Can someone with a bit more experience tell me how you can get a HELOC when you don't have the E (Equity) in the first place?

I've got a few hundred grand in equity in my place and a HELOC. It was quite a chore for me to get the appraisal and argue for as much equity as was possible. Perhaps I need a new bank.

They definitely deserve a bailout. And those who were responsible should have to pay for it. Sigh.

sarcasm.

We have to bail them out otherwise they might not do it again.

Remember, we never would have had this glorious housing bubble if it weren't for the Internet bubble bailout.

OT

Remember the discussion from a few days ago about how best to short?

Today, stock indexes were down at least 2%. The Ultra short index ETFs were up at least 4%, and SRS (real estate) was up almost 9%.

Somebody said it's easier just to short individual stocks like BIDU. Today, BIDU was up 5.6%. In a market like this, anything can happen with an individual stock. The hedgies play BIDU in a game that only they understand, like high stakes poker against each other. If you play along, you win or lose without even knowing what game you're in or who you're playing against.

The smart way to go short is the Proshares ETFs because if your idea is right, soon enough you will profit.

I said buy SRS 3 weeks ago when it was 100. Today it hit $121 and my target is still $140.

Great Post CR,

Great Point too Cote'.

Keep in mind, that "soon to be renter" probably sees the handwriting on the wall and went out and spent the last of those hard earned dollars on Black Friday.

It won't be all nice for these owners. The $300k in debt forgiveness will be imputed income for them for tax reasons so they will owe about $100K in income taxes and can't walk away from that debt in bankruptsy.

You make a good point, andrewp1040, but here's something for you to ponder....

Maybe it will be nice for these folks.

What if they didn't spend that $300K MEW on cars and flat screens?
What if they funneled it all back to their extended family in Mumbai?
What if they don't plan to file bk?
What if their little 'American Dream' worked out according to plan?
What if they already are already on a first-class flight to India, one-way?

Thank you, come again!

"Can someone with a bit more experience tell me how you can get a HELOC when you don't have the E (Equity) in the first place?"

Get a CFC preferred appraiser.

The smart way to go short is the Proshares ETFs because if your idea is right, soon enough you will profit.

I said buy SRS 3 weeks ago when it was 100. Today it hit $121 and my target is still $140.

Alternatively you could have gone short on URE (the Real Estate Ultra fund), and also make money if the money market assets that comprise these funds implode.

Of course if you don't know what you're doing, you can get destroyed with the actual short.

I certainly had the wrong banker. The more of these stories I read the more I kick myself for not buying some properties using no money down loans. Definitely some missed opportunties.

Were they handing out money like this for commercial properties? When I bought my commercial building in 2001 I had to put 30% down and it had positive cash flow at the time of purchase.

With full-replacement insurance and a brush fire the story could get even better.

I wonder where the $270 went?

These are seconds and helocs we're talking about here. Not purchase money mortages. The borrowers are on the hook for every penny, should the bank decide to pursue.

Misean - if you click through you can eventually see the listing and pictures of the house. It was built in 2005 and it looks like there is no way they spent anythign close to 333k on the interior. Some nice furniture maybe, but I would still bet they planned to steal the cash all along. Maybe they were a ninja loan and used the cash to live, but if not, they stole that cash and planned to leave the bank holding the bag.

And this is a "modest" home in the OC. Wait until higher-end homes start showing trouble. Exact same story but with $5M mortgages and $2M HELOCs.

There's close to zero chance Bernanke will allow a significant deflation. The fed can just keep dumping money in the economy to prevent it...

Ultimately this is not Bernanke's decision to make. Bernanke is not king of the US. The Fed can only do what there's sufficient political and popular support for (unless they can print money without anyone realizing it, which might defeat the purpose).

Again, how many voting Americans will want to see the value of their savings destroyed?

I'm not saying it can't happen, only that it's not simply a matter of Bernanke pressing the "print" button.

