stimulus-plan-finance

The American economy is perhaps going through its most challenging phase. Unemployment is at its peak and people are faltering on their mortgage payments. To restore the floundering economy back to health a stimulus plan has been put in place. The Treasury Department is working on the details of this plan. Will it put the economy on track?

Ever since the plan has been put in place the government has emerged as the nation’s largest mortgage lender having equity stake in almost 600 banks. But the stimulus plan is now the centre of a controversy. People are debating if the money that is now being spent will delay the inevitable or accelerate the problem which it was meant to stop?

New money is being circulated to financial institutions leading banks to derecognize the true value in their books. The banks have already written off many loans. Now GAAP wants these marked down.

However, banks are not writing off the many million dollar loans that are still there in the balance sheets. According to the accounting norms, these loans can be classified as “held to maturity.” A majority of these loans are at their original face value and will be so unless the consumer defaults. But the problem is that the original value of the loan is much more than the true value.

An inherent assumption of this accounting procedure is that residential and commercial property prices will recover to the boom phase level. But will that even happen? Never ever has any bubble recovered to its peak level price. So the chance of its happening this time is also remote.

A homeowner would know this. Anyone who owns a house in a region like Florida or California will know that he owes more than what the house is worth. In California, home prices have plunged by 57 per cent from their peak values. In April, an average homeowner in California had to pay $412,000 in mortgage payment while the house was valued at $235,000. In fact, California accounted for 43 per cent of the USA’s bad loans.

Experts say that as unemployment rises, many more are expected to default on mortgage payments. Even the stigma attached to default has faded. Home prices are still declining and it may take a while for the economy to recover. Till May, 2009, Wells Fargo, for instance, had defaults that exceeded the entire 2008. This is particularly grim.

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