Monday, February 08, 2010

Option ARMs and deficit hawks

So the Obama administration is acting like we're all in the clear and setting up a budget that has some anti-stimulatory effects, a budget that assumes we're going to be in vigorous growth for the next few years. There's just one problem: We're about to have a massive hole blown into our monetary system again. Which renders all this concern about deficits rather quaint, because our real problem is that without sufficient stimulus substituting government consumption for the private consumption that isn't going to be happening, we aren't going to be able to print money fast enough to keep the economy from falling into a deflationary spiral.

The basic problem is that a huge hunk of the Alt-ARM’s come due for rate and payment reset between now and the end of 2011. As in, as huge a hunk as sub-primes in 2007. This is going to have two effects: 1) the rate resets will blow a hole in consumption as people have to pay on mortgages, and 2) a *lot* of people are going to default, driving down asset values even more. We aren’t done with this collapse in asset values by any means, and I’m suspecting that most banks are still carrying these loans at full price on their books even though they’re mostly worth maybe 60% of full price at best. That’s going to blow a huge hole in their balance sheets. You want to know why banks aren’t lending? It’s because they *know* that they have that huge hole in their balance sheets, and are frantically trying to fill it so that they don’t have to go back for another handout that would likely result in them being nationalized next time.

That’s what happens when we try to hide problems under the covers rather than fixing them. If we’d just forced the banks to mark to market up front and then taken them over for how much of their equity we had to put in in order to make them solvent again, and adjusted loan balances on those loans to real value and rewrote them to conventional fixed-rate mortgages, this would be over. But noooo, we had to pretend that the banks weren’t insolvent… and we’re still pretending. And that scares the bajeezus out of me, because our so-called leaders are acting as if there *isn’t* that huge overhang of alt-ARMs waiting to blast another hole in our banking system…

Not to mention that all the cretins are coming out of the woods to push the same ridiculous nostrums that didn’t work during the *first* Great Depression, such as the notion that 10% unemployment and 0% interest rates somehow means our capitalist system lacks resources to adjust supply to meet demand and thus we should “liquidate” yet *more* of the economy. They know this is “true” because they read it in Hayek — yes, Hayek, the same miserable excuse for a human being who insisted that the reason 1/3rd of Germans were unemployed in 1931 was because they *CHOSE* to be unemployed. Yes, Hayek actually claimed German unemployment in 1931 was caused by LAZY GERMANS! That kind of nonsense led Hitler to assuming power, because Germans knew they weren’t lazy — just as Americans today know they aren’t lazy. Yet still the cretins insist on the same old snake oil that didn’t work in 1931… and insist it’ll work *this* time. And they have some of our so-called “leaders” on their side! Inexplicable. A combination of historical illiteracy and mathematical illiteracy like I haven’t seen since the last teabagger coven.

Siiiigh! We are so, so, so f**ked.

-- Badtux the Economics Penguin


  1. Yeah. What will this do to property values?

    Will every state and municipality in the U.S. go bankrupt? Tax bases are eroding, and there's nothing anyone can do about it.

    Most Americans think Keynes was totally wrong. You hear the canard about employment being high here because Americans chose to not work (true in my case, but I took an early out incentive, and prematurely retired rather than "unemployed.") being spewed by right wingers.

    I can't see anything, anywhere to generate even the slightest spark of optimism.


  2. Any economic philosophy that starts out with the "explanation" that Americans are lazy as their explanation for unemployment is null and void from the start, because there are no (zero) statistics backing up the notion that Americans are lazy. Americans work more hours than any other nation on the planet, Americans produce more per man-hour than any other nation on the planet, Americans take less vacation time than anybody else on the planet (most Americans don't even take the vacation time they're *entitled* to, forget about the 6 week German vacations!), etc.

    But blaming the victims is one of the things the tighty righties are great at doing. It excuses them for their part in this economic disaster -- their part in urging deregulation, their part in slashing the budget of regulatory agencies that enforced what regulation did exist, their part in implementing irresponsible borrow-and-spend policies during the middle years of the Bush presidency that helped pump up the bubble higher than it would otherwise have gone, etc. By placing the blame upon the victims of their irresponsible economic policies, rather than upon their irresponsible economic policies, they hope to keep voters from recognizing that these Republicans are not their friends and thereby voting them out of office. And the majority of Americans seem stupid enough to let'em get away with it.

    As I was sayin', we're fucked.

    - Badtux the Bend-over Penguin

  3. Option-ARMs "pick-a-pay" are going to make subprime look like amateur hour.

    Oh, and prime jumbos are defaulting around 9% lately. Whee.

    "prime" "sub-prime" "alt-a" are meaningless in the face of rampant fraud.


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