loan modification that should be reviewed by my attorney?

Not much in life is simple.  Do your homework before you finalize any decision involving your home.


Filed Under: Housing, loan modification, Uncategorized Tagged With: , , ,

Are Geithner’s Days Numbered? Banks And Investors Have Zero Confidence

March 16, 2009 by Leave a Comment

First Impressions Hard To Reverse

The old saying in the recruiting business is that one is judged in the first 15 seconds of a job interview.  Irregardless of what happens for the rest of the interview, that first impression cannot be changed.  No doubt, Treasury Chief Geithner wishes that he could take back that first big interview on February 10 when he announced his Financial Stability Plan.  The plan was so lacking in details that one could only wonder why Mr Geithner did not postpone his grand announcement.   Investors on Wall Street rendered prompt judgment on Mr Geithner with the Dow plunging almost 400 points.

Forget The Learning Curve

A month later, Mr Geithner has still not come up with anything of substance to deal with a broken banking system, which by some estimates could cost upwards of $4 trillion dollars.  In fairness to Mr Geithner, he is tasked with solving a problem that only time and the free markets may ultimately cure.   There are no quick and easy answers to the banking and housing crisis, but we cannot afford the luxury of allowing Mr Geithner a multi month learning curve period.    Mr Geithner’s delay in coming up with a detailed plan after his disastrous first attempt may have destroyed his credibility to the point where it doesn’t really matter what he does for an encore.

Banks Burning Mad As Geithner Fiddles

“As Americans recover from the shock and disgust of this latest [AIG] revelation, they will justifiably ask who got us into this mess,” writes Henry Blodget. “The answer, in part, is the same man who has yet to come up with a coherent plan to get us out of it: Tim Geithner.”

Geithner told Bloomberg TV this weekend he will “move quickly to lay out a new financing program” to help banks deal with their toxic assets.

In other words, Geithner still hasn’t put the finishing touches on the “Financial Stability Plan” he announced in mid-February to rousing condemnation because it lacked detail. More to the point, Geithner still doesn’t have a coherent plan he’s willing to share a year after the Bear Stearns-JPMorgan shotgun wedding.

Similarly, Geithner & Co. have yet to unveil their new blueprint for regulating banks. But, again, it’s coming soon

Recipients Of Bailout Cash Stage Revolt

The original TARP bailout plan which was supposed to save the banking industry from collapse has turned into a disaster.  Many banks are saying that they were forced to take expensive TARP money that they did not need or want and now want to return the money – see Banks Push Back On Bailout Plan – Wells Fargo Calls Stress Test Asinine.   The Chairman of Wells Fargo voiced some remarkably blunt criticism of the TARP plan yesterday when he called the governments plan to “stress test” banks asinine.  Relations between the banks and Geithner’s Treasury seem frayed beyond repair at this point.

Effective Leadership Needed

Mr Geithner seems to command zero confidence or respect at this point – he should be replaced by someone who can get the job done.

Filed Under: Bailout, Banking Industry, Confidence, Geithner, Housing Tagged With: , , ,

Bank Of England’s Desperate Last Tactic Forestalls British Sovereign Default

March 16, 2009 by Leave a Comment

Printing Money – Final Desperate Tactic

The Bank of England is engaging in a massive repurchase of British debt in an attempt to pump cash into a crashing British economy.  The Bank of England’s money printing is necessary since Britain has run out of all other options – the vaults are empty and creditors will not buy her debt.

Never in history has a country printed money only for a short period of time; invariably it continues until the country’s currency is worthless and the economy in a state of total ruin.  Should the world economy improve and England maintains a functioning economy, her future would still be bleak.  The very fact that a nation needs to resort to printing money to stay afloat implies a crushing debt burden that is simply to large to ever pay back.  Printing money was the last resort option to sovereign default.  The larger question is what happens next, not only in Britain but throughout Europe.

In The Eurozone It’s A Total Catastrophe

Yes, it is dangerous for the Bank of England to buy up a third of all long-dated gilts. But it would be even more dangerous to allow deflation to run its course in an economy where debt levels have reached such extremes. Debt and deflation are a deadly mix.

