@AnnS – another great report. Thanks.

The Risk from Underwater Homeowners
http://news.yahoo.com/s/bw/20090219/bs_bw/feb2009db20090218423745;_ylt=ApaGXNTxV5dp.M75p2Ywp0iyBhIF

The Obama Administration’s $75 billion homeowner-rescue plan offers a lot of help to people in imminent danger of losing their homes. It does far less for those who are deep underwater on their mortgages but have the wherewithal to keep making their monthly payments. And that could be a problem — not only for those homeowners themselves, but for the banking system and the economy in general.

Here’s the dilemma: Many homeowners owe more on their mortgages than their homes are worth, and — rightly or wrongly — increasing numbers of them may decide to give up and mail in the keys. The taboo against reneging on debts already shows signs of fading in hard-hit markets like Phoenix and Las Vegas. More abandonments would increase losses for lenders while damaging the vitality of neighborhoods.

There’s not much in the Homeowner Affordability and Stability Plan announced on Feb. 18 to deal with this looming problem.

-snip-

Obama’s plan is broader and stronger than Hope for Homeowners, the unwieldy, mostly voluntary program passed by Congress last summer. On the other hand, that’s not saying a lot. Hope for Homeowners has refinanced a microscopic 25 mortgage loans so far. Even a thousandfold improvement over that would still constitute failure for the Obama Administration. That’s why this plan may require some changes in the months ahead.

(more at link)

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Wow, Hope for Homeowners….what a success….helped a whopping 25 families.

February 18th, 2009 at 6:04 pm

Granted, there are definitely some parallels between what’s happening now and the events that transpired during the Great Depression. Discussing this seems to be in vogue during every economic downturn, at least as far back as I can remember.

Milton Friedman asserted in his Free To Choose series (in “The Anatomy Of A Crisis” episode) that the ‘29 stock market crash was just another business cycle, and that following this were the bank runs (there was no FDIC then). He believed that the Fed could have stepped in, bought government securities on a large scale, and with those funds met the demands of depositors. People would have found out that their money was safe and this would have ended the bank runs, minimizing the bank failures. He also stated that the money supply had declined about 30% between 1930-33. Something to think about.

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(1) The stock maarket crash of 1929 did NOT cause the downturn. That had actually began back as far as ’26 and was slowly gathering steam. Manufacturing pulling back, sales pulling back…… The stock market was a symptom but not a cause. In fact the stock market had gotten the bubbliest as everything else slowed and people were looking for another means of get rich quick after Florida real estate poped.

(2) The Federal Reserve had extreme limitations on what it could or could not do in ’29 and until ’33 when FDR took the US off the gold standard as Great Britain , Sweden etc had previously done. Only major power stil ont he gold standard was France and it was hoarding gold.
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The Federal Reserve only had as much money available as it had gold. It couldn’t go out and lend more and more money to banks nor buy up stock because it had financial limits – aka how much gold it had on hand.
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Deficit borrowing was most definitely NOT on Hoover’s agenda so that avenue of funds was foreclosed the the Fed Res and Treasury.
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(3) Buy up STOCK and BONDS? Which ones? The ones where the bond issuance was floated on behalf of a town in Germany that was defaulting? Or the one where it was floated on behalf of a South American country that kept having revolutions and defaulting repeatedly on its debt?
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It was the BOND defaults that sent the banks into a liquidity and solvency crisis – not the stock market. Banks had been merrily buying up dubious bond issuances with their depositors money on the theory that the bond salesmen wouldn’t lie. They were most fond of foriegn bonds of all the choices. And then those bonds started defaulting and their margins were being called and they couldn’t cover and on it went.
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The bank runs did NOT start the stock market crashed. They started when bonds began defaulting 2 years later. (Sort of like mortgages and credit cards to day – loans/bonds made to borrowers who couldn’t pay it back.)
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Like all of Friedman’s other theories, this one ignores reality when it contradicts his pie-in-the-sky ideas. That is whining that the Fed Res did not do the impossible when the constraints on what could be done were inflexible; and the 2 events (market crash & bank runs) were quite separate both in timing and cause.