Martin C. Winer

http://www.bloomberg.com/apps/news?pid=20601087&sid=afIu492CyWMw&refer=home

Make no mistake about this folks, this is a depression era move.  Paulson, Bernake and Schumer are no less than a triumvirate of fools.  Ironically, Bernake claims to be a student of the depression.    There were so many bailouts that the government is forming a government agency to bailout companies.  As I read this article I seemed to remember a similar venture from the Great Depression.

http://en.wikipedia.org/wiki/Reconstruction_Finance_Corporation

There has been another corporation like the Reconstruction Finance Corporation which was used in the late 80′s as follows:

http://en.wikipedia.org/wiki/Resolution_Trust_Corporation

Whatever the acronym, whatever the intent, the purpose is singular.  Let no one try to dissuade you from understanding.  The goal of any such organization is to pass the buck on to the taxpayer.

As far as finance goes, this is a hail mary pass which hurls the debt in the air and hopes the market has time to recover to land the touchdown.  Such a venture did work in the case of the Savings and Loan crisis of the late 80′s, however, many believe the Reconstruction Finance Corporation served only to prolong and worsen the Great Depression.

This latest crisis is by all accounts much worse than the Savings and Loan crisis and as far as the amount of debt shouldered per capita, could easily be a gre’08er depression than that of the 30′s.

Buckle up, we’re in for a wild ride.

I’ve been watching with horror as the US economy is reduced to socialism.  Few are asking how much this will cost.  Those who do ask are getting nonsense answers like 25 billion dollars.  The Savings and Loan crisis of the 90′s took 250 billion dollars to bail out.  This current crisis dwarfs that crisis by orders of magnitudes.  So let’s cut through the bull and look at some math.

The Government is now on the hook for 5 trillion dollars in loans.  The only way they can lose money is if people default on those loans AND the value of the underlying asset (the home) has depreciated since the time the loan was issued.

So let’s say that 3% of people default on their loans.  The government is now on the hook for 150 billion dollars.  The government will now try to sell those foreclosed houses at market value.  Suppose those houses were inflated by a factor of 2 (that is they’ve now lost 1/2 their value).  Now the government sells the foreclosed houses at half the price and they’re on the hook for the left over half.  Thus the cost to the government would be 75 billion dollars.  The formula is thus:

bailoutCost = totalValueMortgages * defaultRate * (1 – (1/inflationFactor))

Now the question is where do we come up with values for things like the defaultRate and inflationFactor? (The totalValueMortgages is given as 5 trillion dollars by the government.)

Google mortgage deliquency rates or mortgage default rates and you’ll find numbers ranging from 2-5,  (I took 3 as an average).  Next to figure out the inflation factor, look at this chart:
http://www.nytimes.com/imagepages/2005/08/21/business/21real.graphic.html
and you’ll see that homes are around 2X inflated in value. 

So given these current numbers, the best case cost would be 75 billion dollars.  If the default rate increases or housing devalues beyond 2X the numbers could of course be much higher.  I welcome any polite criticism and/or suggestions for alterations.