Monkey In Chief,

I agree. The bond market does too. Inflation protected treasuries and non-inflation protected treasuries performed very well today (and similarly). That implies inflation expectations are somewhat contained.

I vote for inflation.

Politically, there are more people who stand to benefit from 5 years of moderate inflation (say 4-5%) than those who stand to benefit from deflation. The US government also stands to benefit, being a huge debtor.

I agree that dropping house prices and a credit crunch could add to deflation, but Bernanke still has some cuts ahead of him, along with the ECB. Plus, the declining currency means no more importing deflation from China, so prices should rise for imported goods. And just look at the inflation in food and energy prices.

if the property actually sells at this price, the lender on the HELOC (Washington Mutual) will lose over $300,000.

Isn't the HELOC a recourse loan, meaning the lender can go after the personal assets of the borrower? After such reckless borrowing, I hope the lender takes all stuff away from the borrower, cars, investments, all, and leaves only the option to file bankruptcy.

Nice touch embedding the Nouveau Riche University emblem in the original piece.

Thanks ac,
At the risk of being obtuse, what is the exact mechanism the FED would buy bad loans? Obviously not with tax dollars as that wouldn't be a net gain of dollars. So the FED says "yes I will buy your option arm portfolio" and then they type some numbers in someone's account and the bad loans disappear from the books? Is creating inflation as easy as typing some numbers in banks' accounts?

Doesn't seem like it would work very well with foreign creditors.

Stagflationary Mark --

However, for the "severe" deflationists to ultimately be right, real yields must rise (meaning hoarded fiat paper is going up in value big time).

Could you elaborate on this? It sounds exactly backwards to me...

Nominal interest rates are forward-looking. Inflation statistics are backwards-looking. So when inflation expectations go up, interest rates (both real and nominal) on long-term bonds should rise. Or as I have asked before, "Who the heck is making 30-year loans at 4.3% interest if they are expecting to be paid back in worthless dollars?"

Long-term interest rates are a reflection of expected inflation (since that affects the value of the money when you get it back) and opportunity cost (since loaning money is only one thing you might do with it). The collapse of the 10-year and 30-year rates suggests a crash of one or the other or both.

Which reminds me. Does anybody here have a reference showing how long-term bond rates behaved in the 70s?

CR said: "...This illustrates two important points: We are all subprime now, and, with falling house prices, the Home ATM is running dry."

And one additional point: That CR is quickly losing its intellectual high-ground by using an over-the-top extreme anecdote as if it were an accurate representation of the entire market. It's not even representative of California.

May as well give Jas Jain equal blogging-rights with Tanta, because that's where things are headed.

Sebastia

At the risk of being obtuse, what is the exact mechanism the FED would buy bad loans?

At the end of the day, the Federal Reserve is just another private bank. The only thing that makes the Federal Reserve special is that its exempt from reserve requirements which means it could loan out infinite amounts of money.

But, that doesn't mean the Federal Reserve books don't have to balance at the end of the day like any other bank. The Federal Reserve could no more monetize bad debt and remain solvent than CitiBank could.

No free money for the banks, no adding zeros to our bank account, nothing but loans in exchange for high quality assets that have to be paid back (with interest).

AT THE END OF THE DAY, THE ONLY GROUP THAT GETS FREE MONEY FROM THE FEDERAL RESERVE IS THE US GOVERNMENT. THEY ARE THE ONLY GROUP THAT GETS BOTH A LOAN AND THE INTEREST NEEDED TO PAY FOR IT. ARE YOU SUPRISED?

I believe Congress just passed a bill to eliminate taxes on loan "gifts" as a result of short sales.

It is planned to not longer tax the forgivness of purchase money, but HELOCs and cash-out are not included in that legislation, if I recall correctly.

The savers still have two paths though. (...)
2. Find a way to beat 9,000+ hedge funds competing with you for a real return.
Bliss!

My way is using FDIC insured CDs with rates above treasuries. With treasuries representing the market, I can get a better return, but hedgies can't.

