Why the $700 Billion Bailout Won’t Work
The plan is to use the $700 billion dollars of newly printed money to purchase “distressed assets.” My interpretation of this is that these are loans where the people are late at paying or show signs that they will not be able to pay the mortgage soon such as ballooning debt or lowered credit score.
So the government is supposed to buy these “bad loans” from the banks then hopeful turn around and sell them in the future at a higher price than what they paid for them.
For sure these will be “bad loans” because the banks won’t likely want to sell good loans to the government.
The money paid for these bad loans cannot be too low, or the banks won’t receive enough money and the wrong message will be sent to the market. The government has been stating that they want to pay above
current values for these loans so that it sends a positive message and so banks have more money.
So, how can we make money at this if we cannot buy below market value for the loans which will most likely fail anyways?
As far as transparency goes, will the government know just how bad these loans are? If they purchase one home, for instance, will they find out that the person owning the home also has seven other homes
that he has defaulted on while only making $50,000 a year in income?
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As we all know some of these bad loans will be from people who purchased inflated priced homes that just a few years earlier were selling for half of their purchase price. The cash flow from these bad loans will stop unless they are refinanced at a lower interest rate and a lower principal amount.
Many of these loans will be from people that will stop making payments at some point. The interest rate cannot be low enough for these people. Instead, the loan will have to be lowered to something that is affordable.
So this means, these bad loans will have to be refinanced with the bank first or with the government after purchasing. So, if an individual owes $400,000 on a home that is worth $150,000 the loan will have to be refinanced so that the new balance is $150,000 and that the interest rate is a fixed rate such as 6%. So the government will clear the borrower of the other $250,000 owed. Obviously in case like this, the loan won’t be worth much.
The sort of message that this will send to Americans will be that if you fail, the government will bail you out whether you are an individual or a bank. Obviously, those that are current on their mortgages or those that didn’t get the refinancing or loan balance won’t be too happy.
Banks and people that made foolish decisions need to be accountable for their actions. This plan sends the opposite message. The recent decisions made by our goverment show that US is changing from a capitalistic economy to crony capitalism or socialism.
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