“All of these efforts sound nice and fuzzy, but they don’t address the ultimate bagholders though”.
The ultimate bagholders are:
A. Investors very hungry for yield, and unable to find much because of a wave of “global liquidity” coming from prodigious savings of the Chinese and some oil producers.
B. Future generations of taxpayers who will pay off the additional government debt incurred by the various new guarantee and rescue programs that FNMA, FDIC etc.
are all busily working on right now.
C. Chinese and other foreign institutional investors buying dollar-denominated bonds subject to inflation/devaluation losses.
Where do you direct the pain? Igniting inflation sends it to C. Congress can direct it to B. Doing nothing will send it to A. Likely, all parties will be asked to take some. The one place that Congress doesn’t want the pain to go to is the voters, i.e. homeowners, in their district. So which of the above 3 is least likely to hurt current homeowners?
What if the price drop in San Diego never exceeds 20-30%, and the rest of the country dips just 10-15%? Then maybe Congress will just go for A. But if price drops in SD exceed that, other areas of the country are likely to be hit hard too, and that will probably trigger some B and/or C.