4822,

It actually is a bit tempting. If nothing else, I'd get some seriously good exercise.

Unfortunately, some years I seem to be more interested in investing in these. They require very little maintenance, lol.

That faux Italian Juliet balcony is really too low to jump and kill yourself but the upper clay tiled roof might work. Quick, get a ladder hon.

I think I am beginning to understand how the FED might help out.

Me, Mr. Banker, will go to the FED and present my collateral to the Central Bank which has to balance it's books. I say, "here is my collateral", and hold out my hand. A young child spectating will notice I am actually holding out a dog turd, and comment thus. Me, not hearing the child, will state, "here Mr Chairman, is a golden egg as collateral." The Chairman will say,"ah yes, nice golden egg," and will take the dog turd and book it as a golden egg. The child will be quieted by the investment banker parents. The audience will uncomfortably agree it is a nice golden egg.

One thing that puzzles me is that, these FED loans are short term, yes? So the FED and audience has to keep pretending an increasingly stinky dog turn is still a golden egg each time the loan roles over, indefinately.

Do I have this right?

"Who the hell pays for this stupidity?"

The answer is pretty obvious: the only people who can pay for it are the people who CAN pay for it. In other words, anybody with assets or savings. Have fun.

wally,

The answer is pretty obvious: the only people who can pay for it are the people who CAN pay for it. In other words, anybody with assets or savings. Have fun.

Nothing says fun like a game of Avoid the Predator™!

Optimal foraging theory
Specialists have a longer handling times and short search times; they are choosy. Lions, for example, have a very low search time but a high handling time , which can be prohibitively large for some prey. They therefore pick out the sick and old.

There are 45+ million people who don't have health insurance in this country. I would argue that the vast majority of the savings is held by the older population. They've simply had more time to accumulate it.

At high prey densities, each new prey item is caught almost immediately.

Who would have thought the housing net could have been so effective?

As the prey density increases, they become less limited by search time and more limited by handling time.

Isn't that the truth.

That $270 is just right for the Appraisal fee if it was a "drive by".As far as this being "one house" and an anomaly,horseshit.The entire city of Patterson is like this,or look at America Canyon,both in N central Ca.I kow of at least a half dozen cases like this in the immediate area of my small town.I would like to point out that that $270 is less than 1/3 of the security deposit you would pay on a small one bedroom apartment,and that qualifying for the $999,999 was easier than passing the average landlord background check.If there was ANY fraud in obtaining the loans,they are not dischargeable in bk,and become recourse loans.Good luck collecting,and you do have to file and object,which costs $ and time.

One thing that puzzles me is that, these FED loans are short term, yes? So the FED and audience has to keep pretending an increasingly stinky dog turn is still a golden egg each time the loan roles over, indefinately.

The discount window isn't free money. Eventually the Federal Reserve is going to have to be paid back. The only thing the discount window does is help provide reserves to banks so they aren't forced to sell assets at firesale prices.

The only way the Fed could get caught holding the "turd" is if the bank using the discount window were to go bankrupt. Even then, the Federal Reserve may not end up taking a loss on the security because when they took it at the discount window it was at some value below the market price.

A bank may try to keep rolling over the security but each time the discount would increase as the security's market value dropped.

Nobody gets free money from the Fed except the Government.

Again, how many voting Americans will want to see the value of their savings destroyed? - ac

Ya all eight savers will bitch like hell and write their congressman... the rest of America will go shopping.

:::::

You're right. The Fed can't just print money. They loan it. Assets are way overleveraged, so there's nothing to lever. - Misean

They can print money by buying bad loans and bonds using the fractional reserve system, and by agreeing to buy any bad loans made in the future. - ac

Even if the Fed Res is 'constrained' the federal gov't can run larger deficits at will... The Fed Res isn't the only money pump in town.

And congress can mess with tax laws & entitlements to make the money they spend far more likely to be consumed and as a result more 'stimulative'... less attractive to carry trade or 'malicious saving'.

