Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - Part 2 - 3rd Dec 21
Stock Market Major Turning Point Taking Place - 3rd Dec 21
The Masters of the Universe and Gold - 3rd Dec 21
This simple Stock Market mindset shift could help you make millions - 3rd Dec 21
Will the Glasgow Summit (COP26) Affect Energy Prices? - 3rd Dec 21
Peloton 35% CRASH a Lesson of What Happens When One Over Pays for a Loss Making Growth Stock - 1st Dec 21
Stock Market Sentiment Speaks: I Fear For Retirees For The Next 20 Years - 1st Dec 21 t
Will the Anointed Finanical Experts Get It Wrong Again? - 1st Dec 21
Main Differences Between the UK and Canadian Gaming Markets - 1st Dec 21
Bitcoin Price TRIGGER for Accumulating Into Alt Coins for 2022 Price Explosion - 30th Nov 21
Omicron Covid Wave 4 Impact on Financial Markets - 30th Nov 21
Can You Hear It? That’s the Crowd Booing Gold’s Downturn - 30th Nov 21
Economic and Market Impacts of Omicron Strain Covid 4th Wave - 30th Nov 21
Stock Market Historical Trends Suggest A Strengthening Bullish Trend In December - 30th Nov 21
Crypto Market Analysis: What Trading Will Look Like in 2022 for Novice and Veteran Traders? - 30th Nov 21
Best Stocks for Investing to Profit form the Metaverse and Get Rich - 29th Nov 21
Should You Invest In Real Estate In 2021? - 29th Nov 21
Silver Long-term Trend Analysis - 28th Nov 21
Silver Mining Stocks Fundamentals - 28th Nov 21
Crude Oil Didn’t Like Thanksgiving Turkey This Year - 28th Nov 21
Sheffield First Snow Winter 2021 - Snowballs and Snowmen Fun - 28th Nov 21
Stock Market Investing LESSON - Buying Value - 27th Nov 21
Corsair MP600 NVME M.2 SSD 66% Performance Loss After 6 Months of Use - Benchmark Tests - 27th Nov 21
Stock Maket Trading Lesson - How to REALLY Trade Markets - 26th Nov 21
SILVER Price Trend Analysis - 26th Nov 21
Federal Reserve Asks Americans to Eat Soy “Meat” for Thanksgiving - 26th Nov 21
Is the S&P 500 Topping or Just Consolidating? - 26th Nov 21
Is a Bigger Drop in Gold Price Just Around the Corner? - 26th Nov 21
Financial Stocks ETF Sector XLF Pullback Sets Up A New $43.60 Upside Target - 26th Nov 21
A Couple of Things to Think About Before Buying Shares - 25th Nov 21
UK Best Fixed Rate Tariff Deal is to NOT FIX Gas and Electric Energy Tariffs During Winter 2021-22 - 25th Nov 21
Stock Market Begins it's Year End Seasonal Santa Rally - 24th Nov 21
How Silver Can Conquer $50+ in 2022 - 24th Nov 21
Stock Market Betting on Hawkish Fed - 24th Nov 21
Stock Market Elliott Wave Trend Forecast - 24th Nov 21
Your once-a-year All-Access Financial Markets Analysis Pass - 24th Nov 21
Did Zillow’s $300 million flop prove me wrong? - 24th Nov 21
Now Malaysian Drivers Renew Their Kurnia Car Insurance Online With Fincrew.my - 24th Nov 21
Gold / Silver Ratio - 23rd Nov 21
Stock Market Sentiment Speaks: Can We Get To 5500SPX In 2022? But 4440SPX Comes First - 23rd Nov 21
A Month-to-month breakdown of how Much Money Individuals are Spending on Stocks - 23rd Nov 21
S&P 500: Rallying Tech Stocks vs. Plummeting Oil Stocks - 23rd Nov 21
Like the Latest Bond Flick, the US Dollar Has No Time to Die - 23rd Nov 21
Why BITCOIN NEW ALL TIME HIGH Changes EVERYTHING! - 22nd Nov 21
Cannabis ETF MJ Basing & Volatility Patterns - 22nd Nov 21
The Most Important Lesson Learned from this COVID Pandemic - 22nd Nov 21
Dow Stock Market Trend Analysis - 22nd Nov 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

US Housing Market Subprime Crash Too Big To Be Bailed Out

Housing-Market / Subprime Mortgage Risks Sep 07, 2007 - 11:56 AM GMT

By: Peter_Schiff

Housing-Market Now that home mortgage defaults are spreading like wildfire from coast to coast, there is a growing sense of certainty that the government will attempt to bail out homeowners and lenders. The ideas put forward last week by President Bush may be the camel's nose pushing under the bottom of the tent. However, just as some things are too big to fail, this problem is far too big to fix.


