Sunday, September 28, 2008

What Does The Bailout Mean To US Consumers?

As I write, it seems that the bailout is pushing forward and should go to vote tomorrow.

There was a kid-gloved analysis of what the bailout means to Joe Q. Public at - The five key areas where the bailout will hit home for consumers.

"Here are the five key areas of concern to consumers where the bailout will likely have an impact:

1. Mortgage rates
If you're shopping for a mortgage, the bailout might make a loan more available -- but higher interest rates might make it less affordable. "The prospect of an additional $700 billion in Treasury issuance is suggestive of higher Treasury yields and consequently higher mortgage rates," McBride said.

I couldn't agree more. It is very important to watch the 10 yr note this week, it climbed much of last week and mortgage rates moved up back over 6% on talk of a bailout.

2. On the job
Without the bailout, the unemployment rate could hit as high as 12%, said Brad DeLong, a professor of economics at the University of California at Berkeley. "A successful bailout could help keep the unemployment rate below 8% for the next year," he said.

Well, unemployment stats are notoriously bad, so I think that statement is fundamentally flawed. Perhaps, some companies looking to expand might be able to finance their expansion after the bailout, but the reality is that economic activity continues to weaken and that is going to be the biggest driver of higher unemployment.

3. Outlook for taxpayers? Depends who you ask
A major worry is that the rescue plan, depending on how it's structured, will cause a big tax hit down the road. But economists differ widely on the likely effects of this potential $700 billion outlay.

I continue to hear that this plan won't cost the taxpayers anything and we'll probably make money. That is a stunningly simplistic analysis even for Congress. The assumption that home prices are going to find a floor and somehow rebound to 2006 levels is beyond silly. It's like telling someone that bought Nortel in 2000 at a split adjusted $1,500/share that it's going rebound and then the taxpayer will make money (FYI - Nortel currently trades around $2.50). The assumption that this will not cost the taxpayer is also based on our ability to continue to access cheap capital from around the world (an assumption that seems to be challenged by the Chinese - see below).

4. Not helping homeowners?
Some say Washington's rescue plan does too little to help struggling homeowners -- a root cause of the economy's current problems. A proposal to change bankruptcy laws to enable judges to modify mortgages appears unlikely to make it into the final package.

Instead, the rescue plan may offer additional foreclosure assistance from the government, and help for borrowers to obtain better mortgages.

"There has been a lot of talk that if the government buys this stuff, they can make modifications. But that's really based on a misunderstanding -- the government is buying mortgage-backed securities. And the holders of mortgage-backed securities don't have the right to decide that mortgages are going to be modified," said Henry Sommer, president of the National Association of Consumer Bankruptcy Attorneys.

"Giving a lot of money to Wall Street is going to be helpful. But if you want to get to the root cause of the problem, you have to get in housing and mortgage relief," Leahey said.

Home prices remain too high, and with the economy weakening fewer people can afford these overpriced homes. This plan does nothing to change the death spiral of real estate.

5. Betting on bankruptcy
Proponents of the proposal to change the bankruptcy laws note that court-supervised modifications could help borrowers with "piggyback" loans, which are second mortgages. Financial institutions who hold those second liens often won't allow loans to be modified without first being paid.

Yeah, it will become easier to go bankrupt!!! Everyone rejoice!!! If you were a bank would you suddenly start lending again to Joe Q. Public that is about to lose his house and job, knowing that it might be easier for him to file for bankruptcy? Of course not. This is why I expect the banks to move quickly to dump their toxic debt on the taxpayer and go into a lockdown mode of self-preservation.

Chinese Premier Wen Jiabao said Beijing was worried about the impact on its investments of U.S. financial market turmoil but now was the time to cooperate to calm markets.

'U.S. finance is closely connected with the Chinese finance,' Wen said in an interview aired on Sunday on CNN.

'If anything goes wrong in the U.S. financial sector then we are anxious about the safety and security of Chinese capital,' he said, but now was time to 'join hands' to deal with the crisis.

It sounds like the Chinese want to be a team player, but the timing of this message is clearly meant to send a message:

Hey America,

We're tired of being your ATM. Be careful or we're going to cut up your credit cards.

Your friends around the world.


Raymond said...

Despite the stats, I see thousands of high paying jobs posted on employment sites - (networking) (aggregated listings) (matches you to jobs)

I see 75K, 100K and 150K jobs

Anonymous said...

Dear Author !
Also that we would do without your excellent phrase