This Is What Happens...

...when you ignore economics.

First of all this:

The re-default rate of loans modified in the first quarter of 2009 was 51.5 percent by the end of the year, the Office of the Comptroller of the Currency and the Office of Thrift Supervision said in a joint report today. The figure, which measures payments at least 30 days late, climbed to 57.9 percent for changes made in the prior 12 months.

People who took out loans that they cannot repay because their payments are either more than they can afford and/or they owe significantly more on the house than the house is worth are, per definition, insolvent because the discounted cash value of their assets exceeds their ability to finance. Pretending that this is not the case by "modifying" the loans is nothing more than putting lipstick on a pig, a dead and bloated one: those defaulting should never have received the loans in the first place.

But by ignoring the economics of the situation, the government decided on policies that have created a nightmare.

Then this:

Interest rates climbed in the bond market Thursday after a government debt auction drew tepid demand. Auctions Tuesday and Wednesday also saw lower demand.

The auction of $32 billion in seven-year notes saw demand fall from the past two months. That means the government could have to start offering higher interest rates to attract buyers.

Testimony from Federal Reserve Chairman Ben Bernanke affirmed the government's pledge to keep interest rates near zero for an extended period.

Duh: remember, credit default swaps on US government bonds have increased significantly as the market anticipates that the US will lose its excellent credit rating because of the size of the deficits and overall debt levels. As it should, given the circumstances.

Of course, the government cannot afford to have interest rates rise at all: if they do, and especially if they do substantially, then the debt servicing will strangle government finances until discretionary spending is gone. I don't mean limited, I don't mean constrained, I mean that if interest rates were to go to, say, 6% (instead of being basically as low as is technically feasible), then servicing the debt means that there will be no money for discretionary spending. Zilch, nada, you're screwed.

Of course Bernanke has to keep interest rates near zero for as long as humanly possible: if interest rates go up, the debt becomes unmanageable.

This is the logical consequence, speaking from an economics standpoint, of the significant amounts of debt that the US has acquired. Pretending that the markets aren't going to react to this is folly.

But then again, folly appears to be the norm for this Administration. Sheer economic stupidity, I assume from ignorance rather than malice.

I'll repeat this: I know I sound like a broken record, but we simply need to demand a higher quality of work from our government.


Because we most certainly are not getting it now.