jyurasek, put yourself in the shoes of many of the participants who are in this up to their necks.
If you’re head of a bank or hedge fund with a lot of exposure, you’re out of a job for certain if home prices drop a lot now. This plan may get you 5 more years. That’s better than 5 more months. And at the end of the 5 years, who knows, maybe your losses won’t be so bad, or maybe not. At least you get 5 more years, and a second bite at the apple at the end.
Yes, total ultimate losses may be deeper by waiting 5 more years, but each individual participant facing ruin now doesn’t care about that. From an individual perspective, nothing is worse than an immediate 100% loss. If a bank’s losses are terrible 5 years from now, the CEO won’t be worse off than if he’s fired today.
If efforts to boost home prices fail, then the Fed and other govt institutions will try everything in their considerable power to inflate while keeping (at least some key) interest rates low.
