mortgage bubble

nobull

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Sep 27, 2010
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A post of mine from a financial blog that explains the economic how the taxpayers got left holding the bag for this reckless gov mortgage bubble.

I am opposed to gov monetization. Let me explain why this has happened.

The best way to fix debt is to turn it into equity. For example a bank has bond holder debt, and share holder equity. But the debt is very large due to mortgage failures. What should be done is take say half of the bondholder debt and convert it to stock or equity. Thus the bond holders own the bank and bear the risk.

This would immediately fix the balance sheets and banks could be well capitalized. Plus, a healthy well capitalized bank would be a lender and would seek profits through loan expansion.

What has happened however is that the bondholders who have a lot of political influence, did not want to convert to equity. They wanted the gov to buy the bad assets and hang the taxpayers with the burden. The result was poorly capitalized banks that hoarded the gov money and stopped loaning basically assuming the Zombie position.

There can be no expansion of earnings without lending but there is no lending when tier capital requirements rest on government buying debt.

The rhetoric is astonishing now. Everyone knows this monetization is not working. Look at Obama... he makes a speech that no bank is too big to fail. Then the policies are exactly the opposite to create these zombie banks which are no more solvent than the day they got in trouble. There is absolutely no reason for this other than those who set gov policy favor bondholders and have no scruples about unloading debt on the taxpayers.

Look at the operation of the companies behind this idiocy. Goldman. What'st the goldman model? They sell bonds but if you look at the company a huge amount of its income goes to compensation, not shareholders. So it is more of a political institution than stock company. It has virtually unlimited gov influence.

Reorganization as I have discussed is the way it should be done. All this mess would have been cleared up long ago but instead, amazingly, we follow the failures of Japan, directly along the same line.... and somehow expecting different results. Zombie businesses are Zombies.

My big concern is that public debt is like welfare and people on welfare get accustomed to being lazy and doing nothing. These Zombie banks are the same. The gov will keep on buying debt and removing all risk from these Zombie banks. So the lip service that no bank is too big to fail is absurd. They are saying the opposite with monetization.

Ultimately in my mind, the printing of money will leach into the money supply and at some point, there is likely to be a massive inflator. The game Bernanke is playing here is that "public debt" which was once private debt, has value but will not mingle with the money supply M1. In other words, Bernanke is implying that the money the Fed is using to buy debt will never actually touch the Money Supply. It will reside in sort of a vacuum jar of debt.

But this leads to all kinds of perception problems. So back to my model of the poker players where the gov this time is printing money under the table but only using that money to reduce the debt of the bad players. They are not actually giving them the money to squander. They are buying the debt and saying to them, when your car game improves you should be able to pay off your debts. So we will just keep your creditors happy with our guarantees and you keep playing.

What has happened here is that no money has been put into the game. So the gov says it has not increased the money supply on the table so this will not add to inflation.

The big problem with this approach is you create Zombie poker players instead of throwing the bum out of the game and playing without him or letting somebody new come in to play. So the fundamental business structure is lost and we have this oddball gov. monetization inflicting itself on interest rates. This is because the risk has been removed from the game. The Zombie players can play indefinitely. RISK of capital has been removed.

In Sum: The right way to fix debt is to convert it to equity. The wrong way is through the political machine of monetization which removes RISK. Once Risk is removed, you have Zombies that have no business survival instinct. The net result is zero growth.

But there are unforeseen consequences already arising. These include the perception that printing money will lead to inflation. So commodities are spiking and bond yields are flat. And why the money managers are so euphoric over more QE II is simply beyond my comprehension. Stock Markets are houses of equity and Risk. To promote zombie business is like saying our goal in America should be to get 60% of the population on welfare. It makes no sense.

Bernanke in case you have not noticed is something of and egoist. Well so's Obama. So once these guys take a path, they take it to the Hitler conclusion or in this case maybe the Goldman conclusion.

Think about it... who has really thrived during this economic crisis? Small business? Nope. Billionaires, Bankers, Bondholder, and wall street shysters. Everybody else is virtually underwater, and unemployed. So the answer is more QE II, and as you can see from the mechanics of monetization, it will not do anything more than reduce RISK and increase Zombieization. The debt will further sink the taxpayer, push housing down, and do nothing for job creation.


Regards
Doug
 
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