An article “U.S. Loan Effort Is Seen as Adding to Housing Woes” reports “Some experts argue the program has impeded economic recovery by delaying a wrenching yet cleansing process through which borrowers give up unaffordable homes and banks fully reckon with their disastrous bets on real estate, enabling money to flow more freely through the financial system.”
WATCHDOG: Those so called “experts” are naïve. If banks forthrightly took into account all of their bad loans, not only would it be a “cleansing process” but it would probably bankrupt most of the banking system. The government allowing banks to fail was precisely what turned a sharp recession into the Great Depression that lasted for over a decade from 1929 through 1940.
The Bush and Obama administrations’ approach has been to gradually wring out the bad debt over several years, even when it means not pressing too hard to challenge values. For example, if a bank forecloses on a mortgage, it can get away with valuing the property at an earlier bloated appraised value rather than having to ‘write down’ the asset to its current below mortgage value and have to show a loss right away.
The building may remain empty, but the bank stays open…and prays for an uptick in the economy.
