Financial Rescue

Stop the Hemorrhage - 18Sep2008:

The genesis of the crisis is the bursting of the real estate bubble. This bubble was driven by very low prime interest rates compounded by unscrupulous pushing of sub-prime mortgages.

The value of real estate became inflated because it was so easy to get cheap financing. And too many unqualified buyers were able to get into homes with ARM's which they became unable to carry or convert. US real estate is worth a tremendous amount of money. But much of it is now "under water" because the mortgages on it are greater than the value.

Those properties are going under at a large and rapidly increasing rate. As they do, their "real value" drops precipitously and takes the neighboring property values with them.

At the same time, the availability of loans to purchase homes has dropped precipitously with the loss in market confidence and so the demand for homes has gone with it. Because of that, the value of far more real estate has dropped; nobody is buying.

Purchasing the bad mortgages will help if the government can somehow turn those mortgages and the corresponding properties into assets and preserve their value. But it won't rehabilitate the depressed value of real estate because it won't increase the amount of real money in circulation. It won't increase anyone's ability to buy. That must wait till an effective plan is put into effect to create jobs and products to drive the economy.

19Sep2008:

Other loans against the value of a home place it at additional risk. And there are additional but perhaps secondary causes. But it was the infusion of paper into the economy via the Federal Reserve which led to inflated housing prices and out of control debt to buy them.

And that infusion of "money" has been "trickle down" for sure. It's come through the banks who are the ones in a position to borrow from the Federal Reserve.

Saving the banks does not remedy the cause of the problem; it just buys time at the cost of moving us closer to the "point of no return" at which our debt is too great to be overcome by future economic growth. We must focus on real growth schemes while temporizing (or not) with bail-outs.

Key Question: In this proposed buy up of bad mortgage based securities from distressed banks, how much of that money will be leaving the country? The assumption is that these are American companies and American properties. But the holders of the securities could be the Bin Laden family, Russian billionaires, anyone.