Thursday, April 23, 2009

Here's an idea for you Mr. President

I'll just put out this disclosure up front - I'm ideologically conservative. Feel free to disagree with me on anything I say, but don't get offended or take it personally.

I heard on the news that President Obama has spent more money in the first three months of his presidency than if we had spent $1B each year since Christ was born. Yikes. That's a lot of money. Money our grandchildren will be paying. And he criticized President Bush for being a big spender??? So today, I thought this T-shirt --> was quite fitting. It was actually a campaign T-shirt for Obama, which I find quite ironic.

So, I understand the philosophy. The federal government is the single largest spender, so kicking up government spending is likely to stimulate growth in the economy. After all, that is what FDR did, in combination with the massive spending that went into WWII, to pull us out of the Great Depression. Perhaps, the mistake is in believing that this recession is like those prior. Maybe, just maybe, the same old tactics won't work? And that is because the reasons we are in a recession right now are quite different from before.

Yes, I know, I am a Doctor of Jurisprudence, not of economics. But, I know a little something something. In my meek view, the interrelated major causes of this recession right now are:

1. Corporate greed - The banks made really bad investments and pretty much went bankrupt. They sold mortgages to people who couldn't afford it, and told them they could afford it.

2. Consumer greed and overspending, over-leveraging credit (kind of like the Great Depression) - People slurped up the money the banks were so willing to hand out and bought way more house, cars, stuff, than they could afford.

3. Consumer confidence - People are freaking out. Everyone knows someone who has lost their job. Everyone's houses have taken a huge hit in their equity. Many owe more on their home now than its worth. Most people have lost 40-60% off of their investments (those who aren't invested with Custodio Asset Managment, that is). People just aren't spending. If people are spending, businesses aren't making money, and in turn aren't reinvesting, and the economy shrinks. Its self-fulfilling prophesy of sorts.

4. The foreclosure crisis, related to items 1 and 2. The initial wave of foreclosures came to head from all the people who believed the banks who told them they could afford the big house and the big mortgage. When it turned out that they couldn't. The second wave of foreclosures came from people who under normal circumstances could afford their mortgages. Until they lost their job. Or, their businesses began losing money. As of the end of 2008, estimates were that 12% of American home-owners were at least one month behind on their mortgage payment. In the first three months of 2009, foreclosures were already up over 24% over 2008. If this isn't a crisis, I do not know what is.

5. Retracted credit markets, related to items 1, 2, and 4. The banks began to crash and didn't have any capital available to lend. And if they did, they were hyper-conservative about it, not willing to risk another cent of loss. Businesses aren't able to borrow money to cover interim operating costs such as payroll. Consumers can't get mortgages or credit to buy vehicles. And the crisis just continues to perpetuate.

6. The severe decline in the housing market, caused by items 1, 2, 3, 4, and 5. If the banks aren't lending, and people aren't buying, the housing market stagnates. On top of that, you have the housing market being flooded with foreclosure sale properties. In most markets, these properties sell significantly below market value, which in turns drags down the values of all the surrounding properties. I've heard estimates that right now 1 out of every 3 homes on the market is a foreclosure property. I have seen estimates ranging from 15 to 40% average decline in home values from the start of 2008. Considering that real estate is probably the biggest investment most people have, and the severe decline in housing values, no wonder everyone is freaking out.

Right now, there is a sense of urgency. Panic. We MUST do something NOW. And certainly, the American public would not tolerate it if the President sat on his hands and did nothing. But are we doing the right things??? It seems to me that an awful lot of money is being spent right now on things that we aren't really sure are even going to make a lick of difference in the long run. (And to be fair, this spending spree started with President Bush back in September with the initial "bail out" funds). CNN has the best tracker for spending that I have found - Bailout Tracker. CNN reports that thus far the government has pleged $10.5 TRILLION and spent $2.6 TRILLION in the recovery effort. Wowzah. Thems no small potatoes!

Yes, some of this spending is good. Tax breaks for Americans (in my opinion) is GOOD. Especially when nearly every household has been negatively impacted by this recession in some way. But, my main beef right now is with the President's proposed Homeowner's Stability & Affordability Plan. As you can see from my explanation above, the foreclosure and housing market crisis is a BIG part of the problem right now. It seems to me that if we can help halt that continued decline, it would have an exponential effect in improving the economy as a whole, and would surely directly and positively impact millions of deserving American families. But the President seems to only have one solution to all the woes of the recession - throw more money at it. In this case, I don't think that will help at all. And there are some BIG ways the President can effectuate positive change without spending one red nickle of tax-payer money!

Elle's Homeowner Relief Plan:

1. Declare a 1 year limited moratorium against foreclosures. If homeowners can afford to pay a certain amount or percentage of their mortgage payment, the bank cannot proceed to foreclose on them for 1 year. Several of the big banks currently are voluntarily doing this. I heard rumors that Citi will let you stay in your house if you can pay just $500 a month toward your mortgage!

2. Require banks to work with you BEFORE you go into default. Currently, most banks won't talk to you until you are at least 3 months behind in your payments. At that point, its nearly impossible for most people to "catch up."

3. Require banks to take one of the following actions with regard to any arrearages accrued during that 1 year period - forgive a portion, re-amortize it into the remaining life of the loan, refinance the loan to include the arrearages, or provide afforable and reasonable repayment plans.

4. Lower interest rates a certain proportion down to a minimum level. Interest rates are very low right now, but very few people can qualify to refinance. And if they qualify to refinance, they have no equity in their homes, so the banks won't do it.

(And if you doubt whether Congress has the authority to do any of this - let me just say that if the Supreme Court could find sufficient nexus between a farmer growing corps for his OWN use to interstate commerce, surely it will find that the activities of mortage companies come within the ambit of Congress' Constitutional authority to regulate interstate commerce)

This plan puts the onus on the banks - the ones who caused this problem to begin with. It benefits the banks because it ensures that they will get paid over the long term on more mortages rather than ensuring HUGE losses now by foreclosing. It helps the homeowners. And helping the homeowners helps the economy. And preventing foreclosures will help both the credit and housing markets. And does it cost the federal government (aka tax payers...) anything? NOPE! That is the beauty of it.

So, if its this simple to me...what's the problem???


  1. Great article, love your suggestions. But, let me add another point that may/should help the student loan debtors.

    Instead of approving student loan applications based on credit scores, use a "good student" criteria such as grades, academic diversity and activity. Then for the students currently in debt, provide temporary relief by automatically reducing the rates, and suspending payments for up to 5 years!

  2. I definetly agree with Ace that something needs to be done for those of us with student loan debt, especially since trying to find a job in this economy is like trying to find a needle in a haystack the size of Texas. Along with reducing rates and possibly suspending payments, if they could just NOT add any interest for a set amount of time (maybe 1-2 years depending on how fast the economy recovers) it would be a phenomenal help. My loans accrue interest faster then i can think about paying it off!

  3. Oh, goodness. I have so much to say about this...