Friday, October 03, 2008

You'll Make Money

Those in politics and the business community, pimping the bailout bill, have been claiming that the American taxpayer will make money on the deal. Horseshit.

Take a property that sold for half a million. Say it could be sold today at half of that. In a lot of markets that's typical, in many, it's generous. It's expensive to put a property through foreclosure and takes several months, at least. Usually the property undergoes significant physical degradation during that time. In order for an investor to make money on a distressed loan, which is collateralized by a property of this type, it could not bring much more than 20 cents on the dollar and in many cases less than that, much less.

If the institutions that hold these loans received that kind of return on them, they would all be bankrupt in no time. The government will have to pay much more than what these loans are worth to save the institutions that hold them. Will these properties ever be worth enough to merit the kind of prices that could bring the taxpayer a profit? It is likely, given the nature of real estate prices and the inflationary nature of our currency but it will be many years. If the currency holds up, decades. The government is not prepared to hold them this long.

The taxpayer is going to lose his shirt on this deal. Given the fundamentals of the economy, this bailout will not do anything but delay the inevitable collapse. If you like this bailout, you are in luck. Another, even bigger one is just over the horizon and another after that. I hope you have some spare shirts.

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