The ultimate way to inflate? Authorize the Treasury to print money (out of thin air) and just go and buy gold, silver, etc., with it. Then hold the gold and increase the 'reserve' against the currency. Almost sounds 'responsible' when worded that way. Congress could authorize that in a blink and folks would 'approve' without thinking.

meanwhile it would remove precious metals from the market& drive up their price (increasing the 'value' of the reserve) while flooding the markets with more paper money to halt 'deflation'.

Wouldn't save any one particular troubled specuvestor or failed bank but sure as hell would inflate the economy with paper currency.

Now who do I send my resume to? I want to apply for the post of Commizar of Liquidity in the new administration.

Dryfly,

Together the Congress and the Federal Reserve can always create inflation. I don't think any deflationist (me included) would argue that point. My view point is that there is going to need to be a severe deflationary recession in to mobilize those extraordnary measures.

Of course, extraordinary measure may lead to higher future inflation. I see it as a chaotic system that starts to swing wildly before finding a new stable attractor.

But, expect that if things get really bad that the Fed will revalue the price of gold they hold in reserves from $45 to something closer to market prices at the time. That would create an instant surplus that the Federal Reserve could hand over to the Treasury to fund a bailout of sorts.

The Treasuries Exchange Stabilization Fund was created in the exact same way in 1934 when the price of gold was revalued from $20.67 an ounce to $35 an ounce.

Of the Fed could follow the European model. The Europeans replaced the gold reserves held on the books at below market value with with government bonds. Government coffers were enriched when the treasuries then sold the gold on the open market.

I'm guessing that the Europeans didn't simply revalue their gold stocks because it would put an implicit floor under the price of gold. I'm guessing central bankers didn't want their hands tied by a partial return to the gold standard.

I'm guessing that development wouldn't be a positive development for gold bugs since gold prices collapsed when the Europeans started dumping stocks.

When you're in charge, can I get a job? I'm very, very Cheap, in relation to the Sales people who have been writing all this crap!
Underwriter | 11.26.07 - 9:44 pm | #

Can you run a printing press? Put that front & center on the resume and it will get noticed at the Commissariat of People's Liquidity. I promise.

Seriously - I get the 'deflationary pressure' meme but don't give deflation much of a chance vs. inflation UNTIL Americans show a willingness to save. That could happen but I see no signs of it yet.

Kicker,
I like what I am hearing from you.

But then,
dryfly scares me again.

"Perhaps it is that this culture sees no value in humans other than as producers/consumers. It reduces us to zombies, mindlessly seeking solace in flat-screen TV's and granite countertops."
"Somehow it all feels hollow ... there are so many other dimensions to us besides how much stuff we have or how productive we are to our corporate overlords. Why not try to recapture some of our humanity, if it means a few lean years or a couple of points less GDP, who cares?"
I say bring on the crash ...
central_scrutinizer | 11.26.07 - 9:23 pm | #

central_scrutinizer,
I am totally with you on that one. I am not religious at all but it still appalls me what has been done to the holiday season. I think a lot of people need to go back and read what was actually said 2000 years or so ago.

Together the Congress and the Federal Reserve can always create inflation. I don't think any deflationist (me included) would argue that point. My view point is that there is going to need to be a severe deflationary recession in to mobilize those extraordnary measures.

We agree to disagree.

I think it will take extraordinary measures to STOP inflation with all the money floating out there in FCB reserve piles just waiting to be 'liberated' & repatriated.

I used the gold scenario to just prove how easy and 'responsible looking' a re-inflation could be made to look.

hell they could also buy land too - say for conservation. Does the same thing.

Or be 'compassionate'... just enable the Fed gov't to 'help' all those cash strapped states & municipalities... print a little money, give it to the states & cities to cover pensions & budget short falls... call it a loan and have the cities & states 'repay' it in say... 100 years. Wouldn't even add to the 'deficit'... technically that is since credits & debits cancel. Where you gonna be in a 100 years? How much you think those bonds would be worth then?

