Some math on how we’re going to get out of this mess

[davelj]

barnaby, I don’t disagree with anything you’re saying but… I’m a pragmatist, not an idealist. My tax share of this bailout will be huge. But I’d rather pay my share than see the country go into a depression. And I suspect the govt will force it down our collective throats. So rather than get miffed about it, I find it more constructive to just accept it and plan accordingly. I would be more upset (and prone to “action”) if I thought our officials were evil and that all of these measures were going to be permanent, but I don’t believe that. They’re just bumblers who very slowly come around to reasonable answers. The irony is that as each month passes and the economy and credit markets get worse (or don’t improve in the latter case), I think the Officialdom has a better understanding of the problems and how to combat them. Again, it will be ugly and full of trial and error, but we’ll trudge through this thing.

[davelj]

[quote=4plexowner]

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

************
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

~

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.

[davelj]

[quote=4plexowner]

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

************
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

~

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.

[davelj]

[quote=4plexowner]

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

************
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

~

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.

[davelj]

[quote=4plexowner]

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

************
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

~

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.

[davelj]

[quote=4plexowner]

260% debt was too much in the 1920’s

are we capable of carrying these debt levels for another decade?

************
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

~

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.

[Arraya]

In a very real sense confidence IS liquidity. The Fed has taken 2 trillion of questionable assets and has pledged to up to 8 trillion. There are 2 lawsuits against the Fed now to disclose the assets. One from Bloomberg and one from, interestingly, Fox news. The Fed is stating that disclosure would cause lack of confidence. Actually they are citing a trade secret statute in their reason for not disclosing. Like it is the formula for Coke or something.

Ironically, the only thing that will bring back confidence is transparency which they refuse to give. You have to ask yourself WHY are Bloomberg and Fox are so nervous about those assets? Until everything is thrown on the table and all losing bets are accounted for it’s a losing game and no confidence will return to the credit market, IMO

The structured finance market is dead and they are gambling with our money that it will come back when it is obvious it will not. What percentage of GDP was that? Those assets are losing value daily and foreign investors know this.

Adhering to an economy that relies on bubbles, over consumption and failed structured finance to survive wont and will only end in complete ruin. There is no plan b.

[Arraya]

In a very real sense confidence IS liquidity. The Fed has taken 2 trillion of questionable assets and has pledged to up to 8 trillion. There are 2 lawsuits against the Fed now to disclose the assets. One from Bloomberg and one from, interestingly, Fox news. The Fed is stating that disclosure would cause lack of confidence. Actually they are citing a trade secret statute in their reason for not disclosing. Like it is the formula for Coke or something.

Ironically, the only thing that will bring back confidence is transparency which they refuse to give. You have to ask yourself WHY are Bloomberg and Fox are so nervous about those assets? Until everything is thrown on the table and all losing bets are accounted for it’s a losing game and no confidence will return to the credit market, IMO

The structured finance market is dead and they are gambling with our money that it will come back when it is obvious it will not. What percentage of GDP was that? Those assets are losing value daily and foreign investors know this.

Adhering to an economy that relies on bubbles, over consumption and failed structured finance to survive wont and will only end in complete ruin. There is no plan b.

[Arraya]

In a very real sense confidence IS liquidity. The Fed has taken 2 trillion of questionable assets and has pledged to up to 8 trillion. There are 2 lawsuits against the Fed now to disclose the assets. One from Bloomberg and one from, interestingly, Fox news. The Fed is stating that disclosure would cause lack of confidence. Actually they are citing a trade secret statute in their reason for not disclosing. Like it is the formula for Coke or something.

Ironically, the only thing that will bring back confidence is transparency which they refuse to give. You have to ask yourself WHY are Bloomberg and Fox are so nervous about those assets? Until everything is thrown on the table and all losing bets are accounted for it’s a losing game and no confidence will return to the credit market, IMO

The structured finance market is dead and they are gambling with our money that it will come back when it is obvious it will not. What percentage of GDP was that? Those assets are losing value daily and foreign investors know this.

Adhering to an economy that relies on bubbles, over consumption and failed structured finance to survive wont and will only end in complete ruin. There is no plan b.

