The US economy is not sustainable. It is like a house built on an unstable foundation. I will make this a short bullet point post.
- Nearly the entire US economy was and still is based on consumer spending (think credit cards, car loans, etc.) and real estate, which was fueled largely by debt.
- The reason so much of the economy was based on consumer spending and real estate is that we do not make anything in the US any more. Real estate, in particular, is still something that has to be "made" in the US.
- Too much money (really debt) flowed into real estate and prices reached levels that could not be supported by personal incomes (the real historic driver of real estate prices - at least if you want a sustainable market).
- Now, our government want to artificially prop the price of real estate back up with more debt via the tax credit, expanded FHA (and other low/no down payment government loan programs), increased loan purchases by Fannie Mae, Freddie Mac and Ginnie Mae and bank bailouts (i.e. TARP). In addition to these taxpayer subsidies (more debt), the government instituted new FASB accounting rules which allow financial institutions (banks) to value their loans at debt value (i.e. the amount they are owed) despite the fact that many of their assets (think 2nd and 3rd mortgage loans, HELOC's etc) are worth 0-10% of that amount due to property value declines.
- The whole premise of this government plan is that if we give money to financial institutions (banks) and allow them to "cook their books", they will start lending to consumers and on real estate again.
- The government's desired result is that real estate will start increasing in value again which will in turn make the financial institutions (banks) healthy again (by virtue of eliminating the need to "pretend" their assets are worth something close to their actual debt values), bring back the construction industry and jump start other industries that feed off of real estate.
- Who will make these debt payments that are artificially high due to inflated real estate prices and increased consumer debt particularly in a time when unemployment is over 10%?
- The problems that started this entire mess in the first place were too much debt and inflated real estate prices (i.e. beyond what personal incomes could support). These two causes operated hand in hand. Now, the government wants to start it all over again. This is insanity.
- The result of these government actions will be that the US economy will go up and crash again (due to another debt bubble, asset bubble and real estate bubble) and/or the US economy will be stuck in a low/no growth state for an extended period of time (think Japan). Either result will cause more short sales, foreclosures and bankruptcies.
- The US economy will not enjoy sustainable growth until the real problems are addressed - jobs and debt (public and private). In order to do this, we need to correct the economic and regulatory issues causing jobs to leave the US and we need to reduce public sector debt and encourage people to reduce their individual debt.
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