Congress wouldn't even need special legislation - they could authorize that spending tonight if Bush would sign it.

That way all those poor pensioners won't have to freeze in the dark and the cities won't go bankrupt... Oh and a whole lot of cash gets flooded out into the markets. How convenient.

The only way this gets sticky is if we DON'T have deflation. Then adding gas to a roaring fire gets you burnt. But if no deflation then why we arguing?

Take Bernanke at his word, these folks know how to fight deflation. Its inflation I don't think they understand.

The only way we get deflation is if we DEMAND IT - that won't happen.

I'll put out my little prediction (which I always put out when inflation/deflation debate emerges)..

There may be a sudden deflationary shock which will be followed by an almost as sudden inflationary shock.

I don't think the fed will be able to inflate fast enough.. and there will be a sort of discontinuous drop in asset prices. Then, the money printing will slowly catch up. Though, I'm still doubtful that this inflation of the money supply would result in an equal inflation in wages.

Anyhoo, here's my prescription for how to inflate the money supply:

Declare that all money printed before 2008 to be suddenly worth twice as much. Debt, credit or other paper assets stay the same.. so.. if you owe $2, you can pay that with a $1 bill printed before 2008.

Sadly, the mechanics of that seem a little to complicated. Only people who happen to have a pile of pre-2008 cash would benefit. But, maybe there would be a way to make something like this work..

I guess, you could declare all debt, credit to be worth half as much as it once was.. and then the fed could just compensate creditors with freshly printed money.

There're a lot of ways to make that work... the fed can find out what you owe.. then you fill out some mind-numbing paperwork and they will send a check for 50% of your debt to your creditor.

This is the end of my comment.

More re H.R.3648:
http://www.cbo.gov/ftpdocs/86xx/doc8667/hr3648.pdf

Not only is it not a giveaway to people who HELOC'd or refi'd cash out, it even tightens up the tax treatment of certain types of property:

Taxpayers are currently allowed to exclude up to $250,000 ($500,000 for married couples filing jointly) of the gain [on] a principal residence, [if it was] a principal residence for at least two of the five years .... The legislation would reduce the exclusion for some residences that were not the principal residence for all of the prior five years. Such time ... would not include [unavoidable temporary absences] ... but would include rental of the property.

Note the distress voiced by some in the visitor comments at
WashingtonWatch.com - P.L. 110-142, To amend the Internal Revenue Code of 1986 to exclude discharges of indebtedness on principal residences from gross income, and for other purposes
regarding the latter aspect.

Dryfly,

There are some demographic reasons that Americans may start saving. The biggest cohort of the Baby Boomers are about to turn 50. Traditionally, that is the age where consumption typically slows and people start saving earnestly for retirement.

There is also a huge swath of echo boomers that are turning 17 this year. Without home equity loans to tap for the kids education their Boomer parents are going to have to come up with the money somewhere. Some of that will surely be through reduced consumption.

But who knows, the boomers haven't shown a lot of responsibility in their adult lives up to this point.

But, with the production over-hangs in Asia we may be in for a deflationary recession even if the US just slows down the rate at which we are going deeper in debt.

There are only a couple of things that would move me out of the deflationary camp. The first is if we start seeing some really strong gains in incomes in the US. That would allow the US to both pay down debts and at least sustain current consumption levels. Combined with increasing consumption in emerging markets may be enough to stoke inflation.

The second is if the rest of the world really decouples from the US consumer. Other than Japan and Germany I don't see a lot of countries with high savings and low debt levels. Good luck getting the Japanese and Germans to spend. At, that's ignoring the public debt and demographic problems in both those countries.

The third is if the Fed really starts growing base money faster than the debt destruction that's already begun. But, public policy is never that linear. We'll start with some sort of "keep people tied to their debts" policy which will just further constrain consumption. Hopefully, Congress will just bailout the banks directly instead of Japanese style "stimulus" packages.

gaius marius writes, attack deflation with devaluation, and foreign holders may well up and flee.

