Freitag, Februar 26, 2010

The Next Bubble...

The next bubble that pops will be government debt.

World-wide, given extremely low interest rates, governments have taken on enormous amounts of debt.

Wonderful, right? Do all that good stuff and pay scarcely any opportunity costs. Best of all worlds for the statists.

But that debt, at some point, even if it is never paid off, has to be refinanced. If interest rates head up significantly - say the yield on government bonds goes from zilch, where they are right now, to rates that are consistent with historical trends - say 7% or even 10% - then servicing the debt will destroy government ability to finance the debt and continue all those lovely programs that they are spending the money on.

See this for what I mean.

Five to seven years. Sounds about right.

Of course, the Obama Administration isn't going to help when they do things like this.

This won't lead to fewer foreclosures: it will lead to more. The reason? If banks know that the government will intervene - invariably with a heavy hand to prolong the agony of homeowners in over their heads and banks facing catastrophic collapse of revenue streams - then they will start foreclosure proceedings earlier in order to ensure that foreclosure does happen by a certain date.

It also means that the major sanction of the banks - foreclosure and disposal of property, with resulting equity loss for the homeowner if they fail to make their payments - will be weakened, rather than strengthened: if the banks know that they cannot foreclose without going through some long, drawn-out reconciliation process that fails to recognize that the economics of the situation simply doesn't work, then they will increase up-front costs to cover the losses.

Only someone with no understanding of economics and finance could come up with such an idea.

But it's to protect the borrowers, the Administration says: the only thing this does is to prolong the agony and distorts the market, as houses do not come on the market when they should.

About par for the Obama Administration's track record. Prolong the agony and continue to meddle in markets...

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