Nouriel Roubini's back at it again- he's forecasting a long way down for residential home prices, for a cumulative drop of 40% from the peak.
Of course, Paulson doesn't want to solve that problem, he wants to keep giving the money to the banks.
Now this fall in home prices is important for 3 reasons. As long as it occurs, residential construction is going to keep on falling in absolute terms as a share of GDP. Secondly there is the huge wealth effect coming from a fall of $6 trillion of housing wealth. But most important factor I think is that right now ongoing is that with such a fall in home prices, by the end of next year about 40 percent of all households with a mortgage are going to be underwater, negative equity with the value of their homes below the value of their mortgages. So about 21 million out of the 51 million houses that have a mortgage. And there’s a huge incentive to walk away from your home, because the US mortgages are not recourse loans.
Now, not everybody is going to walk away. Let’s be even conservative. Let’s assume that only 1 out of 5 people that are underwater are going to walk away. If you do the math — I’m not going to go into the detail of it — you get additional losses for the financial system of the order of $400 billion dollars. This is on top of all the other write-downs that have already had been made through subprime-kind of a writedown. So that’s another huge loss for the financial system. This is just assuming that only 1 out of 5 people underwater are going to walk away. If it’s more like 40 percent, then the losses is another $800 billion. So you’re in a situation in which you can wipe out a good chunk of the capital of the financial system. So that’s what we are observing.
Paulson resisted pressure from lawmakers to commit to implementing a foreclosure-prevention program proposed by Federal Deposit Insurance Corp. Chairman Sheila Bair.
``There is a balance to getting money for those who need it as opposed to those who don't need it,'' Paulson told the panel. ``There's also a balance to not providing a windfall to the banks.''
Home prices fell in four out of every five U.S. cities in the third quarter, a record spurred by nationwide foreclosure sales, the National Association of Realtors said today. The financial turmoil sparked by the collapse of the U.S. subprime mortgage market has caused $996 billion of losses for banks, lenders and insurers.
So, if we're looking at further (semi-conservative) losses of $800 billion, plus the $996 billion already lost then we're pretty close to $1.8 trillion. Our entire GDP is only $13.8 trillion. If you really want to talk crazy then lets figure in the amounts already allocated, which CNBC is calculating as $4.3 trillion. By the way, that's more than the U.S. spent on WWII, on an inflation adjusted basis. So how much longer can we go on solving the problems caused by excessive debt and lax oversight by issuing new debt and handing out money without any oversight? As Naomi Klein says, it's a "multi-trillion-dollar crime scene".
Klein sees three areas of borderline illegality. The first is that rather than being used to get banks lending again, the bailout money "is instead going to bonuses, is instead going to dividends, going to salaries, going to mergers."
The second is that, without Congressional authorization, "the Treasury Department pushed through a tax windfall for the banks, a piece of legislation that allows the banks to save a huge amount of money when they merge with each other. And the estimate is that this represents a loss of $140 billion worth of tax revenue for the US government."
The third problem, which dwarfs the $700 billion bailout itself, is that "there’s another $2 trillion that’s been handed out by the Federal Reserve in emergency loans to financial institutions, to banks, that actually we don’t really know who they’re handing the money out to, because, apparently, it’s a secret."
"If the Fed has accepted distressed assets as collateral in exchange for these loans," stated Klein, "there’s a very good chance the taxpayers aren’t going to be getting this money back. ... So that’s why we’re calling this the 'trillion-dollar crime scene' or the 'multi-trillion-dollar crime scene.'"