The Real Cost of a Full Bailout
A recent study from the Congressional Budget Office (CBO) has zero credibility. It pegged likely taxpayer losses in the Fannie Mae and Freddie Mac bailouts at $25 billion. For those with a sense of history, it is worth remembering that the S&L bailout had a $160 billion price tag. The numbers diverge so far from reality as to be laugh-out-loud funny. Funny, that is, except that the CBO estimate demonstrates a willful disconnect with the actual consequences of federal government actions. The real cost of the bailouts could easily exceed $1.3 trillion. FULL ARTICLE
Comments (17)
What I am left wondering is why when private business is so fast and loose with reality to the ulitmate detriment of interested parties, they get hauled in handcuffs, but when it's the government bureaucrats thrive and Pols are re-elected?
We can blame the government for fooling people with smoke and mirrors (e.g. fiat money) but it stands that a chunk of the population WANTS to be fooled. We need to battle the fools who put these liars in power.
Published: August 22, 2008 9:15 AM
The driving factor behind the federal bailout, regardless the cost to future generations, is the local base. Local governments can't raise the mil rates without facing hordes of residents carrying pitchforks and torches, so they need to maintain artificially high taxable values, to continue plundering the middle class through the vehicle of the property tax.
Of course, the banks don't want to be caught in their fiscal malpractice, either. They certainly don't want to lose money. Bankers, I'm told, have some influence in D.C.
It is local governments, working through their federal representatives, that are pleading for the Fed to maintain their property book values.
All in the name of helping the citizen-homeowners, of course: the citizens who should have known they were getting a too-sweet and unaffordable deal (but didn't, largely because they were "educated" by a federally-supervised school system that is run, de facto, by irresponsible teachers' unions).
Published: August 22, 2008 9:18 AM
To summarize Mr. Kern's comments above, the entire economy has been turned into a vast Commons Tragedy.
Published: August 22, 2008 12:59 PM
Median Price of Home ~$220K
About 1/5 Homes Unoccupied ~19M, so ~100M Total Homes, ~160M Household, ~70% home owners, so ~100M homes sounds good.
30% drop in Home Price = $66K X 100M homes = $6.6 Trillion loss
50% drop in Home Price $110K x 100M homes = $11 Trillion loss
That's not even including commercial real estate, stock market losses, derivatives failures, and unemployment following bankruptcies.
Look for anywhere from $10Trillion to $100Trillion in losses, at minimum a *doubling* of the national debt (not that those will all all be going on the government books, it will mostly just be an evaporation of wealth).
Published: August 22, 2008 2:44 PM
Here is an interesting article. Again how far off was Ben Bernanke in his estimate?
http://www.telegraph.co.uk/money/main.jhtml?view=DETAILS&grid=A1YourView&xml=/money/2008/08/08/ccrisis108.xml
Governments caused the credit crisis, but capitalism gets the blame
By Ambrose Evans-Pritchard
The Fed clearly had no inkling of the shock that was about to hit them last year. Mr Bernanke said on June 5 that " the troubles in the sub-prime sector seem unlikely to spill over to the broader economy or the financial system". Losses would be $50bn to $100bn. (The IMF now says nearly $1,000bn).
Published: August 22, 2008 3:41 PM
Don Rich's numbers are indeed true and accurate and we are about to enter a period never before seen in this country. These GSEs will not be allowed to fail for what are obvious reasons such as bank and retirement holdings, etc. Hyper inflation too is not an option, as folks would never buy another GSE, bond, or in the worst case, a financial disaster would lead to many American deaths. Financial stability of some type is a must. It is not an option! However thinking back about inflation during the start of the Reagan years I recall how "Individual Retirement Accounts" soaked up the excess dollars in circulation. This program was about inflation, not about retirements. It worked, or at least postponed the effect until people actually retire (starting this year). I foresee another government "program" coming down the pipe that will suck up the excess housing and defer the hyper inflation for more years. Perhaps urban renewal on a nationwide scale complete with tax rebates?
Published: August 22, 2008 9:26 PM
Don Rich's numbers are indeed true and accurate and we are about to enter a period never before seen in this country. These GSEs will not be allowed to fail for what are obvious reasons such as bank and retirement holdings, etc. Hyper inflation too is not an option, as folks would never buy another GSE, bond, or in the worst case, a financial disaster would lead to many American deaths. Financial stability of some type is a must. It is not an option! However thinking back about inflation during the start of the Reagan years I recall how "Individual Retirement Accounts" soaked up the excess dollars in circulation. This program was about inflation, not about retirements. It worked, or at least postponed the effect until people actually retire (starting this year). I foresee another government "program" coming down the pipe that will suck up the excess housing and defer the hyper inflation for more years. Perhaps urban renewal on a nationwide scale complete with tax rebates?
