Wednesday, October 01, 2008

Why I support the rescue plan

We need to flush our system out and return liquidity to our financial markets. The money in these bad loans is essentially gone and we need to face up to that. What do we do about homes that have a value now that is substantially less than their purchase price? No refinancing package will fix that. You cannot repay a loan by selling an asset for a fraction of the balance of the loan. The money is just gone.

IMHO one of the most vexing issues of this whole thing is that it was the voodoo loans that enabled home prices to rise beyond reasonable purchasing ability in the first place. Folks took out loans they could not pay back figuring their houses would appreciate in time for them to build enough equity to pay back the loans. The problem is the appreciation was due to the very type of loans they took out. It was a ponzi scheme. Once it collapsed folks were left with no way out. Home values plummeted. They are not coming back.

Only making loans that folks are going to be able to pay is going to have a long term moderating effect on the housing market, it has to. This will build in a price ceiling. All you have to do is look at the average salary of home buyers in the area. Assuming adequate supply, look at what somebody with that salary can afford and that will be the maximum possible average home price in the area, absent voodoo loans.

The voodoo loans that are out there will likely not be repaid. Their owners will default on them; no matter who owns the paper, even if it is the government. They have to. They cannot afford them. They have no choice. Frankly, I think the best thing to do is to think of this as a major natural disaster, like a major earthquake or New Orleans. Only it was our financial markets that were hit and that need to be rescued. We need to build liquidity back into our system or the cost will be greater. The market crash on Monday cost more in lost wealth than the rescue plan.

$1.5 trillion was lost that day. We all made this mess, Democrats, Republicans; we all built our houses on shaky soil. All this bad debt is toxic waste and all you can do with toxic waste is bury it. We also need to pass laws to keep this from happening again. The problem with unregulated capitalism is it leads to uncontrolled greed and corruption.


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