It does not even has much to with the homeowners who are defaulting on their mortgages and are eaten up by mass media, as I will discuss shortly australia luxe shoes. On the contrary, the problem has more to do with too much spending, highly leveraged financial instruments, and unrealistic real estate valuations.
Feldstein's PlanAnother plan, more colorful than the stimulus package, came from Martin Feldstein (former Reagan advisor) Luxe boots uk. Recently presented in The Wall Street Journal, it proposed for the government to lend homeowners who are in trouble 20% of their outstanding mortgage balance.
This money, according to Mr. Feldstein, would come from selling T-bills and have a payoff period of 15 years griffey shoes. The interest would be tax deductible.
Sothe plan does not actually help the homeowners; it just moves debt from one place to another, and tries to pay off loans that were created on ridiculous real estate values (and should not have been underwritten at all). Government loans, as Mr. Feldstein pointed out, will lower the interest paymentsbut werent lower interest rates partly what got us into current troubleReality CheckHow much trouble our economy is in is debatable. The fact is that the real estate that is backing current outstanding mortgages is worth much less than it was worth before.The most comparable historic scenario I can think of is Japan (albeit the magnitude of their real estate market was quite a bit larger). One industry fueled economy, leading to widespread speculations. The formed bubble raised real estate values sky-high. Then it came crushing. Then the Nikkei followed, falling for a decade. Sounds familiarThe Japanese were reluctant to write off bad debt in hopes that the prices would eventually recover. This did not happen and as banks tried to survive, the credit crunch stalled the economic growth so much that for 9 or 10 years the average GDP was 1.5% despite near-zero interest rates.If history repeats itself, then Japan demonstrated that waiting for property values to rise will not work. That interest rates are not the issue. And that trying to do everything possible to keep bad loans on the books will only exacerbate the bear market.It Gets WorseAt the beginning I said that we are in for a nasty bear market, and that the subprime credit crunch is just a key to Pandoras box...What I am talking about stems far beyond the defaulting homeowners, or yesterday's meltdown (and Federal Reserves rescue) of Bear Stearns (BSC). I am talking about global levels of debt beyond of what you and I can imagine.What we are seeing now is that homeowners who are defaulting on their mortgages are being blamed for the credit crisis. This criticism is misdirected. The real players in this game are:- Financial Technicians who piled up mountains of securitized debt with mathematical models that were fundamentally problematic- US Banks who created genius methods of moving dangerously large amounts (trillions of dollars) of credit risk from their balance sheets into accounts of money managers and less sophisticated investors across the world- Regulators who stood by and allowed US banks to carry on- Hedge fund managers who invested heavily in high-yield debt products without thoroughly understanding themPast to Present15 years ago banks funded (and obviously wrote) their own loans. Already in 2003 when I was at a mortgage brokerage firm learning the ins and outs of back-end financing the banks would originate the loans through variety of subsidiaries (sometimes directly), and keep them on their own balance sheets for a relatively short period of time before pushing them to investors by rolling a batch of mortgages into CDOs (collateralized debt obligations). This system allowed banks to tie up much less capital in these mortgages, enabling them to put more money out to finance more loans.The more loans sold, the more could be used to back more loans. The credit standards were lowered to sell more paper (something that the loan sharks helped considerably with). Buyers were primarily pension funds, insurance companies and hedge funds. U.S. and Japanese managers leveraged their bets by buying CDOs with borrowed money on low interest rates. Then credit-agencies (relying on the models developed by the above-mentioned technicians), claiming that these loans would rarely default, used CDOs as collateral to borrow more funds. If you followed me through the loop, thats 3 stages
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