On 2008-10-15, F George McDuffee wrote:
On Wed, 15 Oct 2008 14:20:07 -0500, Ignoramus17346
wrote:

On 2008-10-15, F George McDuffee wrote:
OT: this thread seems a good place to insert this piece of
information.

Hi George... Have you given this a thought: just what is the limit of
the ability of the Federal government to support failing banks and
firms?

Let's say, for example, that house prices fall by 15 more percent.
That would, surely, put a lot more mortgages underwater and further
reduce the banks' capitals. Would the Federal government still be able to
prop up the banks?

Or, let's say that foreign investors decide not to buy as many
Treasuries as they used to. (or would insist on loans to be
denominated in non-US currency) That would raise borrowing costs for
everyone, including the Federal government, and add roughly 100
billion per year of debt servicing costs for the US government debt,
for every percentage point of interest rates.

I have a feeling, which I cannot yet quantify, that the staggering
amounts of money being used to plug up the dikes, may not be too far
from the maximum that the government could spend/print without the
currency free fall.

So, making a hypothetical logical leap, let's assume for a minute that
the losses exceed what the Federal government can finance. Then what?
We have a government that just spent trillions, cannot any more effect
any positive changes, and the crisis would continue but with the
government's hands already tied.

i
=========
When you are a sovereign country, you never go broke. Just like
the bank in a game of Monopoly you can always print more money.
Thus the government bonds and other obligations [denominated in
the domestic currency] can and will be paid to the last cent. No
one will lose a penny.

[Technically you don't need to waste the paper and ink. Through
a process of "monetizing the debt," the FRB can create and inject
as much "liquidity" as required/desired in the form of 1s and 0s
in their computer systems. The scam is that the FRB buys
treasury securities using FRB "notes", and through the magic of
fractional banking then issues up to 10X of the notational value
of the treasury securities in new Federal Reserve notes. Every
cycle through the magic money machine generates 9X "new money.,"
with 1X used to buy another batch of T-bills.]

Now whether this "money" is worth anything is a separate
question.

Another question is whether investors would want to continue to lend
to the government, if they expect inflation. Anyway, this issue has
been beaten to death.

The Case-Shiller residential housing index followed a very
smooth and predictable path indicating the "natural" or normal
growth in the "value" of housing. When the housing bubble was
inflating, the actual housing prices grew far faster and far
above the Case-Shiller projections, although there were some
*SLIGHT* offsetting factors such as an increase in floor areas
and furnishing [i.e. granite counter tops], although IMNSHO most
of this was an increase in cost *NOT* value.
http://en.wikipedia.org/wiki/Case-Shiller_index
http://www2.standardandpoors.com/por...0,0,0,0,0.html

Because the housing bubble was not uniform across the country,
the house costs v the Case-Shiller index projection are different
in different areas, but in many of the bubble areas such as
Miami, Las Vegas, and most areas of California, the "ask" prices
are still 30 to 50% above the C-S "norms," and when the house
prices are pro rata adjusted to the CS, 50% or more of the "new"
mortgages are upside down [the mortgage is more, sometimes much
more, than the projected value of the house.] FWIW -- this
indicates that the "mark to market" accounting valuation of the
"toxic" CDOs and other derivatives is largely correct, i.e. they
are worth nil, nada, zip, zilch, zero.

As John C. observed, if you are running a consumer
society/economy, it is poor public policy to bankrupt the
consumer. Leaving all ethics aside, if you are a parasite, and
kill your host, you die too.

I posted this earlier in another thread, from information
available in many of the most important MSAs [metropolitan
statistical areas] a family would have to be in the top 20% [8th
and 9th] income deciles to afford even the median price home
under the max home price = 2_1/2 X annual family income rule.

This is interesting. So, basically, if housing merely "corrects"
itself and returns to its historical trend, we can see further 15-20%
losses just from that correction. If some areas would correct more
than others, it would mean more losses to lenders compared to all
housing going down equally across the zones.

The extra, additional, damage from that would far exceed damage from
the correction up to now.

i