Thursday, December 6, 2007

The Bailout

Ok, here is what I really think of this bailout.

A) It's great for the individual homeowner that may benefit from this. I have heard numbers from Bush (1.2 million) to analyst expectations ranging from 250,000 to 750,000.

B) There will be totally solvent homeowners trying to milk this gift. Why should someone financially capable/responsible not get the same benefit as those who are not?

C) Why would mutual funds, hedge funds, and foreign investors ever again believe in the investment their putting money towards when the United States government can step in and simply state, "You know, you thought you were going to get this much interest paid to you on this/these loans. Well, think again. You get this (which is less) and you're going to like it."

Points A&B, in and of themselves are good and expected. Point C, however, is where this all gets really expensive.

The outcome from this is, when it comes time that a company tries to sell debt (mortgages, credit cards, car loans, etc) on the open market any company that invests in those loans will require a larger risk premium than they have in the past. Why? If they can't earn what they expect now, why should they trust that they are going to get what they think later? Therefore, the cost of doing business just got more expensive. And who will ultimately feel the pain from that? You got it. You and me.

A plan such as this may sound necessary but you have to realize that any plan to fix this is going to have real effects. It will have real costs associated going forward. And who knows...what if the housing market isn't appreciably better 5 years from now? Then what? This plan would be seen as a bandage over a fatal wound.

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