GIVING MORE SCOTCH TO THE DRUNKEN SAILOR
Courtesy of The Pragmatic Capitalist
David Rosenberg has some concise thoughts on a topic we’ve been banging the drum on for a long time – you can’t solve a debt crisis with more debt:
No wonder we are seeing a housing recovery, and it’s not just about the $8,000 tax credit for first-time buyers. How does the White House possibly allow this extra goodie to expire in November? The FHA is picking up where subprime lenders left off: the agency has seen its mortgage business jump 70% in the past year (!) and its market share in just three years has gone from 3.0% to 23% — it is allowing borrowers to finance up to 96.5% of homes priced all the way up to $729,750. Guess what, the default rate has risen to nearly 7% from 5½% a year ago. And, it is the taxpayer that is going to be picking up this tab … again! So, the policy formula here is that after excessive leverage got us into this mess, is to encouraging even more debt and come to think of it, Cash-for-Clunkers did the exact same thing — enticing people who were probably quite content with their jalopy to take on more than $10 billion of new debt. Amazing. It’s like giving another bottle of scotch to the drunken sailor, but hey — we can’t have the economy weak going into a mid-term election year now, can we?
Source: Gluskin Sheff