We are now faced with the post-debt wreckage. The task at hand is to hold our societies together as best we can.

As it is we have seen industrial production collapse in every region. The drops in January were: Japan (-31pc), Korea (-26pc), Russia (-16pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc). Falls that took two years from late 1929 have been compressed into five months.

Those who say this is nothing like the Great Depression are complacent. Household debt is higher today, and UK banks are in worse shape. (No bank of size failed in the British Empire during the slump). Britain’s economy contracted by 5.6pc from peak to trough in the early 1930s (Eichengreen). Some put the figure at nearer 8pc. We may surpass that this time.

America suffered worse. Real GDP fell 28pc. But the worst occurred in the second leg, after the heinous policy blunders of late 1931. Reading contemporary accounts, it is clear that hardly anybody – not even Keynes or Fisher – realised that the world was slipping into a depression during the first 18 months.

Nobel laureate Paul Krugman says the Fed has been as far behind the curve today as it was then, given the faster pace of collapse. It is bizarre that Ben Bernanke has not started to buy US Treasuries a full three months after he floated the idea, despite a yield rise of 80 basis points.

Given that Germany’s economy is imploding (Deutsche Bank sees 5pc contraction this year) one wonders if the Bundesbank would be less hawkish if the D-mark still existed. Even their hard-money brothers at Switzerland’s SNB are cash printers these days.

So has monetary policy in euroland been paralysed by squabbles at a calamitous moment, blighting every member state? Almost certainly.

Inflate or Default

The huge debt burdens of every sector of the economy and government are being compounded by the sharp reduction in world economic growth.  Debts that are too large to be repaid, will by definition, not be repaid.
The debt trap that the world finds itself in can be worked out by economic growth and the resulting increase in incomes to service the debt.  If economies continue to weaken, only two undesirable options remain – inflate the debt away (as Britain is attempting to do) or default.  Judging by the events in Europe, we are likely to discover just how undesirably these last two options can be.

Filed Under: Bank of England, Government spending, printing money Tagged With: , ,

Banks Push Back On Bailout – Wells Fargo Calls Stress Test “Asinine”

March 16, 2009 by Leave a Comment

Wells Fargo Discovers High Cost Of Government Help

Wells Fargo Chief Calls Stress Test Asinine

March 16 (Bloomberg) — Wells Fargo & Co. Chairman Richard Kovacevich criticized the U.S. for retroactively adding curbs to the Troubled Asset Relief Program, which he said forced the bank to cut its dividend, and called the administration’s plan for stress-testing banks “asinine.”

When the U.S. Treasury persuaded the nation’s nine biggest banks to accept capital investments in October, it signaled the whole industry was weak, Kovacevich, 65, said in a March 13 speech at Stanford University in California. Even though Wells Fargo didn’t want the money, it must comply with the same rules that the government placed on banks that did need it, he said.

Kovacevich joins a growing list of bankers who are chafing at restrictions imposed by the TARP program, which affect lending, foreclosures, pay and perks. Lenders including Bank of America Corp., U.S. Bancorp and Goldman

Kovacevich said the government is still making mistakes as it tries to save the industry.

“We do stress tests all the time on all of our portfolios,” Kovacevich said. “We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”

Regulate Yes – Operate No

Wells Fargo Chief Kovacevich is discovering the truth of Ronald Regan’s quip when he said the nine most terrifying words in the English language are “I’m from the government and I’m here to help”.  I applaud the head of Wells Fargo for pushing back and rejecting the heavy hand of the government in the banking industry.   Those banks that have run their operations properly should reject or return bailout funds and run their operations free of the strangulating hand of government control.  The government should regulate banks – not operate them. The government failed at regulating banks in the past – what are the odds that the government could run a bank properly?

Many other banks are also pushing back and returning TARP money that they say was forced upon them.  Ironically, the TARP money that certain banks were required to accept wound up causing more harm than good.   The banks that accepted TARP funds were viewed as tainted by the public.  The interest rate that the government was charging the banks was so high (up to 9%) that the money could not be profitably lent out without taking undue risk.