First of all, one has to consider the moral hazards inherent in any bailout. Immediate relief in the form of debt reductions and more favorable loan terms will create a powerful incentive to default. Why would anyone stretch to make a burdensome mortgage payment while others are being rewarded for failing to make theirs?

Even without the incentives of a government bailout luring more people into default, policy makers simply have no idea as to the scope of the problem. Before this home mortgage correction runs its course, nearly every homeowner in the country who had availed themselves of an adjustable rate mortgage or a home equity loan will be in need of a bailout. Even a sizable percentage of those with traditional fixed rate mortgages will find themselves in danger. With millions, or perhaps tens of millions, of home owners on the rocks, there is simply no way the government can structure a bailout without bankrupting the country or destroying the currency.

Bailout or not, the economy will still be in a prolonged and severe recession. Even if Federal aid prevents millions of foreclosures from happening, all of the home equity accumulated during the bubble years will be gone. Debt reduction and restructuring will not stop home prices from falling, and will not make homes easier to sell. After all, those looking to buy homes will no longer have access to the easy credit that made bubble prices possible in the first place. Home prices are a function of what future buyers can afford - not what past buyers paid. If new buyers are required to make 20% down payments, fully document their income, and fully amortize a fixed rate mortgage, they will not be able to pay nearly as much as what current owners paid during the bubble.

On the low end, any comprehensive government bailout would easily surpass the $1 trillion mark. Where will the Federal government get the money, particularly during a severe recession? My guess is raising taxes will be out of the question. If people are having trouble making their mortgage payments now, significant tax increases will only make it that much more difficult. Borrowing the money also seems like a difficult task, as our minimal domestic savings means we will have to do so from abroad. Given that the budget deficit will likely be exploding as a result of the recession, foreigners are not likely to foot the bill. If they do, it will require significantly higher interest rates, which will only compound the mortgage rate problems for current and potential homebuyers.

Unfortunately, the only realistic way to “pay” for such a massive bailout would be for the Fed to monetize it. If that were to happen, the value of the dollar would plunge, and consumer prices would go through the roof. Now that the dollar Index has finally broken below the key 80 support level, an event that I have been forecasting would eventually occur for years, a run on the greenback may already be in motion. Ultimately, long-term interest rates will soar as a result, and we will experience unprecedented stagflation and a substantial decline in our collective standard of living. This week's serge in the price of gold, which traded above $700 per ounce for the first time since May of 2006, reveals that some investors are finally beginning to figure this out.

Ironically, in a recession induced by the burst housing bubble, housing itself will not be among our most pressing problems. One of the few “benefits” of the housing bubble is that we now have a lot of houses, many of them vacant. Therefore, few former American mortgage holders will go homeless. However, the real problems for Americans, whether they own or rent their homes, will be maintenance costs (heating oil, electricity, etc.) and keeping their kitchens stocked with food. One thing is for sure: homeowners will certainly not be buying new furniture for their living rooms, big screen TV's for their media rooms, granite counter tops for their kitchens, or new cars for their garages.

The costs associated with the housing bubble will be huge. However, the price tag for a government bailout designed to prevent it from deflating will be much higher. Even those who get “bailed out” will ultimately be in worse shape as a result. Let's hope that cooler heads prevail and that the rest of the camel never makes it into the tent. However, just in case they don't, make sure to get rid of any remaining dollar denominated assets before it's too late.

For a more in depth analysis of the tenuous position of the Americana economy and U.S. dollar denominated investments, read my new book “Crash Proof: How to Profit from the Coming Economic Collapse.” Click here to order a copy today.

By Peter Schiff
Euro Pacific Capital
http://www.europac.net/

More importantly make sure to protect your wealth and preserve your purchasing power before it's too late. Discover the best way to buy gold at www.goldyoucanfold.com , download my free research report on the powerful case for investing in foreign equities available at www.researchreportone.com , and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp

Peter Schiff Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

christian
07 Sep 07, 13:26
NAU is coming

Norad exercises "viligant shield to be run oct 15-20 as a preparation for "martial law"

False flag between 0ct 15-20 during NORAD exercises is in "code red" in regards to probability (and if not w/in the a year)

just like the Norad exercises during 9/11 that prevented military plane's from being utilized so traitors within gov't fractions could help attack and the SEC silenced anyone and everyone about the insider trading that was the smoking gun to prior knowledge. Your gold is not "safe".

This won't be published but i ask the editor to read it and say, maybe the bread and circus's are over for awhile.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in