Friday, October 2, 2009

Iceberg, Dead Ahead!

Deck Chairs on the Titanic
Plan A
– Let the market do what it does best; punish those who make bad bets and really stupid decisions. Big crash, followed by some clarity on what the real value of things is. Economy recovers fairly quickly, and it’s back to work.
Plan B – Pull out every imaginable stop to try and keep the debt bubble afloat, increasing the debt and postponing the inevitable, at least through the next election. Entrepreneurs, investors, international trading partners, hell – everyone – remain unsure and therefore unwilling to make any firm plans. Economy flails around erratically for another couple of years while the Times Square Debt Clock spins out of control. In time, monetary collapse and a really, really big crash.
That the U.S. government is fully invested in Plan B is clear. As a result, like with the Georgian Bank, we really can’t know what the actual value is of pretty much anything. What would house prices really be if the government weren’t shoveling out incentive money and using taxpayer guarantees to stand behind 97% of all mortgages now being issued? Or, if interest rates were left to rise to their market levels, versus being manhandled down by the Treasury and the Fed? How much trouble are the banks really in?
In time, we’ll find out the answers, but not until the governments here and abroad either run out of rope or are run out of office. In the meantime, all we can do is shake our head at the folly and take active steps to avoid being caught on the wrong side of things. On the topic of folly, here’s a good one in the news today, out of Spain – which is a few steps ahead of the U.S. in this race to the bottom. The excerpt is from Bloomberg, from an article titled, apropos to Plan B,

Pain in Spain May Linger as Banks Seek to Avoid Property Losses.
Banks bought about 110,000 homes to keep losses off their books as Spain’s property bubble burst, according to real estate researcher RR de Acuna & Asociados in Madrid. Now they’re using strategies reminiscent of the boom times -- 100 percent mortgages, low interest rates and free cars -- to sell homes, potentially slowing a drop in prices that’s needed to spur recovery from Spain’s worst recession in 60 years.
Altamira offers clients variable-rate mortgages at the one-year euro interbank offered rate plus 0.4 percent, according to its Web site. That’s 1.64 percent at current rates. Santander offers a variable rate mortgage at Euribor plus 1 percent, according to data published by El Pais newspaper.
The bank also offers 100 percent financing, mortgage insurance and aid to buyers of holiday homes, according to the Web site. Altamira said in August that it had sold at least 1,100 of the 2,550 newly built properties it had on sale.
To which all I can think to say, Olé!

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