Economic Crisis Is Solvable
By: Leonard C. Tekaat
Topics: econmic crisis, US Treasury, stimulus, deficit, Federal Reserve, interest rates, Real Estate, Politics
Posted by happyashell Wed Sep 2, 2009 15:45:27 PDT
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The currant government deficit spending policies (Keynesian Economics) will lead to another inflation economic cycle. We also know that the currant policies to correct inflation have always created a recession or a bubble burst. A balanced approach is a better policy.
We need to develop a plan to improve our economy and put a stop to its destruction. We need to convince Fannie Mae and Freddie Mac and other government agencies to start buying mortgages with the terms that are outlined in my article.
Home prices are decreasing all over the country. President Obama foreclosure rescue plan is destine to fail. It does not take into account that most homes in CA .NV. AZ, FL. decreased in price by 40% or more. The rest of the country’s housing has decreased in price an average of 30%. His plan only allows for homes to be 25% underwater. Only a small percentage of the millions of homeowners that his program was expected to help have benefited from the President's foreclosure program. The real estate market and the economy will not recover fully until the consumer’s financial condition is improved and all home mortgages are modified so these homes can be included into the economy. The homes that are underwater cannot be sold or brought until they go through a short sale; foreclosure or the banks and servicing companies forgive, in some manner, the excess portion, of the loan.
Home prices are decreasing all over the country. President Obama foreclosure rescue plan is destine to fail. It does not take into account that most homes in CA .NV. AZ, FL. decreased in price by 40% or more. The rest of the country’s housing has decreased in price an average of 30%. His plan only allows for homes to be 25% underwater. Only a small percentage of the millions of homeowners that his program was expected to help have benefited from the President's foreclosure program. The real estate market and the economy will not recover fully until the consumer’s financial condition is improved and all home mortgages are modified so these homes can be included into the economy. The homes that are underwater cannot be sold or brought until they go through a short sale; foreclosure or the banks and servicing companies forgive, in some manner, the excess portion, of the loan.
The economy needs the real estate market because our homes are the backbone of our money supply, just like gold was many years ago. The reality of the modern world is that we no longer barter to exchange our goods and services. We use paper money or credit. They are both based on promises. If it is credit that you use as a means of exchange, the collateral must maintain its value over a long period of time, similar to gold. Our homes have served this purpose for many years, until people changed policies to create more credit money. Housing collateral is how we provide credit to consumers and small business. If the housing has no equity the banks will not or cannot make the loan.
On our Federal Reserve notes read IN GOD WE TRUST it should read IN THE FED WE TRUST. When the government with its misguided policies and the Fed with its interest rate policies cause the economy to be guided in the wrong direction, they are responsible. If you divert a stream and it does damage to people, you are responsible for paying for the damages. It is not the responsible homeowner's fault if their mortgage is underwater. A lot of people put 20% or more down and they are in financial trouble today because of the government and the Fed. It is estimated that by the end of 2010 ninety present of the homes in California will be underwater with their mortgages. This problem must be corrected quickly or we will have a major problem in our economy.
When the Republicans want to increase people’s disposable income, they want to lower taxes and reduce regulation. When the Democrats want to increase people's disposable income they want to deficit spend, create jobs, create more government programs and increase regulation. Both of these policies reduce government revenues and increase the national debt and the government's deficit, in the beginning of the recovery process. Lowering interest rates does not cost anything and increases more people's disposable income, by a greater amount, much quicker. This policy puts people back to work faster and the problem does not get out of control. The government's liabilities are decreased. We do not have to increase taxes to pay down the national debt or to decrease the deficit. With the correct policies enacted the chance of another housing bubble occurring is practically nil.
On 2-24-09 the Fed Chairman Bernanke, appeared before the Senate Banking Committee. Senator Bob Corker stated during the meeting, “He had not yet heard a definite way out of the economic crisis. That it seems to me that we are continuing to do the same thing as we have been doing. That is, giving large amounts of money to the banks, to capitalize them and nothing happens that benefits the economy.” I agree!
The Fed is currently acting as a bank, regarding commercial paper. In his question and answer session the Chairman stated that, "Because the banks were not confident enough to loan businesses money, the Fed, by paying the banks .25% interest on their deposits, the Fed was borrowing the money from the banks and lending to it to the large corporations. I believe that the solution to the economic crisis is that the same policy should be applied to the housing problem.
The Fed is currently acting as a bank, regarding commercial paper. In his question and answer session the Chairman stated that, "Because the banks were not confident enough to loan businesses money, the Fed, by paying the banks .25% interest on their deposits, the Fed was borrowing the money from the banks and lending to it to the large corporations. I believe that the solution to the economic crisis is that the same policy should be applied to the housing problem.