TARP was passed by Congress last year after the Fed, the Treasury and the President employed scare tactics, predicting financial Armageddon unless the $700 billion bailout was approved.  Now we learn that much of the TARP money was forced upon banks that did not need the money and now wish to return it.  This entire episode leads us to wonder exactly how poor the government’s comprehension of the banking problem was to begin with.  Any future scare tactics employed by the government to borrow more trillions to “save us” should be viewed with great skepticism.

Banks Scramble to Return Bailout Funds

A growing number of healthy bank chains across the country are bailing out of the $700-billion federal banking bailout program, saying it has tarnished the reputation of banks that took the money and tangled them in unwieldy regulations.

“The TARP money is tainted and we don’t want it,” said Jason Korstange, a spokesman for Minnesota-based TCF Financial Corp., which received $361 million and announced this month that it wanted to pay it back. “The perception is that any bank that took this money is weak. Well, that isn’t our case. We were asked to take this money.”

The bank issued a toughly worded statement earlier this year, saying that the money had put the financially strong banking chain at a “competitive disadvantage” and that the bank now believed it was “in the best interest of shareholders” to return it.

For Rothenberg, the banker in Century City, the prospect of unlimited government intervention was too much.

Only a few banks formally have told the department they would return the money early, although others have signaled they intend to follow suit, a Treasury spokesman said.

So far, the banks are waiting to hear how they are supposed to return the money.

Government Cure Was Worse Than The Disease

The banks have learned that any free enterprise operation that gets entangled with the suffocating idiocy of government bureaucracy will neither live long nor prosper.  The government cure turned out to be worse than the disease.  Now let’s see how long it takes the government to figure out the rules that must be followed before the banks can return the taxpayer money that they don’t need or want.

Filed Under: Bailout, Banking Industry, Wells Fargo Tagged With: , ,

AIG Says We Must Retain The Talented Staff That Lost $170 Billion

March 16, 2009 by 1 Comment

According to AIG, Good Work Must Be Rewarded

Record Loss

AIG, whose fourth-quarter loss was the worst in corporate history, earmarked $1 billion in retention pay for about 4,600 of the company’s 116,000 employees so they won’t leave the crippled insurer.

The company’s fourth-quarter loss of $61.7 billion was the biggest ever recorded for any U.S. company, and AIG considered seeking court protection before accepting the U.S. rescue in September.

Bonuses paid by companies receiving public funds have sparked outrage among lawmakers. New York Attorney General Andrew Cuomo is probing $3.6 billion in bonuses paid by Merrill Lynch & Co. shortly before it was acquired by Bank of America Corp. on Jan. 1.

AIG Faces Growing Wrath Over Payouts

Troubled insurer American International Group Inc., now 80% owned by U.S. taxpayers, spent the weekend deflecting mounting criticism of how government funds have been funneled to various banks and used to pay employee bonuses at the business unit that almost sank the company.

After calls for more transparency, AIG disclosed Sunday that roughly two-thirds of the $173.3 billion in federal aid it received has been paid out to trading partners such as banks and municipalities in the U.S. and abroad.

The disclosures came as AIG was lambasted for about $450 million in bonus payments planned for employees at a business unit that lost $40.5 billion last year. The unit’s woes pushed the company to near-collapse, forcing the government bailout.

Conclusion

The government’s bailout of AIG has been a disaster.   The bailout been a public relations nightmare and the cost to taxpayers is open ended.   A controlled liquidation of AIG would have been a more complex but better option.

How does AIG, which is now 80% owned by the US taxpayers, get away with this outrageous conduct?  Had there been no bailout, AIG would not have had the cash to make these ridiculous bonus payments.
What has the $170 billion (and counting) bailout of AIG accomplished?  We still have an organization that is losing huge amounts of money and is now using taxpayers money to pay ridiculous bonuses to the people who ran the company into the ground to begin with.

Let the free market work here.  Stop the government bailout of a failed company and let AIG go bankrupt as they should have.   Executives who have “contractual rights” to huge bonuses can get in line with other creditors in the bankruptcy court.  The taxpayers supporting this atrocity have been screwed enough already.

