Pain train is coming to town.

Holy cow I am very tired. In addition, the US capital markets seem to be going down quick and there isn't any real hope they will get better any time soon.

So, the quick summary is that for a long time housing prices had been rising. During this period some very questionable loans were made because *if* the house prices kept raising even if the homeoners couldn't pay the loan off the bank was left with a house that was worth more than the loan was worth. Thus from the bank's point of view it was a win-win. Huge adjustable rate loans matched to properties that couldn't drop in price.

Well the reality of the situation is that properties definitely can and do drop in prices. There is really no such thing as a safe real estate investment.

From the homeoner's point of view, when the property values rise this is awesome. Put down a 10 or 20 grand and you leverage a at least 2 or 3 hundred thousand dollars. If it rises, lets say 5% you have just about doubled your investment. This is called leverage and it really works both ways. Should it fall 5% you lost twice what you put in.

A lot of people bought houses they could barely afford in order to leverage the most amount of money they could. By barely I mean that for all intents and purposes they could not afford these houses.

Now lets say you can't really make the payments on the loan. Then you sell in the best case or default/foreclose in the worse case. If the property value has appreciated, then the bank wins whether you sell or whether you foreclose. If the property values drop, then the bank is only better off if you sell.

Lets say you have a lot of these properties. You are the bank. Now a ton of them have dropped substantially in value *and* your homeowners (odd term when there is a mortgage involved) can't pay you are screwed. Thus you lost a lot of cash.

In any case, this is probably a gross simplification but a huge amount of capital seems tied up in bad mortgages on bad properties.

The effect of banks going out of business is that everyone from you to your grandma to the farmer down the road cannot get capital easily. This will hit businesses increadibly hard because it is difficult to buy stock without capital. Thus the easier it is to get capital the easier it is to buy stock. This is also important because farmers need to buy seeds and, quite frankly for the US economy, people need to buy houses.

--digression--

A lot of stinky Europeans are talking about how much the US deserves this because we have an extremely unregulated financial market. I think this is a load of bullshit, personally. Europeans tend to be the most fiscally risk-averse people you have ever met. They like to have a single job for 1000 years and throw a fit when they might actually have to change that job. Of course our financial system is more unregulated but in the long run I think that it is probably more effective because of this. We think of all sorts of interesting ways to make money that you just can't do in Europe because the risks are too great. Every now and then there is going to be a serious correction; but at least we *can* buy a house. At least we *have* access to good fair credit.

So if you listen to a lot of BBC and various other outlets you will continually hear the reporters ask if this will lead to more regulation. I sincerely hope it will not; that regulation will make capital for small businesses harder to come by and make owning a home a much more distant proposition for millions of Americans.

--end digression--

In any case, we are going into a serious correction. This will most certainly end in a recession but it should not end with a depression. A lot of smaller businesses are going to have a hard time because they can't invest in stock required for their operation as easily. A lot of people are not going to have houses or are going to lose their houses and that is the way it is.

So lets talk about the government's buyout plan. First, let me explain my biases because I am sure they have colored my analysis of the situation.

When I hear the Bush administration talking about $700,000,000,000 of money going to someone I assume it will be the top 1% of Americans it will go towards and it looks like initially this is the case. I haven't made it into this percentage group yet so of course I think this is utter bullshit.

They want to buy the bad assets from the banks. This will let the banks off the hook and leave the taxpayer holding onto approximately $700,000,000,000 of foreclosing mortgages and poor property values. Should the taxpayer hold on to this long enough they will surely get this money back. The main question is how long is long enough and what is the real return on investment.

Notice that I didn't say they will buy the high-interest-rate ARMs from the home owners. The home owners get no protection; the banks and financial institutions get to continue business as usual. Most likely the managers of said banks will continue get their awesome bonuses just as they would have anyway and a lot of them will talk about how hard the crisis hit them to ensure the proletariate don't get too upset.

They needn't worry about it, however, as the proles will never revolt.

The Democrats in congress are attempting to provide the other side of the equation. They want some of this money to go to homeowners buy most likely refinance the sub-prime mortgages into ones that have a little more lenient interest rates.

Now, let me quickly say what is really going to happen. Should congress authorize this gigantic bill who controls all of this money of the long run? Somehow money will start flowing into some account, and some group of legislators will be put in charge. A bit of it will go towards the advertised uses; whether the banks or the homeowners. The rest will be buying the most cocaine, hookers, and bridges to nowhere you have ever seen in your life. Those senators will suddenly have amazing reelection campaigns because whoever stands to get even a little bit of that money will fucking hook a brotha up.


Which is why, at the end of the day this just will suck for a while and who knows what will happen. Everyone will say how they supported whatever solution the legislative branch comes up with and talk about how they were really working for the American people. These guys are assholes. First rate assholes.

Chris