The US is, in a general sense, bankrupt

[Ah Xoc Kin]

First take a deep breath, and recall President Franklin Roosevelt’s wise advice that there is nothing to fear but fear itself.

Then let’s admit something painful: The United States is bankrupt, in the sense that it’s assets (housing stock, corporations and cash flow, plant and machinery) are now worth much less than its liabilities (in the form of mortgage-backed securities, other debt and loan instruments).

By the end of H1 2008, homeowners still held about $8.7 trillion worth of net equity after adjusting for mortgages, according to the Federal Reserve’s Flow of Funds Accounts.

Households real estate assets were valued at $19.429 trillion while they had borrowed $10.639 trillion against them. But net equity had already fallen -$1.135 trillion (-11.4%) from its peak in Q1 2007, when it stood at $9.924 trillion, and the equity cushion will continue to shrink as home prices fall while the debts secured against them remain unchanged.

The situation is far worse than this net equity figure implies. A significant proportion of households will have paid off their mortgage entirely and are living in homes with 100% equity. If we look at just that subset of homes which are still subject to a mortgage, the net equity in THESE properties is far lower, shrinking fast, and might even be negative, especially if home prices continue to fall another 10-20%.

The debt secured on half or more US homes will be worth more than the home itself, with little or no prospect of a quick rebound in housing values to rebuild positive equity. The collective liabilities (in the form of mortgage bonds) are worth far more than the proportion of the housing stock against which they are secured, and the situation looks set to persist or worsen.

Federal revenues amount to only $2.567 trillion per year, or just $1.932 trillion per year if taxes earmarked for Social Security and Medicare are excluded. The government also has $9.6 trillion of its own debts to fund, with another $600 billion or so already added to that to cover the costs of the bailout and lending operations so far.

The United States as a whole has $17.639 trillion worth of overseas assets---but it owes $20.081 trillion to foreigners.

In this context, the country’s now-derated assets are probably worth less than its collected liabilities (both internally and internationally). The United States is now, in some very general sense, bankrupt.

http://ftalphaville.ft.com/blog/2008/10/12/16931/kemp-the-united-states-is-now-in-some-very-general-sense-bankrupt/

[dipsydoodle]

1. What happens

if you subtract the cost of the occupations of Iraq and Afghanistan ?

[enough]

2. He's recommending reducing the face-value of all mortgages by 20 or 30 percent.

snip>

The solution is a collective restructuring of the claims. The President and Congress could enact a law compulsorily reducing the face-value of all home mortgages by 20%, or even 30%. Mortgage-backed bonds would be adjusted accordingly. This would have the effect of recognising that US housing assets will probably have to be marked down 20-30% in the long term as the market settles at a new lower level.

snip>


Seems somewhat unfair to those who have already paid off their mortgages, but maybe I'm not seeing something here.

[tosh]

3. Yeah, of course I'm for the good of all...

and FOR the stabilization of the national, no, world, economy but as a non-mortgaged, no-kids (no dependents) taxpayer who's been trying hard to save for a decent retirement, I feel more-than-once-screwed.

[Ah Xoc Kin]

4. what you're saying is

the equivalent of condemning welfare dependents you have
to assume responsibility for....except the dependents are paper millionaires who took excessive risk

you need to realize however that if everybody in the
United States did this:

non mortgaged
no dependents
save every penny

the economy would have crashed a long time ago
sadly, 75 percent of the economy is consumer spending

[enough]

6. I don't think the analogy with welfare dependents is accurate.

This writer is proposing to reduce the amount of ALL mortgages by 20 to 30 percent. This would not just be the mortgages of people who are in financial trouble and need help.

People who have made financial sacrifices to pay off mortgages early, or simply to pay them off on time over many years would now not receive the benefit of this universal federal relief, even though their houses have also lost value (which seems to be the rationale for the mortgage reduction).

[phantom power]

5. Perhaps in the specific sense, too.

[Alpharetta]

7. Hardly the work of an economist

The current debate has obscured this by pretending that everyone can emerge whole. In particular, that the government can buy $700 billion worth of troubled assets, and lend huge sums to the banking system, and expect to get all or almost all of it back. That households can somehow repay all or most of what they still owe. And that the mortgages and bonds and other loans will somehow be mostly repaid. In other words that no one will have to bite the bullet. That seems completely implausible.

I don't know who this guy is but this is a shabby piece of work.

#1 the above statement incorrectly characterizes the current "bailout". The current "bailout" does not pretend all participants will emerge whole.

#2 the $700B is not a big deal. The problem is, it's barely a drop in the bucket compared to the size of the problem. An economist would know our Fed can float an additional $700B relatively easily and really not need to pay it back.

#3 the mortgages and CDx's are a fraction of the problem the swaps are. He has no concept or even any recognition of the problem with swaps which have already been triggered and have yet to be settled. Trillions of dollars of these swaps cannot be "untriggered" because the triggers were on downgrades, not defaults.

I'd really like an economist make some attempt to tell us how big the swaps problem is. I suspect ALL actions so far are simply to delay the swaps issue, but no solution is in sight for these swaps no bank or government can pay off.

Until the governments get together and agree to void ALL the swaps, Armageddon is around the corner. Good luck getting all these countries to agree, because simply articulating the problem will create a panic worse than what we've seen.

Disclaimer: I am not an economist. But I did stay at a Holiday Inn Express last night.

[Ah Xoc Kin]

8. 700 billion

the $700B is not a big deal

that's what some people told Ron Reagan when
he started ballooning the debt in the 1980s