Job Creation

Any meaningful recovery must include significant job creation in order to reduce and pay for our built-in government expenditures. Our current leader seems to think that government created jobs are the answer, despite the fact that government work programs failed to get us out of the Great Depression (and I use that term loosely - 2008 - ? may ultimtely become known as the Great Depression). So let's all work for the government. But wait, then the government would have to tax us all @ 100% just to break even. Guess that won't work. Fact is, the FEWER people that work for the government and the MORE people who work in the private sector is best for the economy. So, what creates jobs in the private sector?

CUSTOMERS. Wake up Washington. Customers create jobs. No matter whether your business provides goods or services, the more customers you have, the more employees you need to service them. Conversely, as you lose customers, you lay off employees (or if you lose too many customers, you simply go out of business). It's that simple.

So what is a customer? I like to think of a customer as a person with money AND the desire to spend it. You can't be a customer without money or something to exchange for what you want. And even if you have money, you're not a customer if you aren't willing to part with it. So if a lack of customers caused businesses to lay people off, WHAT HAPPENED TO ALL THE CUSTOMERS?

Well, I think we can rule out the lack of desire to spend. We love to buy things, we like to eat out, take vacations, go to the movies - the list is endless. That leaves us with, you guessed it, A LACK OF MONEY TO SPEND, because if I had more and I knew that month after month and year after year I'd have more, I guarantee that I'd be spending more. I've got to believe the idiots in Washington are so out of touch with how the rest of us live, they can't figure this out. Oh that's right, they can vote themselves benefits that the rest of us can only dream about, and conjure up money whenever they want. Well, if we print it up ourselves its called counterfeiting, and we can't borrow more than we can pay the interest on. So when we reach our debt limits or don't have job's we STOP SPENDING, businesses LOSE CUSTOMERS, and lay off more employees. It's not rocket science.

It's this simple folks: IF YOU WANT TO CREATE JOBS, YOU HAVE TO REDUCE THE AMOUNT OF DEBT STIFLING THE ABILITY OF MIDDLE AND LOWER INCOME PEOPLE TO CONSUME.

Same Problem - New Perspective

Let's look at our problems from a different perspective. I contend that our country digs itself into a deeper hole every day that passes without a significant economic turnaround. We need a recovery to cut unemployment costs, reduce the deficit between payroll tax revenues and benefits paid out by the Great Ponzi Scheme (feel free to ask if you can't figure out what that is), and help defray the cost of all the other automatic spending our government does despite the loss of revenues which occur when our economy tanks. I'm not going to repeat the warnings of I.O.U.S.A; suffice to say that the rising price of gold and silver says it all.

Justification

I consider myself to be a practical libertarian. I suspect that the purists won't go for what I've proposed here because it involves the government getting involved with the markets and doing something that really isn't a valid function of government. I couldn't agree with them more. But that's where the 'practical' comes into play. We can do nothing. Basically that is what is happening now. If we continue down the path we are on, I don't see how we can avoid hyperinflation. If this 'recession' continues for any length of time, and it is bound to unless the government takes some meaningful action (and government infrastructure spending is NOT meaningful action), then some day in the future they will be refering to it as a depression. It is going to take considerable time for the private sector to shed it's debt load short of what I have proposed, even if the underemployed are able write off 40% of what they owe. And the longer it takes, the more massive the deficits will be and the sooner the social security upside down day will arrive. And don't count on the Republicans or the Democrats to do the right thing and correct the problems with the entitlement programs. If someone wanted to intentionally write a script to destroy our economy and way of life, they couldn't have done a better job than what we are facing now. Maybe that is what it is going to have to take, complete failure of the existing institutions before the bums are thrown out. The big question is, do we end up with freedom and go on to future greatness, or end up with totalitarian failure?

What I am proposing is a way to buy some time. It was the government that created the interest rate instability that forced lenders to resort to ARM's. Then it encouraged the irresponsible lending practices that led to where the housing market is today. Now it can create the necessary stability to make it all right again. I believe that Bush could have done it before he left office and the Obama could do it now, without congessional approval. Since it would be a lending bill, not a spending bill, I believe that it could be done by executive order. Once we get the country back to work, however; it will be necessary to change how Washington is currently operating. In my opinion, it will take a third party to reform Washington. But my thoughts on that will have to wait for a while. I've got taxes to do.

More Benefits

6)Replacing as many bad & questionable loans as possible with good sound loans would go a long way toward bailing out the FED and all of the financial institutions and funds weighed down by the the big black cloud of mortgage backed securities. And as the market improves, the MBS market should improve accordingly.
7)I hope by now that everyone realizes that there is another train wreck on its way in the commercial real estate market. If we don't get things turned around soon, all of last years bailouts might have been in vain. Or the government my have to come up with another trillion or so that it doesn't have (and hasn't budgeted for) to save the financial institutions that are "too big to fail". OUCH!

Housing Reform Benefits

So, what benefits should be we see as a result of my proposal?
1) The residential real estate market should immediately stabalize. Homes would become much more affordable. My understanding is that there are still many Alt-A loans with payments due to increase dramatically. As that happens, more people will be walking away from their homes meaning more empty homes on the market and more bad paper out in the investment world. I'm not saying my proposal will save everyone who still has an ARM due to reset, but it will do more than anything that has been put in place so far. As proposed in my last blog, very low interest rates could be used to save as many loans due-to-go-bad as possible and to make the existing market more affordable for lower income people. A six month window could be used as an incentive to get people back into the market. As the existing inventory declines and the economy improves, interest rates could be adjusted so that the market doesn't overheat.
2) With lower 30-year fixed-rate loans available, people with lower incomes will be able to afford homes. People will see the value of home ownership as inventory declines and prices begin to rise again. People considering walking away from their homes now could take advantage of the program and reverse the trend of falling real estate values.
3) Millions of homeowners who can convert to lower interest rate loans could save hundreds of dollars month after month. THIS is the bailout which will help get the middle class out of debt and ultimately provide the stimulus which will create jobs.
4) The same homeowners who save hundreds of dollars monthly due to lower interest rates will also have lower home interest deductions on their 1040 schedule A's. Tax revenues will therefore increase at a time when they are desperately needed, WITHOUT raising tax rates. The ulimate win-win situation.
5) As the economy picks up, so do revenues at all levels of government. Hate to think of what will happen if this recession lasts much longer.

