Friday, February 20, 2009

[foreclosures] as night follows day

Denninger says:

So Obama comes out with his "plan" to try to halt foreclosures.

It won't do it, but it sure sounds good.

I will give him an "F" for substance but an "A" for effort.

Why an "F" for substance? Because what he's trying to do fundamentally cannot be done.

The fundamental problem is that everything got levered up to the gills during the bubble years. Now all these "upside down" assets are a huge millstone around everyone's neck - a problem from which we cannot realistically escape by any means other than realizing the losses.

Why not? Because for nearly 20 years one of the fundamental requirements for sound lending - that is, the sharing of risk by the borrower and provision of a buffer against asset value declines (this is commonly known as a "down payment") was systematically removed from our financial system across all asset classes.

See, assets do not always rise in price. It doesn't matter whether the asset is a stock, a bond, a piece of real estate or anything else. This is especially true when one "pumps" asset prices through the provision of nearly-unlimited credit without regard for ability to pay.

Read the rest of it.


Wolfie said...

True and there is worse yet to come as this new administration is exacerbating the problems yet further because it refuses to interpret exactly what the party did wrong (even out of office) to the economy. I'll be writing a bit about this shortly (in a generalised way).

James Higham said...

We watch and wait.