Government Bailout? – Piggington's Econo-Almanac

This topic has 11 replies, 8 voices, and was last updated 18 years, 2 months ago by bubba99.

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September 30, 2006 at 6:59 PM #7642

powayseller
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Can the government bail out this housing collapse and upcoming recession?

Let’s see how that might work by looking at the last burst bubble. See what they did, who was helped in the aftermath of the 2-year decline in the stock market dot com collapse.

First, they did not help the individual investor. They help, as they usually do, the economy as a whole. So while many Americans lost half their net worth in the stock market, the government could not help them. Too bad, Mrs. and Mrs. Jones that you took bad risks. But we will help the economy to avoid a recession.

Second, the government has a history of bailing out banks in trouble, so I’m sure that when WaMu and CitiBank and others get into trouble with loan defaults, the government will bail them out to avoid a banking collapse.

Third, the government has a history of starting war in bad economic times, because war is good for the economy. My 78-yr-old neighbor, who lived through the Great Depression and has the stories to tell about it, think our economy is bad enough that our government will start a war.

I don’t think the government will help any homeowners who lose their homes. The government does not have a history of bailing out individual investors. There is no concern of homelessness, because there is a glut of housing, so people who’ve been foreclosed can simply move in with their family or rent one of the 4 million homes for sale, many of which will find their way to the rental market.

I expect a large tax increase to bail out the banks and GSEs, on the order of $200 bil – $3 trillion. I have no clue how much money is needed to bail these entities out.

I think our deficit is too high to start a war now. We’re already in a war, and it is too expensive and unpopular.

The Federal Reserve will lower interest rates by later this year or early next year, in response to the recession. However, interest rates have been dropping the last month already on the short and long end, and housing sales continue falling, so lower interest rates are not going to stop the collapse.

What do you all think the government will want to do to stop the housing market collapse and rescue the economy?

September 30, 2006 at 7:05 PM #36906

Anonymous
Guest

PS, I think this is THE important question.

I’m still wading through some history books on this (and I’m a slow reader, unfortunately), and once I gather my thoughts, I’ll post them.

I look forward to hearing folks’ thoughts on this.

September 30, 2006 at 7:30 PM #36908

powayseller
Participant

The last time we had a national housing downturn and recession was in the early 90’s, right? We ended up with bank and savings collapses, lots of foreclosures, high unemployment.

What did the gov’t do in the 90’s to mitigate this? How will any government intervention have better results than the one in the 90’s, when our problems this time are so much worse and our deficit so much higher?

September 30, 2006 at 7:42 PM #36909

waiting hawk
Participant

They can’t really do much unless give money to home debtors and increase inflation to Zimbabwe standards.

My website tracking Temecula and South Riverside County

September 30, 2006 at 8:15 PM #36910

rseiser
Participant

Poway, you really outdid yourself with a great post. Yes, I agree it is a very important question. As for the answer, I have no clue. But here is something I said earlier in the year about the inflation/deflation debate, and what the government will do. I think all things considered the government still pitches to the voters. They will probably try to please as many as they can, and on the side pocket some money for themselves and their cronies, whatever they can get away with. So, look at the overall pressures and try to find which way they point. If we have a universal credit contraction, and everybody is in debt, the government might just lower interest rates and print money. But the forces in commodities might point up strongly, and also there are many people (retiring baby-boomers) who are not in debt, so this might limit the government’s ambitions. I can’t really see the government do anything to keep the housing market or stock market at the present level if oil goes to $100 and gold to $1000. Why would they anger retirees? But they might do something if housing drops 60% and gold only rises 20%. So basically, my answer would be that there will still be pain for homeowners, and there can still money be made by contrarians. But when the pain gets too large, or a large group of people or banks are headed for zero, the government will probably bail them out to prevent that. But it might not matter to me so much since I really don’t care if say LEND goes from $37 to $10 or from $37 to $0. I am not betting on the last $10, hoping that other opportunities will arise at that point. But I agree, it is an interesting and important question. And after all, if a stock trades at $1, it does make a big difference if it goes to $0 or to $10. This is actually where some great investors made the big money. So we have some time to answer this question. Maybe by then we know if we should risk getting long on certain $1 stocks.

October 1, 2006 at 6:24 AM #36916

LookoutBelow
Participant

I fully expect the govt to try and do something about it. The keyword is "Try"…..They may have let this little economic boost and detour from the dot com depression grow into the proverbial "800Lb. Gorilla"

I am of the mindset that it CANT be stopped at this point, the fallout will be painful for many, many people. This is another one of those "cycles" that make up the graph.

