The U.S.A. is bankrupt, and we don't know it...?

A very interesting commentary was published on Bloomberg this morning. You can read it here. Watch the video here. It states emphatically that these lovely United States of America are bankrupt, and we just know it. I deny that. We know it. We just won't admit it.

Let's face the facts folks, we cannot pay off the national debt. When you cannot pay off your debt, that's bankruptcy. When you cannot payback your debt, you meet the official legal definition of the term bankruptcy. Now what we are grappling with her is power and problem of human psychological denial. Given the fact Ram fans can deny the state of their offensive line, and propound that it was a good idea to take an injury prone QB in this years draft, we will certainly be able to deny the robust and concrete fact that our current form of government is bankrupt.

Notice I said our current form of government... Some people just aren't observant. They just don't pay any attention to detail or take note of things.

So Mr. Kotlikoff lays his program for radical simplification. I love it, but it will never happen under this democratic republic. Such a program cannot be initiated until some dude with 4 stars on his lapel drives up to the capital with some tanks and machine guns. When that happens, let's hope he begins a radical simplification program.

When your political power blossoms from the barrel of a gun, it is possible to say no to the special interests. What the former reps say means absolutely nothing at that point. You just implement the reforms. Anybody who doesn't like it is going to get hurt... real bad. They will have a different way of manufacturing consent in those days.

And so we have the righteous ending to the age of Aquarius. The free radicals of the 1960s wanted to spend freely on guns and butter and this is what comes of it. They thought they could regulate Wall Street, or do away with it entirely. Do you see what has happened now? They captured all of your regulatory machinery and all your social programs also. They blew the market economy skyhigh with plenty of help from the government. Good government "on your side" turned into an exercise in the organized looting of the public sector, with bankruptcy resulting.

I guess you were off in the 5th dimension with some drugs and free love whilst this was going on. The only thing that mattered was that the moon was in the 7th house and love was steering the stars at the dawning of the age of Aquarius...

Fuck those sonofabitch Aquarians! Do you see what you have done? You are the stupidest goddamn sonsofbitches on the face of the Earth, and I am not kidding either. I fart in your general direction, and upon all your idealism. Life is a series of difficult trade-offs, and you can never ever learn that. You want your cake and you want to eat it too.

Why you and I should not buy houses in Los Angeles County... just yet

My, my, my... If my mailbox and eMail account are any indications, the State of California and the U.S. Federal Government sure would like me to buy a house in my county right now. I have been informed no less than 13 times this month that CalVets and the U.S. Department of Veterans affairs would like me to exercise my right to a VA home loan... real soon. The time has never been better... or so they say.

I don't agree, and I will tell you why.

House prices remain obscene

Much to the dismay of current home owners and mortgage institutions, the price of houses remains obscene. How do I define that? According to classical banking doctrine, you never write a mortgage for more than 2.5 times the annual household income of the borrower. According to various estimates, Mode, Mean and Median household income in SoCal hovers between 76,000 and 85,000. That means that price on an average middle class home should $212,500. That should be the price because that is what the market should bare.

If you have conducted a study of housing prices in the San Fernando Valley of SoCal, you know that the price cap on a middle class home is nowhere near $212,500. 1,500 sqft will cost you $350,000. You can touch 2,000 sqft for the sum of $400,000, but you had better be prepared to do some repair work. In good hood, we're talking about a major fixer.

The consequence of this market structure is very simple: Most middle class people do not own homes. Most middle class people are renting. Those who bought are struggling like hell. Many of them are organizing short sales or being foreclosed. That's what's up in my neighborhood.

This brings us neatly to the question: Why lend no more than 2.5 times the household income? Who wrote that law? Why are we bound to this rule? Why not more?

The answer is pretty simple: We are currently living the consequences of ignoring this unwritten law that was pregnant with the wisdom of the elders. A youth group came up about 10 to 15 years ago that did not understand the reason why, they ignored the rules, we saw massive inflation in the price of housing, and now the mortgage industry is going bust as people cannot afford to pay what they owe.

The elders understood that 2.5X was the limit of what financially healthy people could afford to pay in terms of mortgages. Anymore and you begin to cut into their contingency funds, their health care payments, car repairs, etc. This is an unwise move for a banker to make. You can't cut the throat of the milk cow to bleed her from the neck. The cow becomes unhealthy if you do this, and you will loose your milk supply. Bad move.

Old bankers restricted mortgage loans to 2.5x to keep housing prices in-line with buyer means. Old bankers restricted mortgage loans to 2.5x to keep borrowers financially sane. Old bankers restricted mortgage loans to 2.5x to allow mortgage holders to have enough financial space for a decent life after the mortgage payment was made. This rule was best for all concerned.

