Tick, tick. August 2nd is the Debt Limit Armageddon. Or Not.

You must no read my posts;

uh? uh? uh?

What's this? Have the boys on the bus started to break ranks?

jbendery profile

jbendery NEWS! Rep. DeFazio says Biden told House Dems, if all else had failed, Obama was willing to invoke the 14th Amendment. #debt

HouseInSession Billy House
Who'll be leavin' on a jet plane once the debt ceiling vote is held tonight? And what will the FAA say about that?

....The business community and banks are sitting on billions in cash, supposedly waiting for confidence before expanding into growth areas. Let's see them do just that. If they don't then the Republican concept of free markets has fallen on it's face. If they do then revenues will increase on their own through a well-employed workforce. We have between now and Nov 2012 to see how the business/banking communities react. They aren't sitting on the sidelines because of government anchors around their necks. They have been given all sorts of bailouts and incentives to grow and expand the economy and they've chosen to do just the opposite. Now is the time to see what steps they take to do their part to pull us back from the brink....

Suppose a household buys a house worth $200,000. The household puts down $20,000 and borrows $180,000 from a bank through a nonrecourse mortgage—meaning that in the event of default, the bank has access only to the collateral: the house itself. The bank is a big one—it has $2 trillion worth of assets, $1 trillion of those assets consisting of mortgages (either through direct ownership or through ownership of mortgage-backed securities). The bank has $200 billion worth of outstanding equity—so its debt-to-equity ratio is 9-to-1. Here, I should be clear that my value references are all market-determined values.

Now, suppose that land prices fall, and so houses around the United States fall suddenly and permanently in value by 30 percent. For the house in my example, that means its value has fallen from $200,000 down to $140,000. The household is now significantly underwater because it owes $180,000 on a house worth $140,000. If the household loses its sources of income—as might well be true if houses around the country are worth 30 percent less—then it will have no choice but to default on the loan (through a short sale or a foreclosure). Even if the household keeps its sources of income, it’s now in a position where so-called strategic default on a nonrecourse mortgage is financially rewarding. The bottom line is that this mortgage once worth $180,000 is now worth much less, perhaps no more than $140,000. In other words, the 30 percent fall in the value of the underlying asset has led to as much as a 22 percent fall in the value of the mortgage itself.

This has severe implications for the bank, of course. Recall that $1 trillion of the bank’s assets took the form of these kinds of mortgages. Given the possible 22 percent drop on its mortgage values, the bank’s assets have fallen by as much as $220 billion, depending on the default choices of households. Its equity, originally worth $200 billion, will fall greatly in value—possibly to zero.

What a perfect day for Gabby Giffords to return to the House.