Filed Under: AIG, Bailout, Corruption, Government spending Tagged With: , ,

The Dow Jones Is Really At 1,000

March 15, 2009 by Leave a Comment

Larry Summers Says Buy Stocks

The President’s economic advisor, Larry Summers, noted last week that:

“Although there could be many ways to question this calculation, that the market would be at essentially the same real level as it was in 1966 when there were no PCs, no Internet, no flexible manufacturing, no software industry and when the work force was half and net capital stock was a third of what it is today, may be regarded by some as the sale of the century.”

Observations

This implies that the dollar is worth is worth less than 1/7th of what it was worth in 1966.

This calculation does not take into account the dividend stream from owning the Dow Jones stocks.

Per Mr Summers calculations, stocks have gained zero for the past 43 years after adjusting for inflation.

There is something fundamentally wrong with the American economy when the value of America’s Dow 30 stocks do not increase in real value over 43 years.

It is very difficult to increase your wealth by investing in the stock market.

The buy and hold theory for stocks may help brokers sell stocks, but for the long term investor it is a cruel hoax.

If you bought the Dow Jones in 1966 at 1,000 and sold today at 7,000 you would be in a loss position on your inflation adjusted capital, after paying capital gains taxes.

Buying stocks has returned a zero gain for the past 43 years but Mr Summers says that stocks are now the buy of the century.  Does this make him an idiot or a genius?

Mr Summers should focus on ways to create real wealth and jobs in America that are not dependent on excessive leverage.   We tried to get rich with borrowed money and easy credit and it obviously did not work for the majority of Americans.  Instead of pursuing that same losing strategy, maybe it’s time for a new approach.

Filed Under: Stocks Tagged With: , , ,

Where Is The Physical Gold And Why Does US Restrict Gold Purchases? Does The GLD Have Any Gold?

March 15, 2009 by 5 Comments

Strange Situation In The Gold Market

Two recent articles seem to suggest that there is a large physical shortage of gold.

Is the physical shortage of gold the reason for the large restriction in US Mint gold coin sales?   If there is no physical shortage, then why would the US government be severely restricting the ability of its citizens to own physical gold?

Furthermore, if there is a physical gold shortage, how is it possible for the ETF GLD to purchase 45 tons of gold last month?  Do the gold ETF’s really hold physical gold?

Gold Coin Sales Further Restricted By US Mint

US Mint Suspends Production of More Gold and Silver Coins

March 14, 2009 | Filed Under US Mint | 11 Comments

The United States Mint has officially announced the suspension of another slate of gold and silver products. The affected products are 2009 dated American Gold and Silver Eagle coins produced for collectors. These coins are considered collectible versions of the bullion coins.

Although these are collectible coins, they represent a sizable amount of precious metals sales and represent a method of gold and silver investment for many individuals. Last year, the US Mint sold 1,157,911 ounces of silver in the form of Silver Eagle coins minted for collectors. They also sold 155,740 ounces of gold in the form of Gold Eagle and Gold Buffalo coins minted for collectors.

The following message was posted on the US Mint’s website in the space where the collectible Gold Eagle coins typically appear. The proof coins has been offered uninterrupted since 1986. The uncirculated version has been offered since 2006.

Production of United States Mint American Eagle Gold Proof and Uncirculated Coins has been temporarily suspended because of unprecedented demand for American Eagle Gold Bullion Coins.

This adds to the lengthy list of 2009 dated precious metals products that have been “temporarily delayed” or suspended by the US Mint. In my previous post Actions of the US Mint Discourage Gold Ownership, I mentioned the delayed release of 2009 Gold Eagle fractional coins, 2009 Gold Buffalo coins, and all 2009 Platinum Eagle coins. The delay, which was first announced in November 2008, continues with no further explanation provided.

That makes a total of 38 precious metals products which have been delayed, suspended, or discontinued by the US Mint.

As it currently stands, investors or collectors looking to purchase newly minted American Eagle or American Buffalo precious metals products have only two options available. These are the 2009 1 oz. American Gold Eagle and the 2009 1 oz. American Silver Eagle. Both of these products continue to be subject to rationing.

Did The ETF Fund GLD Really Purchase 45 Tons Of Gold Last Month And If So, Where Did It Come From?

