Lately pundits have been arguing over whether or not we are in a recession. At the same time the housing foreclosure mess is being addressed in the same fashion, as it was during the Great Depression (25 states passed moratorium laws on home foreclosures in the early 1930’s). The phrase “Déjà vu” comes to mind.
This five year moratorium on resets may backfire in a strange but consistent way. In California a few years back, the legislature realized that the spot price for natural gas for the utilities was a lot cheaper than their ten year contracted price. So they decided not to renew the contract and buy on the spot market. When the contracts expired the spot market took off like a rocket. The legislature meant well, it just didn’t turn out like they though it would.
A few years back, Congress passed a law to help farmers write down large farm equipment purchases over five years. Sounded great, every Realtor from here to nowhere bought a Hummer and wrote it off as a business expense.
In essence, teaser/exotic loans are gone, no more 2/28 or 3/27 loans. Everything from here out, is straight missionary style. The banks will draw a red line around California. Financing a home will become more difficult.
The headlines for tomorrow revolve around the five year freeze for home loans. The real story has been overlooked; the banks are in one hell of a mess. The possibility of one million families losing their homes would be tragic but most would be back to the regular old grind within a year. That’s not true for America’s financial banking system. Leave out the FDIC insured stuff. What is left of the rest is probably a USA (Up in Smoke Asset). IRA's and retirement funds come to mind.
I kind of get the feeling that President Bush just held the ribbon cutting ceremony for the Next Great Depression. Notice that you don't need an ambulance for this sort of catastrophe. You go to sleep well off and wake up poor. It's kind of like paying real cash for the hooker you had in your dream last night. It makes absolutely no cents.