are we capable of carrying these debt levels for another decade?
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none of the bailout plans so far have made much difference to the housing market
reducing mortgage principal might help some people but the ‘forgiveness’ plans I have read about just transfer the ‘forgiven’ part of the loan into a 2nd note or lien that remains a burden on the property – the new mortgage is likely to be a recourse loan so the ‘forgiven’ loan holder puts their other assets at risk – better to walk away IMO
outright forgiveness of mortgage principal would have to be widespread and dramatic – we are talking about millions of mortgages which, in some cases, are underwater by several hundred thousand dollars per mortgage – it is possible but I’m not holding my breath
rewriting mortgages is complicated by the layers of derivative paper written against bundled mortgages – what happens to these MBS, CDO, etc when the mortgages bundled within them are being written down? – some of these derivatives have clauses that force the issuer to repurchase ‘bad’ mortgages at face value
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what signs do you see that indicate any slowing of debt build?
I see articles talking about $2 and $3 trillion dollar deficits in 2009 – lots of new spending with no reductions in existing spending
again, time will tell[/quote]
The structure of the debt of the late-1920s was very different than today. Much shorter-term and at higher rates, so the payments as a percentage of income were higher. Don’t get me wrong, I think a more sustainable – that is, “healthy” – level of debt-to-GDP is under 250% (200% would be nice), but the total debt service ratio at 280% today (given mortgage and treasury rates and terms) would be materially lower than the debt service ratio of the late-1920s. Again, I’m all for less debt. I’m just trying to compare apples to apples from an economic standpoint.
Where the mortgage restructuring issue is concerned, as I mentioned in my original post, the issue is that restructuring these things is complicated. I’m right there with you on this issue. It all looks good on paper, but actually going through these things one by one is a major undertaking. Again, even though it rewards dummies, I’m for outright principal reductions that we – via our ownership of Fannie and Freddie – will eat. But that’s just me. A year ago I would have been against it, but my tune has changed based on the severity of the situation. From a pragmatic standpoint, I’d rather eat my share of those losses via higher taxes than see a depression. Again, that’s just me.
Regarding federal debt, recall that a lot of the debt we’re taking on right now is backed by assets. Some of these assets are of dubious quality, mind you, but most are not. I think, for example, that the TARP money going into banks will be, net/net, money good. We’ll lose some money in a few cases, but we’ll make it back on the others. The vast majority of the banks getting the TARP money will survive, pay back principal and interest and the equity stakes will be worth something. But a few will fall over, undoubtedly.
The REAL NEW debt is comprised of (1) the various stimulus plans and (2) the losses we take on however we decide to tackle the residential mortgage issue. These are pure holes that have to be filled and will likely total a few $trillion, as I addressed in my previous post. And even the stimulus isn’t a total hole – there will be some real benefits gained. But I think you get the point.
