By Msgt Gunny
A wider picture of the planned lender's bailout to be decided next week.
Treas. Secy Hank Paulson said the credit markets are “ frozen ” and “ fragile right now .” And, he predicts that unless government intervention prevails, the lending practice will only worsen, and likely create a huge recession, if not a depression.
So, he comes up with his blow torch. In an attempt to “melt” these frozen credit markets, so the public can go back out and get new credit, that business can secure loans to keep its operations running smoothly. In short, putting money back into circulation, thus circumventing a recession, or worse. Yet what he really is doing is propping up private lenders, in an effort to keep what he perceives from major banks crashing, including foreign banks with US interests.
Not much is said about the thousands of much smaller banks, and the grubstake they will receive as part of the blow torch plan. Currently there are about 8,200 US banks and credit unions ; many experts predict that number will be cut in half in the coming months as the recession deepens (what recession, you say?) and these lenders go awash with other toxic mortgages and bad debt.
But to do all this, it will cost some $700 billion. Or there-abouts. Perhaps up to $1.5 trillion or more, to be self explained further down in this essay.
Paulson's plan is to purchase toxic mortgages and other derivates from the lenders to enable them to offer better lending. The plan would allow the lenders to move from a mostly insolvent position to being solvent once again, with its bad debts now “off the books.”
The plan means the government would use these funds to purchase the bad debts at a “deep discount” and then attempt to sell off the debts through a “reverse auction process.”
Only, nobody is giving any rationale about how the government will find buyers for these bad mortgages, most of which are foreclosed homes. So then, the government ends up owning millions of homes, which have to be maintained, insured and taxes paid on them.
Do you see the $700 billion now starting to grow?
Add to this mix, the many Wall Street so-called “experts” which will have to be brought into the Treasury to help administer not only the banker bailouts, but to provide the input in an attempt to smooth out the untold wrinkles of the plan. Likely the very same "creatures" who got us into this mess.
So how does the government actually get rid of these homes? Oh, right, get Congress to recognize it now has a new problem, with millions of homes on its hands (likely to be administered through HUD), and needs legislation NOW allowing FHA insured mortgages to be instituted through the lenders which it has now declared solvent.
After-all, did the PLAN really expect that investors would continue to purchase toxic mortgages and other bad debts about to happen soon? Thus, new legislation and the FHA playing a major role. Maybe a few savvy investors would “cherry pick” some desirable foreclosed mortgages, but for the most part, this would be extremely difficult to sort through millions of properties, unless one had an inside-track with government maintainers of these records, even to know where to look. This opens new doors for possible problems, if not outright curry favoring. It's a brotherhood thing, "doncha know"?
Since the government would now purchase the toxic mortgages “on the cheap” it can then resell them to interested home buyers, at a profit, or so it thinks. Of course, any profit would go back into the Treasury, (after expenses) to keep paying for the wars in Iraq and Afghanistan , with newer military equipment.
Remember, these planned funds are to be borrowed against the American public taxpayer's full faith and accountability to be administered through the Internal Revenue Service (IRS) which collects the taxes, and in turn dolls it back to the Federal Reserve for “interest” repayment on the government loan. And, we are all to believe that a new round of tax increases are not on the horizon? Think again!
Except there's one major hitch. The government will not be “bailing out” corporations, such as GM, Ford, Chrysler, and many other major corporate players already about to implode, which will only result in untold thousands upon thousands of unemployed workers. And when other corporations begin to fail, so it goes for reduced consumer spending, or even ability to pay regular monthly bills. Worst yet, who will be able to qualify to purchase a new mortgage, regardless of the methodology Congress will provide through FHA lending practices? And, what effect will that now have on the banks?
What does this plan do to a recently declared solvent lenders? Why, of course, it causes yet more toxic debt! Is there any other outcome that could be expected? Back to the basics, the lenders are now handling toxic foreclosures once again for those who did get new mortgages. And they are running into trouble again, because there is no new mortgages; thus a lender's freeze. (Oh, the blow-torch again?)
Does the picture now widen? Of course it does. In fact, the picture is that it encircles much like a merry-go-round. And this carousel keeps running around in circles until the electrical plug is pulled, and suddenly grinds to a stop.It could happen sooner, rather than later.
Recessionary? You bet it is! Can it cause an economic disaster ? One can only imagine the impact that begins by starting this vicious cycle of events.
While all of this is unfolding, nationwide unemployment is already at 7.5%. The number of existing foreclosures is nothing when compared to those already in pre-foreclosure, who soon will go into full foreclosure status. By a staggering 5 to 1 ratio over current foreclosures, and growing daily.
Want Evidence of this?
Some call this the “coming tsunami” that lurks in the shadows. Most have no clue as to the impact setting in the background already in pre-foreclosure status. A perfect example of this coming storm can be found at Realtytrac.com .
At that site, anyone can simply click on any zip code, then click on “maps” and get a startling revelation of just how many pre-foreclosures (blue flags) there are showing street by street, against a backdrop of already foreclosed homes (black flags), and see the ratios awaiting, for themselves.
Take a look at some of the hardest hit areas in California , Nevada , Florida and Michigan , as prime examples of just what is lurking in pre-foreclosures. The numbers are literally staggering. Take a real close look, and see if those blue flags doesn't give you the creepies of what is about to implode.
In case you may wonder just why these pre-foreclosures have not yet been determined to a foreclosed status, is largely due to the fact that the Circuit Courts are literally swamped with legal filings, and most do not even have the staff on hand to accommodate the daily filings, let alone more judges to handle the surge. That's the back log! And everyday the filings increase, as homeowners, unable to make that mortgage payment, walk away from their homes. Tent cities are springing up everywhere in the nation, not just "tent city" in California . Apartment complexes are raising the rent to make a better profit due to the surge in new apartment seekers. People are literally sleeping in cars, trucks, motor homes, travel trailers, by the thousands, anywhere they can. And by bailing out the major bankers, this will solve the problem? Or merely exacerbate it?
Back to Paulson and his blow torch. The question is will his plan work as he “ hopes ” it will, or will there be a further meltdown that would be unimaginable?
As the government leaders continue wrangling through the details over the weekend, it seems nobody is talking about any economic repercussions that could come from overseas investors, mainly China , among a dozen more. Moreover, little is mentioned anywhere about the American outrage that is going on at this very moment.
After-all, we all have to remember that most of our current debt owed to the FED, now some $9.4 trillion, is being covered by foreign investors, again China holding the lion's share, who, at any point, could change the course of economic events overnight. Already an article coming out of China news media strongly suggests it's country re-examine its financial position with the United States. And its not pretty.
The Treasury is broke, and the borrowing continues. Congress is likely to up the national debt to $11.5 billion by next week. This unfathomable amount will likely never be repaid, not even in the next three generations.
Start thinking about the coming credit card and auto loan defaults, already on the horizon, and about to burst. And ask yourself, if Paulson's blow torch plan will really work, or if its just a small flicker from a match.
Have a nice weekend.