Where Do All The Gold ETFs Get Their Bullion From?

Don’t you think it is about time GLD and all the other popular international gold ETFs told its owners exactly what kind of gold they claim to own?

Can you imagine a situation where a person buys a gold ETF to own “non-gold” but finds out that they in reality own OTC derivatives on gold? That would be an investment in the same type of financial instrument (not gold) that one owns gold bullion to protect against.

The failure to unearth the Madoff scandal becomes incredible when one understands that the returns from the market claimed on the size of the hedge fund were logically impossible.

The exact same reasoning screams bloody murder when applied to the many Gold EFTs in terms of what it is they really own.

This begs one major question: From where did all the gold claimed to be owned by all the gold ETFs come from?

Where did funds such as GLD get their additional 45 tons in the last month?

We certainly can forget about that gold coming from the Comex. 12 deliveries would stand out like a sore thumb.

This concept and record keeping eliminates all exchanges around the globe as the source of bullion delivery in any size to all Gold ETFs.

The physical market is so tight that coin minting has all but closed down compared to what it was one year ago. It is hard to accept that the Gold EFTs can buy what the mints can’t.

Like so many other surprises of the last two years the Gold ETF shareholder may actually have no gold at all.

A perfect Ponzi scheme would allow you to surrender shares for bullion. You need only think about it.

Filed Under: GLD, Gold, Gold Coins, US Mint Tagged With: ,

China Questions US Solvency – US Says Not To Worry

March 15, 2009 by 3 Comments

US Insists China Fears Over Debt Unfounded

The Obama administration rejected China’s concerns that its vast holdings of U.S. assets might be unsafe, in an unusual diplomatic exchange that underscored the global importance and the potential fragility of the Sino-U.S. economic relationship.

In a coordinated response to blunt comments from Chinese Premier Wen Jiabao, White House officials said Friday that Mr. Obama intends to return the country to fiscal prudence once the crisis passes.

“There’s no safer investment in the world than in the United States,” said presidential spokesman Robert Gibbs.

The premier’s comments were unusually pointed and raised the possibility that Beijing’s appetite for U.S. debt could wane. In the worst-case scenario, a significant new aversion to U.S. investments could drive down the dollar and drive up interest rates, worsening the U.S. recession.

But in the last year, Beijing has become increasingly vocal about what it sees as U.S. economic mismanagement making U.S. investments riskier.

Obama Says Investors Can Be Fully Confident In US

March 14 (Bloomberg) — President Barack Obama said investors can have “absolute confidence” in Treasury bills as he sought to assuage China’s concern about the safety of its holdings of U.S. debt.

Chinese Premier Wen Jiabao, whose country is the single largest overseas owner of U.S. government debt, said two days ago that he was “worried” about holdings of Treasuries and wanted assurances that the investment is safe. The U.S. is counting on overseas purchases of its debt to finance Obama’s $787 billion package intended to help pull the world’s biggest economy out of a recession.

Obama’s Catastrophe

US creditors are getting nervous about the ability of the United States to repay its huge and fast growing debt load.    The fact that the US has to explicitly tell its creditors not to worry makes them worry more.  Obviously, if there was no need to worry, China would not have raised the issue of US solvency and the US would not have had to assert it’s credit worthiness.   We need to go very far back in history to revisit the last time that the credit worthiness of the United States was questioned.

China is not likely to be swayed by the latest spin out of Washington.  Actions speak louder than words and the Chinese view the US debt rampage as economic mismanagement.  Perhaps the Chinese concerns arose after Mr Obama stated that the US was facing an economic “catastrophe” if we did not borrow and spend more money.  When  China couldn’t see the logic of our strategy of curing a debt crisis with more debt, they started to reassess the US credit rating.

China Should Act Like A Real Lender

Hopefully, this entire situation will have a happy ending.  If China implements sound lending practices, they will not continue to lend more money to an already over leveraged borrower, or at a minimum, demand a higher interest rate for the higher risk.  If China can help the United States find the fiscal discipline it lacks by imposing harsher terms as a condition for additional loans, both parties will benefit.

Filed Under: China, Deleveraging, Government spending Tagged With: , ,