Friday, May 29, 2009


Money Morning is one of a handful (or two handfuls?) of investment newsletters that I get on a regular basis. While the ultimate goal of these e-mail newsletters is to sell you their investment products there are several that provide very good market news and political analysis. Money Morning is one of those newsletters.

In this Money Morning review - "Obama Stimulus May End Up Hurting the Economy it Was Supposed to Have Helped" - Martin Hutchinson writes that because President Obama's economic stimulus package adds to our national debt that interest rates are starting to climb. This is not news; it's Economics 101 stuff.

The news lies in the impact that rising interest rates will have on a housing market that is being beaten down by foreclosures and the effect of rising unemployment.

Hutchinson predict that if housing prices continue to fall (which they will; see my "These Guys Still Don't Get It" post below) then "on average every 80% [of] mortgage[s] undertaken since May 2002 ... would be underwater." Let me put this another way - and as a way of emphasizing - the net effect of a continued collapse of housing prices would be that every home owner who purchased a house with 20% down since May 2002 would owe more than it's worth. Why is this scary? Because people will walk away from their homes in droves.

How do you fix this? There are several ways. One, which I've been suggesting over the past year, is to nationalize the failing financial institutions. This would allow the federal government to renegotiate home loans that are under water rather than leaving the job in the hands of a failed industry that is not negotiating in good faith.

Think about it. The U.S. taxpayer is going to get stuck with the bill either way. But I'd rather get stuck with a scenario that stabilizes home ownership (good for Main Street) rather than with a scenario that includes record foreclosures, a wrecked housing market, and subsidies for financial institutions and market players who got us into this mess (which Wall Street wants).

Unfortunately, President Obama listened to Wall Street and ignored Main Street when he left the failing banks in the hands of the morons who got us into this mess. Today they will not negotiate in good faith with homeowners who have stable jobs and who want to stay in their homes because they - and the market players who own a piece of the mortgages - don't want to see the value of their "investment" go down. I'm not sure what this is called, but in my book, this is not capitalism (seriously, read my book, it's not capitalism).

At the end of the day, if the housing market continues to collapse, we need to let Wall Street know that they will also have to pay a price for their greed and stupidity. We can't just let homeowners and the American taxpayer pay for this mess in the form of bankruptcy, foreclosures, wrecked credit and future tax burdens.

- Mark

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