[Arraya]

In a very real sense confidence IS liquidity. The Fed has taken 2 trillion of questionable assets and has pledged to up to 8 trillion. There are 2 lawsuits against the Fed now to disclose the assets. One from Bloomberg and one from, interestingly, Fox news. The Fed is stating that disclosure would cause lack of confidence. Actually they are citing a trade secret statute in their reason for not disclosing. Like it is the formula for Coke or something.

Ironically, the only thing that will bring back confidence is transparency which they refuse to give. You have to ask yourself WHY are Bloomberg and Fox are so nervous about those assets? Until everything is thrown on the table and all losing bets are accounted for it’s a losing game and no confidence will return to the credit market, IMO

The structured finance market is dead and they are gambling with our money that it will come back when it is obvious it will not. What percentage of GDP was that? Those assets are losing value daily and foreign investors know this.

Adhering to an economy that relies on bubbles, over consumption and failed structured finance to survive wont and will only end in complete ruin. There is no plan b.

[Arraya]

In a very real sense confidence IS liquidity. The Fed has taken 2 trillion of questionable assets and has pledged to up to 8 trillion. There are 2 lawsuits against the Fed now to disclose the assets. One from Bloomberg and one from, interestingly, Fox news. The Fed is stating that disclosure would cause lack of confidence. Actually they are citing a trade secret statute in their reason for not disclosing. Like it is the formula for Coke or something.

Ironically, the only thing that will bring back confidence is transparency which they refuse to give. You have to ask yourself WHY are Bloomberg and Fox are so nervous about those assets? Until everything is thrown on the table and all losing bets are accounted for it’s a losing game and no confidence will return to the credit market, IMO

The structured finance market is dead and they are gambling with our money that it will come back when it is obvious it will not. What percentage of GDP was that? Those assets are losing value daily and foreign investors know this.

Adhering to an economy that relies on bubbles, over consumption and failed structured finance to survive wont and will only end in complete ruin. There is no plan b.

[arnie]

davelj,

thanks for your prognostication. As always, you seem to have a keen understanding of these matters and convey your thoughts with clarity.

Has anyone suggested or heard of the government providing down payment assistance? It seems to me to be a much easier proposition to let those who truly can’t afford their debt to foreclose and then provide the bank with assistence on the back end by letting the house sell for close to what the original mortgage was worth. This can be achieved by providing some sort of first time buyer down payment assistance of 15-20%. If combined with current interest rates this would get credit flowing again. It would also take away the moral hazard of people defaulting on payments just to get their principal reduction.

[arnie]

davelj,

thanks for your prognostication. As always, you seem to have a keen understanding of these matters and convey your thoughts with clarity.

Has anyone suggested or heard of the government providing down payment assistance? It seems to me to be a much easier proposition to let those who truly can’t afford their debt to foreclose and then provide the bank with assistence on the back end by letting the house sell for close to what the original mortgage was worth. This can be achieved by providing some sort of first time buyer down payment assistance of 15-20%. If combined with current interest rates this would get credit flowing again. It would also take away the moral hazard of people defaulting on payments just to get their principal reduction.

[arnie]

davelj,

thanks for your prognostication. As always, you seem to have a keen understanding of these matters and convey your thoughts with clarity.

Has anyone suggested or heard of the government providing down payment assistance? It seems to me to be a much easier proposition to let those who truly can’t afford their debt to foreclose and then provide the bank with assistence on the back end by letting the house sell for close to what the original mortgage was worth. This can be achieved by providing some sort of first time buyer down payment assistance of 15-20%. If combined with current interest rates this would get credit flowing again. It would also take away the moral hazard of people defaulting on payments just to get their principal reduction.

[arnie]

davelj,

thanks for your prognostication. As always, you seem to have a keen understanding of these matters and convey your thoughts with clarity.

Has anyone suggested or heard of the government providing down payment assistance? It seems to me to be a much easier proposition to let those who truly can’t afford their debt to foreclose and then provide the bank with assistence on the back end by letting the house sell for close to what the original mortgage was worth. This can be achieved by providing some sort of first time buyer down payment assistance of 15-20%. If combined with current interest rates this would get credit flowing again. It would also take away the moral hazard of people defaulting on payments just to get their principal reduction.

[Author]

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