As usual, the little guy has a very tough time cashing in on these type declines. The S&L faliures of the 90's made property available at previously unheard of low amounts, but as usual, the big fish seeing this as an opportunity to use their financial might and make a very quick buck then the available properties were all wrapped up into HUGE real estate portfolio's and only the very, very rich could bid on these "portfolio's" that were starting at around 600 million dollars per package, then they tack on another 25% and only THEN do they make them available to the little guy, you and me, so our real savings bargain was dliuted by at least 25% or more.

I did get to buy 2 lots on a very exclusive golf course and I flipped them in a 2 year period and made some serious (for me) money on. I just wanted to do it again and again ! But was priced out pretty quickly when the big boyz got wind of it.

October 1, 2006 at 11:20 AM #36929

no_such_reality
Participant

I’ve been pondering this question too. The banks are already positioning it as Fraud, fraud, fraud on the part of individual home buyers.

Other than an S&L type bail out of the banks backed by the taxpayers for all the fraudulent loans buyers foisted upon them, I don’t see what the Gov will do to prevent what will be local market conditions. The banks will be a national issue, SoCal’s housing implosion will be SoCal. Texas will keep chugging along. Detroit, Indiana, and Ohio isn’t a housing issue as much as a jobs issues.

In the end, I think experiencing a single asset revaluation is a lot easier on everyone than experiencing a currency revaluation.

October 1, 2006 at 11:51 AM #36932

DaCounselor
Participant

I think that lowering interest rates will probably be the extent of it. The rest will be up to the lending institutions and debtors themselves. Assuming that the collapse will be initiated largely by ARM resets, lower LIBOR = smaller increases in payments after resets. This would probably reduce the the size of the collapse. Lenders, of course, can attempt to save themselves and individual property owners from the inmpending foreclosure/distress sale process by simply re-negotiating ARM terms prior to or at the time of reset, but I wouldn’t hold my breath.

October 1, 2006 at 12:08 PM #36933

powayseller
Participant

If interest rates are lowered too much, foreigners will sell their dollars and get into euros. There is a tipping point, so the Fed has to be mindful of our addiction to foreign investors. Other FCBs are raising interest rates due to global inflation pressures, so we’ve got to keep ours high enough to attract the foreign money we so desperately need to keep our government employees paid, etc. Party’s over, how can you save a drunk? He’s got to vomit, have a blasting headache, and feel sick for a while. There is no cure for this.

October 1, 2006 at 5:24 PM #36971

Anonymous
Guest

Please go to table L.210, Agency and GSE-backed securities.

http://www.federalreserve.gov/releases/z1/Current/z1r-4.pdf

FNMA/Freddie Mac have issued $3.8 trillion of mortgage-backed securities (line 4). Those $3.8 T in MBS' are held by households ($641B), U.S. banks ($1.1T), mutual funds ($483B), and foreigners ($1.1T).

When those MBSs go down in value, due to defaults, the savings of lots of folks here in the U.S. is going to be written off: folks will see the value of their mutual funds go down, see their directly-held MBS' go down, and see the interest earned on their bank CDs go down (as banks will be writing off their declining MBSs, and won't be able to offer higher rates on deposit accounts and CDs).

I'm guessing that the Feds will get involved, extending special loans to homeowners, preventing evictions until folks are 12 months overdue, etc. But such will only stretch out the pain, as happened in Japan in the 90s. Only if the disease is allowed to naturally and fully run its course, and loans are allowed to be written off, will we see a recovery. Yes, when loans are written off, many will see their savings take a huge hit. But, that's exactly what is needed; those assets — S&P 500 stocks (17.4 P/E as of the end of August), homes on the godless coasts, MBSs — have artificially high valuations. When those overinflated assets get written off, folks will see big reductions in their investment accounts, and will be forced to 'oversave,' to make up for past undersaving.

It's going to break my heart to see the self-indulgent Baby Boomers work longer than they hoped and planned.

October 1, 2006 at 10:06 PM #36984

powayseller
Participant

Add to that the MBS sold through private lenders.

I sure hope the gov’t does not bail out homeowners. The bank can take back the house, sell it to an investor, and let the former owner rent the house. Maybe we’ll see the formation of mutual funds which buy up real estate. I don’t believe the taxpayer should be responsible for the financial mistakes of individuals.

October 2, 2006 at 8:46 AM #37002

bubba99
Participant

It was easy money that created the bubble, and I can see the FED using the same tactic to forstall any housing bubble burst.

What if a new “special tax free” mortage backed security was created that paid 3% tax free and provided new 3.x % mortage money for 12 – 24 months to be used exclusively to re-finance action arms or other shakey mortgages.

With governmant guarantees the money would be available, the loans would limit the foreclosures on homes financed with “questionalble” mortgages, and prevent a spiral of downward pressure on housing.

I have no reason to believe that this will happen, but this or something like it could be in the FEDs bag of tricks.
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