What's going to happen to the "bad pool" of assets the US government creates for the banks?
Will they be able to resell that? Will it just sit there and be worth NOTHING? I'm not sure I totally understand the point of it.
Best Answer
411 points
jester112358 answered one year ago …
Alanj: you might want to look at the 100 year history of inflation adjusted housing prices. Except for the period from 2001-2007 its just flat. You could buy a house in 1900 for the same inflation adjusted price as in 2000. In other words housing scales with inflation-no more, no less. It can't produce cash flow unlike a business. Its only cash flow can be its rental value which also increases at roughly the rate of inflation. So, you couldn't be more incorrect in your assumptions. Higher demand must come from purchases with the income to support the prices. Historically (over the same 100 year period) this ratio of 3:1, housing price:income. So, unless you have some plan to boost incomes by 20-30% above inflation, housing prices will never increase at the rate seen in the last 7 years. Demand means nothing if there is no cash/income to support it. Unless you create phony debt(oophs thats what got us into this problem to start) and pawn it off to some sucker liike the government of the US, China and Japan (the greater fool theory of investment).
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412 points
MajorPayne answered one year ago …
I think the "hope" is that home prices will eventually rise again -- which they most likely will -- and assuming the US Government doesn't "over pay" for these mortgage backed securities, then they should be able to make a handsome profit off of this "investment". But this gives me 2 fears:
1. They overpay and they don't make a profit off of these investments
2. The US government makes it a habit of "speculating" on investments
It's a scary thought.
117 points
ferd1 answered one year ago …
Maybe I am missing something here, but the reason these are bad investments is that the housing market became over-inflated and the banks,etc. continued funding these inflated loans without appropriate real assets to back them up. So when/if the housing market recovers, will it not recover to a more reasonable market valuation? And if this is so, will there not be a gap(deficit) between the loans the govt. takes over and what the market is likely to support as it recovers. If this logic is valid, then the govt.(we the tax payer) will likely be "stuck" with the difference. And this doesn't even go to the question of how long before the govt. simply has a wash sale and dumps these loans to the highest bidders, costing the taxpayer even more. The market will eventually buy up all these assets at some price and we the taxpayer will pay the tab for the price difference it takes to accomplish this. Not a pretty picture, but possibly better than the melt-down that might have occurred had the govt. not stepped in.
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alanj answered one year ago …
ferd1 is missing something. These bad loans are backed up with real estate. After the real estate market has finished correcting it will go higher than it did before. It always has and it always will. There's only a limited amount of property on the planet. As the population increases the demand for property will also increase. A higher demand results in higher prices. Eventually, those bad loans will become profitable if held long enough. And if the government is buying those bad loans at a discount they will become profitable even sooner because the real estate market will not have as far to go up to become profitable. If done correctly the US taxpayer may even come out ahead.
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