Tying The Pieces Together In This Declining Economy

Implications: The Peter G. Peterson foundation will confront the dangers of America’s $ 9.5 Trillion national debt.  The article quotes Peterson as saying “Over time, taxes would have to double to pay for the debt and that's unthinkable''. 

Analysis: This weekend, the Administration is considering refunding FNMA and FHLMC before they go under in the apparent near future.  These portfolios affect some 70% of U.S. mortgages.  Meanwhile, legislation is going through Congress to shift at least a portion of the burden from defaulting loans to FHA guarantees.  Remember, too, that the burden of defaulting direct guarantee VA loans is four times the conventional loan market as soldiers, sailors and airmen can’t meet their obligations from the wages the services pay them.  To add to the problems, the Federal government took over the huge IndyMac Bank last Friday as the first of what will undoubtedly be much more of the same to come.  At the same time, Bank of America is struggling to make some sense of its $ 2.8 Billion Countrywide acquisition.  Then too, the Fed is saying that the window will be open to the investment banks as they struggle to make sense of mortgage portfolios that have no historical lessons as to how to repair the damage. In addition, commercial real estate activity and prices and occupancy stats are falling as owners seek to refinance maturing debt. Further and also … there is no end to this news.
All of this is going to do to the American economy what Manny Pacquiao did to David Diaz a few weeks ago.  No TKO here like in the past, a full retirement type KO is coming in my opinion.  Future generations will need to rebuild this country.  They’ll do it – no harm if today’s leaders fade out quickly.  The ashes of our recent generation will always be visible in the excesses of Greenwich and the Hamptons just like the 20’s could be reviewed in Newport, Rhode Island.  Lessons will be obvious.   
Read The Silence of the Lenders http://www.nytimes.com/2008/07/13/business/13mail.html and you’ll get the sense that at least a portion of the defaulting American public thinks the government should bail them out of the problem.  Denial is the name of that attitude. That article points out however that the stats to date do not show any underwriting which can solve huge capital problems at the banks.  Nor does the data show that there is any modern miracle cure for borrowers who cannot meet the beat.  For many, extensions, modifications and other mitigation measures do not promise other than a deferral of the inevitable.
The indicators here lead to a conclusion that when investments are made in housing and commercial real estate, the investor had better not only be certain of the capital to enter the deal, but also the funding to accomplish the exit.  Government programs whether Federal or local may be unreliable, the end user mortgage market and the commercial real estate debt and equity market may be problematic, and the ability of the appropriate jurisdictions to accomplish their part of development programs may be impaired.  It’s getting hard to impossible to predict reasonable future markets and that may be the beginning of future opportunity.  Careful, though, that the pricing of your intended allows a long hold to find the real investment truth.