Why The Bailout Is 100% Doomed, In Under 1,000 Words.

The bailout legislation passed Friday is doomed to failure. It CANNOT succeed.

Why?

First, it is too little, too late. $700BB is only about 3.5% of the total housing stock of around $20TT.

Second, banks will have learned their lesson, and NOT lend to shaky credits. Or they will. And we will start this thing over, but there will be no accompanying price bubble. People will begin defaulting almost immediately because prices are falling.

What the bailout actually does is ensure The Worst Of All Economic Worlds: STAGFLATION.

The Cause Was A Price Bubble. The Cure Is Popping It. That's All.

This bailout is like "bailing out" the hamburger market that has recently gone to $30/lb. But now, it's FALLING, and it's at $20/lb! OH NO! Let's BAIL IT OUT! Let's get it back to $30/lb.!

Nonsense, of course. Goods that go to unsustainable prices must simply fall back to prices in line with incomes & substitutes. That means home must be in line with local incomes and must provide a comparable return as rentals. At the peak, Bend homes were priced at negative returns FOREVER. At the peak, 92% of all Bend homes were unaffordable to families making 120% of the median family income.

Prediction: Obama wins, and he will oversee The Worst economic malaise since the Great Depression. Question is, will he be a Carter or an FDR?

There is No Question, The Bailout Is Doomed. We will all begin to realize THAT in the coming weeks & months. There is ONLY ONE CURE: Home prices falling to parity with incomes. That's all. All else prolongs and intensifies the pain.

We are in a death spiral of bad loans, default, and foreclosure, a cycle that will repeat itself until we hit bottom. So, in addition to local incomes & rental return parity, people must Get Loans to buy houses, and that will NOT HAPPEN until it looks like housing has hit bottom AND is headed up. Believe me, Banks Will Not Loan Money At The Bottom. Only after a few years of stable to rising prices will they lend.

THAT Final Nail In The Housing Coffin is why home prices are headed LOWER than they were before this thing got started. That's why Bend could easily hit $120K medians AND STAY THERE FOR YEARS.

Prediction: Banks will HORDE this cash. The Gov't will ultimately have to INSURE HOME LOANS to get lending going again. But all this will be after a wave of foreclosures & continuing PLUMMETING of prices.