A few weeks ago our Treasury Secretary Henry Paulson decided to send the 9 major banks, or should I say all of his friends on Wall Street, $125 Billion. Paulson is the former CEO of Goldman Sacs and has close ties with all current banking leaders. (Coincidental, his political term will also be ending in a few weeks, and he'll be back out looking for a new job.)
While this was in no way part of the original plan to use the $700 Billion recently granted by Congress, Paulson assured them and the American people that it was necessary to get banks lending again to strapped homeowners. What did the banks immediately do with the money? They used it to pay dividends, add cash to their balance sheets, and make sure there was enough bonus money for the CEOs.
When the American public realized this had happened, Paulson then announced he'll be sending another $125 to the smaller banks around the country to get THEM to lend to homeowners. Of course, the smaller banks will do the same thing as the larger banks.
So this week we now have the answer. There is now a new plan in place to send money directly to struggling homeowners. What the government will now do is renegotiate current loans that are not being paid. The cost for this has been estimated in the $600 Billion range. This is being sold as a benefit to the entire country, because of course, if a home is falling in price on your street it directly impacts the value of your home. Here is what really will happen:
1. Recent estimates show that about 30% of homes today have mortgages greater than the current value of their home. (That may be a low estimate) The majority of those thirty percent, for some crazy reason, are still making their payments every month. With the new government program, their next door neighbor who is no longer making his payments will now be able to go to the bank and renegotiate his loan amount with government assistance. So, anyone who is not a complete fool will then stop making their mortgage payments so they too can renegotiate the value of their mortgage.
2. This will cause a new flood of foreclosures to enter the market. There is already a flood coming based on the number of people that will soon lose their jobs, and the Alt-A loans that will reset over the next 24 months, but now it will be a tsunami.
3. The money now needed to renegotiate all the new foreclosures will skyrocket. This will put the original $600 Billion in the $1-$2 Trillion range.
4. In many cases where the government cannot cover the full cost of the the debt, they will just change the value of mortgage. This will be violating contract law, and any foreigner still stupid enough to throw money away on American mortgages will now be scared away completely.
5. This will pave the way for the new lender of last resort, Fannie Mae and Freddie Mac. They will now issue all new loans to homeowners. As Americans continue to default on those loans, the losses will be borne by the government, or the American people through increased taxes or inflation.
6. The $1-$2 Trillion needed to renegotiate loans will be printed as well, moving us one step closer toward hyperinflation.
For a real life look at where our country is headed, take a look at the following article: