Punchinello’s Chronicles

September 26, 2008

What do we get for $1-Trillion?

There’s no question that in today’s world, the United States must become an integrated organization. America, like any other country, sinks or swims on it’s ability to produce things other countries want, and buy things from other countries that we don’t have or don’t need to produce. America, Incorporated makes a whole lot of sense in a global economy.

That global economy isn’t something that someone caused, which then affects the way we all do business around the world. Globalization is a result of how large and small business owners do business in the most efficient and rational way. Given the Internet, fast transportation, modern communications, computers, and other technology, even a small business can choose to appeal to international buyers. The result is a global economy, not the other way around. The global economy didn’t cause international trade.

To that end, this trillion-dollar bailout package has to be examined from the perspective of financial sense and strength. What do we get with the currently proposed plan? Nothing at all, excepting an unbelievably massive tax on everyone in the US. How does this make America a financially stable and attractive company?

On the other hand, a team of analysts over at JP Morgan & Co., led by Dale Westhoff has run the numbers: What if the government simply bought all the outstanding “bad” mortgages of right now, and for the projected next few years?

“Addressing home prices is critical amid expectations for an additional 5.5 million foreclosures over the next five years, on top of about 2 million already in or through the process, they said. Outside of loans in U.S. mortgage programs, the government would buy some $1.05 trillion in loans for a price of $630 billion over five years, they said.

Total losses on liquidated mortgages average less than 40 percent, so the program should be self-funding, they said.” — Reuters, NEW YORK September 25, 2008

What’s this actually mean?

The way it’s set up now, the proposed bailout plan would simply pay banks to stay afloat. The value of the loans those banks made would remain the same. If you can’t afford to pay your mortgage, too bad. Having the government take over these loans to keep the banks going would mean the US would suddenly own about 30% of the land in the entire country. They would own houses and buildings, having to either sell them or maintain them.

On the other hand, if the government went into real estate, buying the homes at current values, only the banks would lose. If they loaned $400,000 on a house that nobody can pay for, and the market value now is $240,000 (60% of original), the government would now own the home at $240,000. They then could change the mortgage and perhaps many people would be able to afford the new, lower payment.

At the end of the day, as people paid off their loans or sold the houses in a rising real estate market, the government would make a bit of money, be out of that particular property, and families would have a place to live.

Doesn’t that make a whole lot more sense than just giving banks money? Right now, the banks are losing 40% of their loan values, and might go under if they were mismanaged enough to have no other money. But if we give them the money, where’s the incentive to get better management? Where’s the incentive for them to negotiate lower mortgages so people can have roof over their heads? There isn’t one.

Let the banks collapse, if that’s what it comes down to. Even if the make-believe FDIC were to make special rules to cover American citizens with over the limits in those banks, neglecting or postponing repayment to foreign investors, we still would come off cheaper.

Individual investors are making a killing on the market nowadays, buying houses for discounted values so the banks can get out of the bad deal, then leasing back the house to the original owners. But there only are a finite number of these investors. I’d rather see the government become the temporary “landlord” with the expectation that many of these houses would be sold off for reasonable prices at a later date.

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