On Sunday Alan Greenspan said "This is the Worst Economy I’ve Ever Seen."
That’s a pretty bold statement from the guy that built it! Greenspan noted that the government was left with tough decisions: which institutions are "so fundamental to the functioning" of society that they demanded a federal safety net? Earlier in the week, the former fed chairman noted that such choses extended to tax policy as well. In an interview with Bloomberg Television, Greenspan argued that the country couldn’t afford the tax cuts being proposed by John McCain without an equally massive reduction in spending. "I’m not in favor of financing tax cuts with borrowed money," he said. "I always have tied tax cuts to spending."
It will be interesting to see what Bernanke has to say today in the FOMC minutes, clearly we can’t just keep throwing more money at this problem but that’s never stopped this administration before which is why we are favoring some hedging in gold, in case our government’s solution is another $250Bn or so tossed onto the fire. It is shocking that, still, no one seems to be addressing the actual problem – people cannot afford their mortgages. 2.2M home foreclosures were filed last year and close to 3M homes will get filings this year. Every home that is foreclosed and dumped back on the market by the bank devalues the homes around it, causing problems for the remaining homeowners and it spreads like a disease.
5M US homes carry an average mortgage of $200,000 each, that’s $1Tn and their loss causes a write down of at least $400Bn, probably $600Bn. That write-down is future tax revenues not collected so the government is eating $200Bn whether they help or not. Since those foreclosed properties also cause additional performing asset write-downs, the losses can quickly double or triple. How much is the mortgage on $1Tn worth of homes? If those homes loans were backed directly by the government, paying every single one of them off in their entirety at 5.75% interest (and the government should be able to do better) would be $5,835,730,000 a month.
That’s right, $70Bn a year to fix every bank in America at once, to put value back on the books, keep American families in their homes, maintain home prices and give the country a chance to take a collective breath. Is that an outrageous idea, the government already took over the…