Now look where the fuck we are. Houses are now unaffordable by the middle class. Most people I grew up with do not own homes, despite the fact that all our families owned homes. I am 43 and I have never owned a home. I have lived in apartments or a barracks for most of my adult life. There was an occasion when I rented a room in Mill Valley... Those who own homes cannot sell them at all, much less at a profit. Those who need to buy homes cannot afford them. The market is frozen. It is not liquid, vibrant, healthy, functional or alive. Prices have simply reached an untenable point.

The solution is simple: Those who wrote imprudent loans are going to take the ass-end of the coin they flipped when wrote the mortgage. They knew they were taking a risk, now the risk has come up snake-eyes. You lose. Of course they do not accept this! I know they are resisting this conclusion ferociously. They don't want to admit that they have a Forrest of bad paper on the books. Nevertheless, the fact is that they do.

The Market is going to get healthy... soon

Banks used the Bush/Obama bailouts to avoid foreclosing on the bad paper they hold. They only forestalled the inevitable. I believe that the foreclosure wave is coming in March 2010. It takes about 90 days to complete the process of foreclosure and put a naked house on the market. The buying season begins June 1, 2010. To be ready for this, I believe that the foreclosure notifications begin to fly in about 6-8 days. A ton of houses will be on the market June 1, 2010.

The prices will begin to fall at that point. Banks are hoping that putting foreclosures on the market at the hot-point will decrease the rate of decrease, but I think they understand that prices are going to fall. Let's hope it is a lot more than the $50K drop limit they are hoping for. A $50K drop will not restore the real estate market to health. To be frank with you, even a $100k drop will not restore the market to health. A drop from $400K to $300K is still well short of $212K. It is better than nothing, but the price is still steep for mode, mean and media people of SoCal. They really cannot afford $300K.

Uncle Sam would like my help

Of course, Uncle Sam is a wholly owned subsidiary of the Financial Houses on Wall Street. Ergo, Uncle Sam would very much like me to exercise my VA loan entitlement to buy an overpriced house and support the unhealthy market price structure right now.

This is the very best thing for Wall Street and for Uncle Sam. Interest rates are low. This means Uncle Sam won't have to give me much leverage in the mortgage interest tax deduction. This means I will ultimately pay more taxes. Also, if I buy at a high rate now, financial institutions will take a lower loss on the property they sell me from their current supply of bad paper. That's good for the financial institution because I will pay them more money.

I don't want to help

You will pardon me if I am a bid selfish, but I don't want to help. I want the market to get healthy from my perspective. I want to pay less taxes and pay less to Wall Street. I will buy after:

• The wave of foreclosures come
• The rate of interest increases, and my mortgage tax deduction increases.
• Prices go down
• I can buy $100k cheaper

So have you heard the economic news of the day?

The news just doesn't get any better. It keeps getting worse. The markets are crashing again.

1. The European Markets lost 3% over night.
2. The IRS & Treasury revised their GDP figures this weekend. The U.S. economy shrank 6.2% in the 4th quarter of last year and is expected to shrink another 6% this first quarter of 2009.
3. The Dow, Nasdaq and S&P 500 fell through the frickin' floor quickly this morning. The Dow, in particular, is now trading below 7000 which is going to set off a wave of panic.
4. Nourial Rabini, the only economist to correctly call this recession, said we would finish 2009 at DJIA=6400. Rabini clearly declares that this will be an adverse market reaction to the Government taking control of the banking system, and forcing them to eat all their losses. This could produce 3 years of zero dividends and famine.
5. As I write this we are approximately 14 minutes shy of the close on 3/2/2009. The Dow currently sits at 6,763.29. That is down 299.64 points or 4.24%. The Euros lost 3% last night. We beat that by one and a quarter. We are now at a low we haven't seen in 12 years, since April of 1997.
6. This sudden plunge is largely a consequence of AIG's latest loss figures: 61.7 Billion USD in the 4th Quarter of 2008. This is the largest corporate quarterly loss in history.
   
7. GM, AIG, and Citibank seem to be in a perpetual vegetative state.
8. The U.S Government is the defacto owner of Citigroup right now, and won't admit it. Also the Government is refusing to assume control of it's new holding and reorganize the house.
   
9. I heard former labor secretary Robert Riche on the Radio yesterday, retracting his condemnations of the D word. That is, Depression. He formerly said that no economist should use the D word related to this present recession, as there was no chance of us hitting 25% unemployment. He is now saying that those were hasty words, and he may have to eat crow for saying that. He still says that we are at only 8.9% unemployment vis-a-vis 25%. Unfortunately, the technical charts are forecasting 15% unemployment soon. That is downright nasty.

The latest most interesting analysis says the following: Every recession since the Depression has been caused by the Fed jacking up interest rates in an attempt to cut off inflation. This is the first time since the Great Depression that a major down turn has been caused by out-and-out banking collapse. Of course, the banking collapse was triggered by the explosion of a massive speculative bubble in Real Estate.

I thank God I never bought a house during that time, and that I just had my employee review meeting, and I scored all 90s and 80s, and they are going to give me a 3% cost of living increase in pay. I'm a damn lucky guy.