Friday, 26 September 2008

Soros seems to talk sense

The discussion over the US Government's proposed $700bn bailout of the US mortgage market has left me a bit confused. The banks don't trust each other any more and won't lend to each other, and like a game of musical chairs in which not one but all the chairs are removed, the music has stopped and they're all left without a seat holding 'toxic' debt secured against over-valued property by people least able to service the debt. The US government somehow proposes to 'buy' these assets - but I don't see how this will increase interbank lending or help the struggling debtors. Now George Soros writing in the FT makes it a bit clearer;

The injection of government funds would be much less problematic if it were applied to the equity rather than the balance sheet. $700bn in preferred stock with warrants may be sufficient to make up the hole created by the bursting of the housing bubble. By contrast, the addition of $700bn on the demand side of an $11,000bn market may not be sufficient to arrest the decline of housing prices.

Something also needs to be done on the supply side. To prevent housing prices from overshooting on the downside, the number of foreclosures has to be kept to a minimum. The terms of mortgages need to be adjusted to the homeowners’ ability to pay.

That seems to make sense.

1 comment:

Newmania said...

Not sure I understand it myself