A Drop in the Bucket

Basking in Himself, Obama just christened a $50 billion mortgage bailout that is mathematically doomed at it's launch. The market is actually UP on the heels of this foolishness, at least for the moment.

This legislation largely rewards the folks who had the least business buying a house, and it does so primarily at the expense of those who never set a foot wrong. As bad as that is, it isn't even the biggest problem with this kind of thinking...

Fact is, each "breadwinner" laid off now in February translates into another foreclosure by this time next year. GM just announced 47,000 such layoffs and Chrysler brought it up to an even 50k. Parts suppliers will soon be joining the layoff extravaganza - rumors of 5,000 at Goodyear are an illustration of what awaits as this ripples through the industry. And that's just ONE day, in ONE industry.

Let's do some math: I'll assume each laid-off worker has a mortgage of $200,000. (This is slightly above the current median home value, but remember that many mortgages were written over the past few years at the height of the bubble and have much higher balances.) 50,000 layoffs times the average mortgage note equals $10 billion in future mortgage delinquencies that weren't even on the table when this plan was announced Tuesday morning!

One DAY worth of new layoffs has eaten up 20% of the money allocated in the bailout! Then subtract the "postage and handling" typical of government programs and viola - one third of the money's spent before the ink is dry!

I know this is a simplistic calculation. Fact is, some of these folks own their homes and may have no problem. Others have auto loans, credit card balances and student loans on top of their mortgages that will have to be added in to the looming defaults. (All in all, I suspect my math is on the conservative side of reality.) Simplistic though it is, it does show the magnitude of the problem. It handily demonstrates the fallacy that the government can save us from this mess. The Fed's printing howitzers are aimed directly at the deflationary pressure on asset values, yet the contraction continues as though the Fed weren't even there. Meanwhile, the money supply and public debt is growing like a cancer (which it is) and the specter of hyperinflation looms ever higher over the economic landscape.

We're addicted to economic delusions, and we're embracing Obama's latest "fix" with eyes closed and a warm rush of relief like the addicts we are. It would be far less expensive to acknowledge the delusional period just ended and allow asset values to sort themselves out on their own. This approach would have added the novelty of being honest - a sensation that would be very good for us as well! Instead, we are attempting to refinance the asset bubble into a grand "new and improved" public debt bubble.

And people wonder why I'm so cynical...