But how would they do that? By selling their trillions in dollar-denominated bonds to someone? Really? To whom?

The Chinese and Japanese are essentially committing against their own people vendor-financing frauds like those of Nortel and Lucent during the telecoms bubble -- lending the money to buy their products to customers who otherwise would never be able to afford them, and who predictably will never be able to repay the loans in full.

They won't be able to sell those loans (the bonds) to other parties at full value any more than Nortel or Lucent could have sold theirs for full value.

Citibank is taking a 7.5B investment from Abu Dhabi

Abu Dhabi to Bolster Citigroup With $7.5 Billion Capital Infusion - WSJ.com

Returning to the topic of the Turtle Ridge house and H.R.3648 tax liability forgiveness, I note that their loan was a pay-option ARM with 1% teaser rate, so the amount by which their loans will exceed their purchase debt will include any interest that's been added to the principle due to the pay-option feature.

Know where inflation & consumption will come from? Subsidized medical care & social security.

I'm not sure how that one will play out. It's a demographic problem that can't be inflated away. Ultimately, GenX/Y are going to need to be encouraged to consume a lot less so that the Boomers can consume at all.

Being a GenX'er I can't see how high inflation and negative real rates is going to encourage me and my peers to save (defer consumption). High real rates and deflation would do a pretty good job.

I'm guessing we'll see higher rates of immigration to solve the demographic problem. Congress will squelch on promised benefits rather than deal with the belt tightening required to honor them.

At least the US government can fund some of it with new debt. I have no idea how Japan will deal with the issue.

A deflationary recession followed by an inflationary recession. Wow, I think we've just re-discovered the business cycle. The only real question is how long and how deep is the recession and then what?
Kicker | 11.26.07 - 10:52 pm | #

Unlike Misean, I'm not an 'Austrian' but my father who was an economist turned biz guy entrepreneur was a real fan of Schumpeter. He introduced me to him just as dot.com took off - I was stunned. I'm not sayin' the theory has all the answers but the narrative does suggest some. I would read up on it (take with a grain of salt).

Schumpeter saw business cycles as small waves on larger 'long waves'... similar to the Russian K waves except he attributed the large waves to innovation driven growth (which seems to come in spurts or waves).

There's a lot to it but I think we are in a down part of the current computer internet technology wave and that by itself is 'deflationary'. So I think the gov'ts are trying to run up the down escalator fighting deflation.

The result of these two I think will be some pretty nasty turbulence between deflationary pressure & inflation... until the next big thing comes along and 'floats all boats' for awhile again.

If the waves come through on schedule (cycles about every 40 years - some bigger than others) we'll start seeing the early signs of the next big thing about 2020 or so and peak about 2035... just in time for boomers like me to have died off.

I think that a major element in what has been going on with money supply expansion is that the Fed has been trying to expand it fast enough to prevent the breakneck expansion of exports from Asia from causing overall deflation. So to counterbalance the plunging prices of imported consumer goods has required a complementary rise in the prices of other things.

Kind of like trying to use a fire hose to keep the water level from dropping in a vat that has a large hole in its bottom. Of course, this is difficult to do with precision and elegance -- without splashing a lot of water over everything in the general vicinity.

I'm not sure how that one will play out. It's a demographic problem that can't be inflated away.

In an inflationary environment it most certainly can NOT be inflated away - deficit spending on health care or anything will exacerbate inflation (increase money supply).

But in a deflationary environment where money supply is shrinking it can easily be 'inflated away'... dumping money into a deflating economy is like dissolving sugar into water - it disappears & if anything is 'stimulatory'. That is until the solution gets saturated... then no more will dissolve. That's kinda like where you transition from 'deflation' back to 'inflation'.

I don't anticipate us having deflation but if we do a lot of the 'entitlement problems' go away for as long as the deflationary conditions exist.

