Although we waxed skeptical here the other day about Warren Buffett’s just-announced $5 billion stake in Bank of America, we allowed for the possibility that the deal will provide a handsome payoff to him no matter what happens to the bank. B of A could implode, after all, a victim of sinking collateral values for its mortgage loans, and of litigation over its securitized-lending business. There is also the wild card of homeowners challenging lenders in court to show clear title to properties that are in line for foreclosure. In fact, this issue alone has the ability to capsize the global financial system, since “clear title” is exactly what ceased to exist when the feather merchants of the banking world leveraged out real estate to-the-max earlier in the decade to create an $800 trillion derivatives edifice – the Mother Lode of Digital Money, as it were. All of that sum must be viewed at the moment as deflationary overhang, by the way – not to mention, a key stumbling point for those who argue that The Great Economic Crisis must eventually precipitate out as hyperinflation. So, how do you produce even mild inflation, let alone hyperinflation, with the housing market in a full-blown Depression? Most surely not by expanding the capacity of banks to make mortgage loans. That’s been tried to death – first moderately, then aggressively, and finally desperately -- with zero success. Despite trillions of dollars worth of mortgage stimulus and supports both implied and real, the residential market looks even grimmer than it did a few years ago. Existing-home sales fell 3.5 percent in July despite the fact that prices were 4.4 percent lower than in July 2010. Now that’s deflation. There’s also the $6.6 trillion loss of home equity that has occurred since the onset of the
mortgages
Flat Tax Could Be the Cheapest Way Out
– Posted in: Commentary for the Week of March 8 FreeWe’ve been treating the debt-limit donnybrook on Capitol Hill as a joke, just like everything else that goes on in Washington, but it now seems more than remotely possible that the issue could turn gravely serious. Even allowing for the usual brinksmanship, it’s hard to imagine what concessions either side might make at this point that would be significant enough to break the logjam. For its part, Moody’s – as big a laughing stock as D.C. politicians since the Great Financial Collapse of 2008-09 – has put America’s AAA credit rating “on review” for a possible downgrade, sending the dollar into spasms late Wednesday afternoon. Of course, there’s no way in hell Moody’s would actually downgrade U.S. credit, since that would trigger financial Armageddon. Consider the mayhem that downgrades have already caused in Europe, where credit spreads for the PIIGs have widened as much as 250 basis points over German bundts. This has put the PIIGs in a financial death spiral that all the official happy-talk in the world can no longer counteract. Now try to imagine how a mere 50-point widening of spreads would affect a U.S. credit edifice that dwarfs Europe’s. Add just a paltry few basis points to the interest paid on nearly $15 trillion of federal debt for a year or two, and pretty soon you’re talking about real money. And then you could start worrying about how it would affect adjustable-rate mortgages in a depression-bound real estate sector, and the interest paid by households on revolving charge accounts. It would also knock Obama’s fiscal assumptions for a loop, since he’s counting on the fed funds rate to average 2.5% between now and 2020. If credit problems should cause this rate to revert to the 5.7% average that has obtained since the early 1980s, the additional