The Basic Idea

My proposal is to allow any person over 18 years of age to be able to purchase one home (or convert one existing home loan) to a 30 year fixed mortgage according to the following outline:

The applicant goes to the lending institution of choice and applies for the loan. The lending institution does the appropriate analysis of the applicant's financials and determines whether or not they qualify. If so, the lending institution goes to Fannie Mae or Freddie Mac with copies of the qualifying documents and secures the amount of the loan necessary to purchase the home. (It might be prudent to require at least 10% down so that the buyer has a vested interest in the property.) The lending institution borrows the money at 3% fixed for thirty years, and charges the applicant 4% fixed over the same period. For those with existing loans, so long as they are current on their existing loan, their lender can take proof of being non delinquent and convert the loan to the 4% fixed rate. For delinquent existing loans, the lending institution would have to look at the borrower's financials to determine whether or not they would qualify for the new loan. (The interest rates proposed in the outline were chosen as examples. Whereas I consider them to be reasonable, the lending institutions might argue that they need a float larger than 1%. Also, if the administration was really serious about getting the economy back on track, it might open a six month window where the interest rates would be 1% and 2% respectively as incentives for purchasing existing inventory and/or loans already gone bad.) Loans would be tracked by social security # so that no one could have more than one at a time. We don't want to re-create the bubble that just burst. The plan is intended for home owners, not home flippers. Unless the applicant can establish that they had to relocate [e.g. due to work], we might want to restrict people to a 1-2 year waitng period between loans.

Killing Two Birds With One Stone

So, the two problems we have to solve are 1)bad home loans & 2)personal debt. My first thoughts on the matter were: assuming the subprime borrowers could afford the early teaser rates they were given, the solution would be to convert their loans to 30 year fixed loans at those rates so that they could afford to keep their homes. At this time, of course, lenders aren't able do that with interest rates subject to the fluctuations brought about by fiat currancies. However, what if lenders could borrow money from the government AT A FIXED RATE FOR 30 YEARS. They could then turn around and lend it out for 30 years (at a fixed rate) and not be victimzed by an increase in interest rates. Now we have an effective way to deal with a lot of those bad loans out there (and most of those loans still to go bad). How does this help out with the personal debt? Instead of the administration's complicated and lame attempt at bailing out a narrow segment of homeowners with problem loans, don't discriminate; make the program available to EVERY homeowner AND potential homeowner out there. If every homeowner could convert their, say 6% loan, to a 4% loan, they would be saving hundreds of dollars a month in interest payments. The savings could be used to pay down their credit card debt to the point where the could afford to become consumers again. UNDERSTAND THIS: it is people with money AND the desire to spend it that creates jobs and moves the economy. Lowering interest rates for homeowners will put some significant money in middle class hands WITHOUT the government GIVING anyone anything. If anything, it will shore up government coffers at a critical time in our country's history. More to follow.

The Problems

1/7/2010

A few of my sources started warning about the impending housing bubble in late 2007, warning their readers that banks and other lending institutions would be in serious trouble when it burst. Then in the late spring of 2008 one of them went on to say that the problem was more serious than the housing bubble. Middle Class America, it warned, was up to its eyeballs in debt, and we should be prepared for a major market correction, recession, and/or worse. The engineering schooling I'd had kicked in after reading that, and I began to think if there were any ways of dealing with the collapsing housing market and all of the private debt. It was clear that Bush's little $600- stimulus payment wouldn't get the job done, not to mention that it would only increase the national debt due to little of it coming back to the government in the form of tax revenue.

Where I'm Coming From

1/6/2010

I do my own investing, so I subscribe to several e-letters so that I can get a lot of perspectives on what is going down on the economic front. I don't claim to be an 'expert' on the issues which will follow. I've never had a class on economics at the college level. What I'm proposing will be based on a logical evaluation of the problems our economy is facing. If you wish to take issue with the problems, I'll reference the 'experts' from my e-letters. Let's get to it.

Why I'm blogging.

1/6/2010

Well, I have to kick this off somehow, so here goes. The purpose of this blog is to share ideas with my fellow citizens so that they can judge for themselves just how competent our elected leaders are. Until a couple of years ago, it didn't appear to be necessary. Despite their selling our progeny down down the river since Kennedy was assassinated, I was beginning to think that I wouldn't see the fruits of their labor in my lifetime, or at least until it was just about to end. But now, with our current recession soon to become a prolonged depression (and a Weimer Republic inflation around the corner), I feel it my duty to let everyone know that there is a very simple thing that could be done to turn our economy around now; hopefully, before it is too late. So I'll try and put down my stream of consciousness on a daily basis until the work is complete. If you agree with what follows, please email the contents or the URL to as many people as possible. The voting public is the ONLY way that the ship will be righted, despite our current leader's hollow campaign claim to be the candidate of change. If you disagree, I welcome any and all constructive criticism, and look forward to debating it as it is received.