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Posts Tagged ‘Equity’

Home Buyers Required to have More Mortgage Down Money

Posted by Steve Markowitz on February 19, 2011

Commercial banks are requiring home buyers to come up with more down money for mortgages.  This is a natural result of a marketplace that got out of balance during the housing bubble.

The Wall Street Journal reported that the median down payment has risen from a mere 4% in 2006 to 22% on conventional mortgages, similar to what was required in the more sane times of the mid 1990’s.  While this increase will continue to depress hosing prices with fewer people able to obtain mortgages, it will stop another housing bubble from occurring.  It will also bring supply and demand for homes back into balance.  Finally, it will help insure that banks get repaid on mortgages made, a novel concept.

The federal government has had a schizophrenic reaction to the more rational behavior of the mortgage markets.  The Obama administration last week indicated that it will seek to raise the minimum mortgage down payments to 10% on conventional loans backed by Fannie Mae and Freddie Mac.  However, private lenders are already ahead of this curve.  At the same time the federal government offers loopholes for mortgages obtained through agencies such as the Federal Housing Administration (FHA), requiring only 3.5% up front.  The FHA makes up half of today’s home mortgages.

The government used the housing bubble to heat up the American economy to 2006 at the expense of our economy today.  By promoting cheap mortgages with low down money, as well as home ownership to those that could not afford them, they artificially increased home values.  These increased values were then used by home owners to use phantom equity to barrow and ultimately spend more than they could afford.  The financial meltdown and ongoing economic challenges are prices we continue to pay for these bad polices.

Private greed played a role in creating the housing bubble and resulting financial meltdown.  However, this greed could not have been acted upon at the level reached without the government’s intervention into the mortgage markets.  Should the government continue intervening in the housing market in the name of lessening the public’s pain, future economic imbalances will be just as catastrophic as those that resulted from its previous interventions.


Posted in Governmental Intervention, Supply and Demand | Tagged: , , , , , , , , , | Leave a Comment »

General Motor’s False Advertising Campaign

Posted by Steve Markowitz on May 17, 2010

This Blog has previously written about the market disruptions and fraud that come with government bailouts and interventions into private markets.  A recent GM (Government Motors) advertisement campaign offers a glimpse into current unintended consequences of the GM bailout.

Repeating a line from his Wall Street Journal op-ed, GM’s Chairman Edward E. Whitacre states in a televised advertisement that GM has paid back its government bailout loan “in full, with interest, years ahead of schedule.”  This claim would be humorous if not bordering on fraudulent.  Let’s review the facts.

  • GM reported its first quarterly profit since 2007 for the first three months of 2010, earning $865 million with a free cash flow of $991 million.  In previous quarters since emerging from bankruptcy GM incurred losses.
  • GM received about $50 billion from the U.S. government.  The Obama Administration gave them $6.7 billion as a straight-forward loan at a 7% rate of interest.  The rest of the bailout was through the U.S. taxpayers being forced to purchase a 60.8% equity stake in GM.  The Canadian government also gave GM $1.4 billion loan and $8.1 billion for an 11.7% equity stake.
  • The GM advertisement claims that because of improved business, it is paying the U.S. back $6.7 billion, five years ahead of schedule.  That is an outrageous claim.

How is a $6.7 billion loan payback “in full” when the bailout equaled $50 billion?  What of the remaining $49.6 billion U.S. taxpayer funded bailout money?  Payback on that larger amount cannot occur until and only if GM makes a successful IPO (Initial Public Offering) and that has been delayed according to GM CFO, Chris Liddel, who said it will occur “when the markets and the company are ready.”

In addition, since bankruptcy GM has had a free cash flow of less than a $1 billion, yet it paid the U.S. government back $6.7 billion.  It doesn’t take an accounting wiz to figure out that something is smells fishy.  Where did the money come from?  Simple, it came from the same U.S. taxpayers; i.e. a shell game approved by the federal government.  The Obama Administration gave GM $13.4 billion of bailout funds in an escrow account as working capital.  GM now used part of these funds to pay back that same government, but at an interest rate of only 5%.  So the U.S. taxpayers lost 2% of interest charges in the transaction.  Pretty sweet deal!

Besides using this bogus payback claim for positive PR to sell cars, Sean McAlinden, chief economist at the Ann Arbor-based Center for Automotive Research, believes GM has another motivation.  It has applied to the U.S. Department of Energy for a $10 billion low interest loan to retool its plants in order to meet the government’s new Corporate Average Fuel Economy standards.  Thus, GM’s bogus PR, with at least the tacit approval of its largest shareholder, the U.S. government (Obama Chief Executive), is being used to grease the way for even more government bailout money.

President Obama made a gross error when he decided to bail out this failed company, GM.  This decision did not result in one more car being sold in the United States or one saved job.  It merely allowed a failed company to continue selling cars that would have otherwise been sold by more successful and deserving companies.  It also allowed some employees to remain working at GM, with bloated pay packages, rather than forcing them to join more successful companies.  If that isn’t bad enough, the bailout to keep the failed company afloat is being borne by individual Americans and successful American companies.  Adding insult to injury, taxpayers are now paying for a propaganda campaign designed to ultimately obtain more funds from themselves.

Linked below is the video clip of Whitacre’s deceitful advertisement that we the people paid for.  Only Progressives intent on nationalizing major American industries can dare call the GM bailout a success with a straight face.  The fallacious GM advertising campaign is an effort to fool the electorate into believing the bailout was a success.  Should Progressives still wonder why the Tea Party is gaining so much traction they need look no further.

Posted in Bailouts, General Motors, Government Ineptness | Tagged: , , , , , , , , , , , , , , , , , , , , , , , , | Leave a Comment »