September 8, 2007

Mortgage Bailout Scam question of the day

Via Nourial Roubini’s blog:

These are some of the complex and difficult issues that analysts and policy makers are starting to address. Bill Gross of Pimco is now proposing the creation of a fiscal institution like the RTC (that resolved the S&L banking crisis of the late 1980s and early 1990s) – what he called the Reconstruction Mortgage Corporation – to resolve the subprime credit problems. While this may sound as a fiscal bailout of borrowers (and by default of lenders) the alternative in his view is destructive home price deflation (as much as 10% fall in home prices in his view) and million of homeowners ending up in foreclosure. Folks at Goldman Sachs are actually predicting that home prices will fall as much as 15% in the next few years before they bottom out.

Home prices in my neighborhood in Southern California increased, on average, more than 150% between 2001 and 2006, with no corresponding increase in average income. Can someone please tell me why > 25% YOY gains for 5 years straight is considered peachy, but a subsequent 10% decline is a disaster of such epic proportions that it merits the biggest bailout in government history?


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