I Think This Plan Bankrupts Us

Pretty typical stuff today
The market is on the brink of starting yet another leg down and what happens, the US Government throws 12 figures of US Taxpayer Dollars (it doesn’t have and needs to print) at the symptom of the problem in hopes of letting hedge funds and banks deleverage even more at an artificially high price.

Freddie and Fannie Go Countrywide
The plan announced today is that homeowners in default will have the opportunity to cut their monthly payments to 38% of their gross income. In order to make it possible to get monthly payments low enough to service the mortgage debt, the following solutions are offered –

1. Extend mortgages out from 30-year to 40-year loans
2. Offer low teaser rates
3. Reduce the principle amount on the loan and take the reduced amount and turn it into a balloon payment (think ARM) due when the house is sold or the mortgage is finally paid off at “maturity”.

It just looks to me like the US Government has become the creator of yet another round of exotic mortgage financing! Isn’t this the same stuff that got us into this mess in the first place? But now instead of the shareholders of Countrywide or Washington Mutual being on the hook, the US Taxpayer will be on the hook when these people default.

I figured that at some point the Government would come up with a plan that made so many taxpayers irate, that it would start a public backlash to unravel all the insane programs of Paulson and Bernanke and finally get the country on the path of fixing the problem and not bailing out the crooks and fools who got us into this mess. This may be the one.

This plan is insane!
Am I the only one who sees this? According to Bankrate.com, the Maximum Housing Expense should be 28% of gross income and the “Maximum Allowable Debt-to-Income Ratio” should be 36%. But the US Government just put the taxpayer on the hook for several million deadbeats at a level of 38% on mortgages which do not even represent all of the debt of each individual mortgage. Holy cow, we are in deep dodo!

This program actual has the capability of bankrupting the country. You read that right, and wrote it exactly the way I intended. We are now issuing $2 trillion a year in new debt to cover our deficit spending and at some point soon, with the likes of China issuing $600 billion of their own new debt, there simply won’t be any new buyers for US Treasuries. At that point, we are bankrupt.

If this program goes forward, then I don’t like our chances. I think cooler heads will prevail and public outrage will escalate exponentially in the next few days. Let’s see how this plays out.

I will have a very detailed look at the markets later this evening. Please email me with any questions.