Market Ticker – Karl Denninger
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November 28, 2009

I’ve been slack-jawed a couple of times during this debacle of an economic mess, but this has to take the cake: (<– I highly recommend reading this link in its entirety including the comments.)

Here is the real stunner. A senior person at Treasury said to a small group of us that it is now official Treasury policy to extend and pretend on real estate loans. In other words, the policy statement from last week says, if you can make an analysis that says even if the current value is less than the loan, if you can do a spreadsheet that shows if you extend for 3-5 years, and if the economy gets better, and if the loan can be amortized down to where the loan is no longer more than the value, then the lender does not have to take an impairment -write down. Loans are to be modified by rate reductions, deferral of reserves, deferral of amortization or what ever.

Did ‘ya read all those “ifs” in there?  What if one of the “ifs” doesn’t?

It gets better:

Giant make believe. The free market seeking an equilibrium price is no longer economic policy. In short, the working of the free market is suspended. She went on to say it was administration policy that they will create new employment and by doing so they will boost the economy, and so then real estate values will return to old levels. There were 50 of the most senior and smartest real estate people in the room. They ripped her to pieces. It looked like one of the town hall meetings of August, except everyone there was a very senior, polished professional. At one point everyone was calling out or moaning at her. It was clear to all she had been given a few talking points and she was told to stick to them no matter how foolish she looked. The group told her in no uncertain terms this is terrible public policy. They said for jobs to be created you need to lower rents so the cost of occupancy was at a level to encourage more hiring. If the loan is kept at old levels and building values not reduced, then landlords can’t reduce rents to where they need to be to make taking space by tenants economically viable. Retailers costs remain higher than they should be making it harder to lower prices to induce sales. So there is a massive make believe going on.

The pros get it (as have I and a few others.)  What’s more they communicated it.

When I pressed the issue of political interference she said – what do you want us to do, bankrupt all the banks.

That is the choice.

What does this tell you?

A. The problem is going to take much longer to solve than it should,

B. The banks are still very weak, so lending will not return anytime soon,

C. A massive refi problem is getting deferred to 2013-2015.

D. The administration is playing politics with the economy to a degree that is dangerous. There has to be a massive value reset for real estate. We are deferring the inevitable.

Actually, it tells me something else.

What are the odds that all those “ifs” pan out?



What happens when they don’t?

The banks all go bankrupt anyway, and the economy has been further trashed by the destruction leveled on employment as a consequence of this policy.

What’s even worse is that this jackass of Treasury Representative, assuming the conversation reported really happened, told a bunch of professionals that if all of those “ifs” don’t pan out the banks are all going to blow up.

What do you think those professionals will be doing when, not if, it becomes apparent that they’re right – that the economy is not recovering at a reasonable pace and that the “extend and pretend” game is not only not working but is inhibiting recovery?

And by the way, I’m curious how you all think this is going to work out, given this little ditty (find the source here)…..

These pros are going to short the ever-loving hell out of anything that has a ticker symbol as soon as the turn-down is evident!

There is only thing worse than being stupid – it is admitting that you’re stupid by putting a bankrupt and unworkable “policy” in front of a bunch of professionals who have the acumen to analyze what you’re up to, tell you that you’re nuts, and then act on it to profit while grinding the banks and indeed all of America into dust – but you stick to it as “policy”, even though those who are smarter than you are have told you point-blank that it won’t and in fact can’t work.

Thank you Barack and Turbo Timmy – you own it, this is your policy, this is your legacy…….

……and this will be your political obituary.