In an inflationary environment these problems get much worse as more money thrown on top of an already rapidly growing money supply leads to worse inflation (unless those programs are throttled back to grow slower than inflation, soaking up money and act as a brake on money supply growth inflation).

Obviously different folks get hurt differently by deflation & inflation.

"How many voting Americans have savings?..."

I would estimate that about 1% of the population has any understanding that inflation is something that the government causes. The people can't vote to have the government stop inflation if they don't know it's the government that's creating it.

Re: "Who the heck is making 30-year loans at 4.3% interest if they are expecting to be paid back in worthless dollars?"

Perhaps it is simply supply and demand that has caused the 30 yr. to be out of whack with our expectations.

I.e. the feds stopped issuing them in October 2001, probably because they knew they would be a warning signal for the inflationary policies that followed 9/11. Though reintroduced in Feb. 2006, supply is much lower due to the 4.5 year hiatus.

With a low supply, price is artificially high and yield artifically low. E.g., hypothetically, at some low level of supply of 30 year bonds, the market would clear at 3% yield.

tj & the bear,

The paper has some value. It is backed by the taxes on our work force (and the government always gets its cut).

I would simply argue that the paper isn't worth what it once was, nor will it probably gain back what was lost, nor will it hold its value in the long-term from here (long-term history shows it won't).

I would also argue with the people I sold my gold and silver to in 2006 when the metals started turning parabolic (the first time). Well, maybe not so much argue, but whine.

"Why did I sell it to you? Why! Why!"

D'oh! That being said, I had a nice run when I was simply looking for safety. I can afford to give some of it back going forward (and I suspect I will, along with many others).

Turn that sentiment around. Why would inflationists assume that "a piece of paper that can be printed easily, that we've told can be printed easily, and that will be printed easily" will hold any value.
tj & the bear | 11.27.07 - 12:03 am | #

tj - they don't. Currency isn't wealth its only the medium of transaction for exchanging goods or vehicles for producing goods (land, mines, factories)or vessels for storing wealth (art, gold, etc.)

Only when money supply is shrinking is currency per se a good store of wealth & value... and the sovereign can 'tax' that easily by doing nothing more than printing more money (inflation).

So if you fear inflation is likely you don't trust the paper - that's the whole point. You convert that paper into a productive asset or that stores value at low cost.

On the other hand if you anticipate deflation you WOULD embrace fiat - load up on it because it will be increasing in power due to scarcity... mo' mojo all the time.

tj & the bear,

Hyperstaflationary? Maybe I need to rethink my open letter to Bernanke.

Deer Ben,

Please drop some more doe from the helicopters.

Fawndly Yours,
"Stag" 'flationary Mark

a,

I think you should ask yourself where exactly you are going to park all that money for ten years so you can be sure you can pay it back. In a bank? What if the bank goes bust? Under your bed? Either you take the risk of fire/theft or you pay a fortune for insurance (and accept the risk the insurance company will welch).

I don't have to ask myself where I'd park the money. I'm already doing it (treasury bills, TIPS, I-Bonds).

For this hypothetical example, I could park it in U.S. Treasury bills and use automatic reinvestments (much like I'm doing now). Any interest generated would be pure profit (since I never ponied up so much as a penny of my own money) sent to my bank account, and the original principal would be kept intact (and safely outside banks) to pay off the loan as it came due.

If some interest was generated (interest rates someday rose), that's pure profit off OPM (other people's money). If no interest was generated (presumably because interest rates stayed at 0%), no money lost. I'd have everything to gain and nothing to lose.

In summary, if the government wants to offer me a 0% 10-year fixed rate loan I'd take as much as I possibly could. It wouldn't help the economy any though, unless you believe in the crazy trickle down theory as I someday spend my hoarded proceeds.

That rational people are beginning to agree with me, I have been ranting about this stuff for years, and nobody has seemed to care. It's the big reveal scene. Everyone takes off their wigs and underneath they're wearing tinfoil hats.