If an adjustable rate mortgage was created with a starting interest rate that is low enough (3%) to jolt the economy back to life, the toxic securities will become valuable again, when the new refinanced mortgages become performing assets. The interest rate on these new mortgages should increase one-quarter percent a year and cap out at the currant market rate of 5%. To decrease defaults on mortgages, the borrower would have to qualify at the 5% interest rate to obtain the loan. These new mortgages should not be tied to any index. People do not trust indexed mortgages because of the uncertainty of the future. This is why they prefer the fixed rate mortgage. Currently we need lower rates to stimulate the economy. The banks will make huge amounts of money rewriting the mortgages and servicing them. Thereby becoming profitable and help capitalize them. We are currently trying to capitalize the banks by infusing the money directly into them. This policy is wrong because the collateral is losing value. This situation means the banks will need more and more capital to remain viable. The value of the collateral must be stabilized first, for the banks and investors to be confident enough to lend money against it.
What will this stimulus plan do for the economy? When the homeowner refinances their home from a 6% mortgage interest rate to a 3% interest rate their monthly interest payment will decrease by 50%. A $1500.00 monthly mortgage interest payment will decrease to $750.00. That will be like the person receiving a $750.00 stimulus check each month for the first year and thereafter a little less each year for the next seven years not just for a few months like the other plans. Multiply this by millions of people and you will have a stimulus plan that puts the purchasing power were it should be, with the people. Loaning more money to banks does not create demand in the economy, people do.
I want you to ask yourself three questions?
1. What is the first thing the Fed does to stimulate the economy? Answer: Lower interest rates, this permits people and business to refinance their debt at a lower rate of interest, which in turn lowers their monthly payments, freeing up monthly income, which increases their disposable income. With more disposable income, people have money to spend on other things, other than interest payments.
2. Why did it not work this time? Answer: Collateral prices were going down. Banks or investors cannot refinance people's loans until the price of the collateral stabilizes. When the banks and financial institutions did not, would not or could not follow the Fed's lead, of lowering interest rates, it made deflation and unemployment worse.
3. How do we solve this problem? Answer: The banks cannot lower their interest rates low enough because of the risk factor of the collateral's price going down. They have to make a profit and pay a high enough interest rate to keep their depositors satisfied. The US Treasury, which is a not for profit government agency, can borrow the money on the open market or from the Fed, just like the banks do, and fund the refinanced or new mortgages, at near cost, until the collateral's price stops decreasing and investors start investing in the new mortgage securities. The Treasury would receive the cash flow to fund more mortgages. When the economy is up and running again, the Treasury would sell the mortgages to investors. The banks and other financial institutions would arrange these new loans and mortgages or modification agreements. This stimulus plan would not cost the taxpayer a dime.
It has always been the 90% of the population who spends their money and pays their bills that brings the economy out of recession. When their disposable income increases and they have the money to spend on household goods and services, big-ticket items, autos and trucks ECT. By improving the financial condition of the 90% this will help the 10% unemployed people more than any government jobs or welfare program.
This plan should be the second stimulus. I would not fund what is left of the first stimulus and modify it to lower the deficit, which would keep interest rates from rising. The reduction in the deficit would calm the world's fears that we will have inflation in the future and that the dollar will be devalued.
This plan should be the second stimulus. I would not fund what is left of the first stimulus and modify it to lower the deficit, which would keep interest rates from rising. The reduction in the deficit would calm the world's fears that we will have inflation in the future and that the dollar will be devalued.
I am writing this article today because I feel that people have a good understanding of the primary problem or flaw our economy is experiencing. This article is one of many articles that I have written explaining what I believe is a solution to our economy's woes. The other articles are at my web site www.economysflaw.wordpress.com/. If you would like to read the Alternative Economic Stimulus Plan that I have written click on the key word John Maynard Keynes at the above web site.
This Plan does not rely on a trillion dollar government deficit. In fact the Alternative Stimulus Plan will not cost the American people anything over time. The Alternative Stimulus Plan also includes a policy that will help those people that owe more on their mortgages than what the house will sell for.
Leonard C. Tekaat is a retired economic Analyst, Economic Scholar, Financier, Investor, businessman, author, and a former Candidate for California Congress. He has experience in the financial world of over 40 years.
I hope to hear from very soon on this important matter. My Ph# is 661-619-4858 11620 Traviso Ave. Bakersfield Ca. Fax 661-588-7986
Copyright Sept 1, 2009
By Leonard C. Tekaat
Leonard C. Tekaat is a retired economic Analyst, Economic Scholar, Financier, Investor, businessman, author, and a former Candidate for California Congress. He has experience in the financial world of over 40 years.
I hope to hear from very soon on this important matter. My Ph# is 661-619-4858 11620 Traviso Ave. Bakersfield Ca. Fax 661-588-7986
Copyright Sept 1, 2009
By Leonard C. Tekaat
Sincerely
Leonard C. Tekaat
Leonard C. Tekaat
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