Published: August 22, 2008 9:28 PM
It is very interesting to watch how real estate prices have corrected sharply like the stock market did a few years ago. Our government will continue to print excess dollars to try to cover $3 trillion of federal spending. The inevitable result will be another upward trend in real estate prices. Why keep your savings in money market accounts, treasury bills etc where inflation and income taxes erode its value? Americans and foreigners should convert their depreciating dollars into real estate now. As more rational governments, institutions and individuals on our planet dump dollars, real estate prices must rise. Another huge federal bailout will only accelerate the inflation process. Demographers predict US population to reach 400 million by 2040. Higher demand causes higher prices. Cash is trash so why do investors buy CDs, treasury bills and money market funds instead of gold, real estate and profitable businesses?
Published: August 22, 2008 9:36 PM
Communism does work; corporate communism doesn't work either. But don't tell those corporate capitalist bastards who run to mummy when things go pear shaped.
Published: August 23, 2008 5:09 AM
Don, I cannot find Case Shiller going back any further than back 20 years. Where did you get the graph?
As far as "inflation" ... the Fed hasn't been increasing base money at all during one of the worse credit contractions since the Great Depression. All the stuff they've taken on their balance sheet as assets they've subtracted from the liability side. Mises.org has consistently got this wrong by not referencing the actual facts of the situation. Rising commodity prices are a result of prior inflation, not inflation from the last 3 years. While they may yet use the fiscal powers of the U.S. government to convert private debt to actual public money, they have not done this on balance. No one knows what will happen in regards to the speed of contraction compared to the authorities "ability to take action" so a decent position is to hedge both sides.
For example, the geopolitical realities may force the authorities to support the dollar to a greater extent than before, else the U.S. will lose a major leg of it's ability to project power into the middle east. So I'd be really cautious inspiring people to bet on massive inflation, even though oil and other commodities might be the strongest price. If you lose your job and have your money in inflation bets, you could be seriously impacted.
Only recently (last 3 weeks) has the Fed let up and allowed the monetary base to expand moderately (3% rate).
You can confirm this by looking here: http://research.stlouisfed.org/publications/usfd/page3.pdf
And if you know how to manage the changes in repos to get to a bottom-line figure, you can best confirm that analysis here: http://www.federalreserve.gov/releases/h41/
Published: August 24, 2008 9:55 AM
JIMB,
You're right about Treasury swaps. No new money is being created.
This worries me because it makes me doubt the rest of the analysis that is presented on this site.
Published: August 24, 2008 12:14 PM
Interesting article Mr. Rich. Very little facts to back it up, however, just some back of the napkin math. It seems to have caught on quite well in the blogosphere. I find it interesting that you state the CBO's analysis has zero credibility. I'm having trouble granting you any credibility. You're not listed on the faculty of either Delaware County Community College or Montgomery County Community College, so I can't verify your credentials. Care to post a resume? After reading both your article, which is highly speculative, and the CBO report, which at least contains higher level monte carlo simulations and probability analysis, I'm going to side with the CBO on this one. Thanks for the entertainment!
Published: September 4, 2008 5:38 PM
Mr Rich,
There is a mathematical flaw in your analysis. You assume that if property prices fall 30%, then mortgage values fall 30%. In theory, there should be about a 20% buffer since the mortgages are only supposed to be for 80% of the property's value.
Walt F
Published: September 5, 2008 11:54 AM
There is indeed a mathematical flaw, but Walt F's is also flawed. After the buffer, say 20%, you become under water. But some will not default; they will just continue to pay the mortgage. Only a percentage of under water homeowners will walk away. Therefore, to calculate the loss for Fannie and Freddie, you need to figure out the percentage of homeowners who will default, and the average loss for each default. Does anyone have a good estimate there? Also, Fannie and Freddie both own and guarantee mortgages, and the calculations are different for these two types of businesses.
Published: September 7, 2008 7:43 PM
5 Trillion are mortgages, not home values. Suppose that house market goes down 30%, that does not mean 30% on 5 Trillion will not be repaid.
I can accept the assumption that the banks might lose 30% on subprime mortgages (Loan To Value of close to 100% on valuation of houses higher than "real" market value).
Why should bank lose ANY money on "normal" mortgages (i.e. LTV mortgages of 50%)?
Published: September 8, 2008 12:33 AM
5 Trillion are mortgages, not home values. Suppose that house market goes down 30%, that does not mean 30% on 5 Trillion will not be repaid.
I can accept the assumption that the banks might lose 30% on subprime mortgages (Loan To Value of close to 100% on valuation of houses higher than "real" market value).
Why should bank lose ANY money on "normal" mortgages (i.e. LTV mortgages of 50%)?
Published: September 8, 2008 12:34 AM
The excesses are apparent, it will be interesting to see if the next President has the willpower and backing to take charge. All the excesses since WWII are not washed, so hold on. Even with post-war monetary checks and balances the Kondratiev Cycle Theory will most likely bring us to historical equaibrium. Hang on to your...
Published: September 9, 2008 11:52 AM