Uncle Sam Plays "Extend and Pretend"

“Extend and pretend” will go down as one of the famous financial phrases of 2009. It has permeated the commercial real estate business… instead of realizing the loss on a bad loan, bankers are “extending” the terms and “pretending” the borrower will be able to pay in another week, month or year. In more poetic parlance, “a rolling loan gathers no loss.”

We start with this idiom today because it’s been taken to a new level… by our government.

Yesterday the Senate passed extensions of the unemployment insurance benefits — and the first-time homebuyer tax credit. We’ve seen this coming for some time. With a moribund economy, what else can they do? The whole thing still needs to get the OK from the House and President Obama, but here’s the deal as-is:

Senators want to extend unemployment insurance by 14 weeks in all states, 20 weeks in most. This will kick the can down the road for as many as one million people whose benefits are set to expire by yearend. Should this bill become aw, some Americans will be able to collect unemployment for up to 99 WEEKS, an all-time high.

The $2.4 billion cost of this extension will be funded by more unemployment taxes already paid by businesses. The logic: A business pays the government for every employee they hire… the government, in turn, gives money to people the company didn’t hire, hoping they will get hired by a different company… who will then pay more taxes for hiring that person. Brilliant.

Even the most conservative estimates don’t expect unemployment to peak until 2010… those benefits might even get extended again.

The Senate also agreed to extend — and expand — the homebuyer tax credit. The $8,000 in free money for first-time buyers will be extended for at least seven more months. And now current homeowners who have been living in their house for at least five years will be eligible for a $6,500 credit if they buy a new place.

The cost? At least $10 billion… but hey, whatever it takes to “get this economy back on track,” right?

“At a town hall meeting focused on ‘Recession Recovery’ last night,” Addison Wiggin writes, “we tried to explain that while on the surface the 3.5% GDP growth in the third quarter looked good, much of that figure was comprised of one-off government programs like ‘cash for clunkers’ and the housing credit. If the GDP were to continue to ‘rise’ Congress would have to go back to the public teat for more tax incentives and rebate programs. At least until the private economy started producing goods and jobs again.”

“’Really?’ was more or less the collective response. ‘How do we go about getting our share of those programs?’

“Oy. The town hall was hosted at the Sheppard Pratt mental health facility here in Baltimore. When you drove into the parking lot, the attendant asked you which event you wanted to attend, ‘Recession Recovery’… or a symposium on ‘negligence and alcoholism.’”

The Daily Reckoning