There is no simple solution to the current economic crisis. There is no dollar amount, even $700 BILLION, that can fix the problems we face. Our economy has been bleeding skilled and unskilled jobs for decades, but we haven't adjusted. In fact, we've actually spent more while making less.
The dot-com bubble temporarily masked the decline by creating an economic rush at the expense of the accumulated wealth in baby boomer retirement accounts. When that bubble burst, Alan Greenspan was there with cheap money methadone to relieve our pain, but he left us on the low interest rate drip so long that a housing bubble formed. That bubble resulted in speculation and fraud, but it also masked the weakness in the economy by providing TRILLIONS of dollars in extra income through the home equity ATM. Stopping the foreclosures won't replace that spending power. In the absence of another bubble, we'll be left to suddenly adjust to the reality of a service economy without the cushion of baby boomers spending their pensions on those services. It's going to be a struggle, regardless of what happens to banks.
There are reasonable things we can do to try to minimize the damage. One aspect of the current "crisis" is that banks don't want to loan money. Another aspect of the crisis is that mortgage defaults drive down home values which triggers more defaults. Setting aside the crocodile tears in Washington over families losing their homes (politicians stuff self serving verbiage into each bill which they can use as a campaign talking point, yet no one gets rescued), this is a very real problem because it is driving the acceleration of this implosion. If prices fall far enough, people with strong incomes and good credit will default on principle. It doesn't make sense to pay a premium on an upside down mortgage, especially when Wall Street executives are walking away from their obligations with hundreds of millions of dollars in their offshore accounts.
If we could stop home values from plummeting, we could slow the rate of defaults. It's likely that collateral damage to the economy due to layoffs or business losses will trigger additional defaults for some time to come, but we could offer hope to those people who could still afford to make some sort of mortgage payment and create a bottom to stem the velocity of the implosion. One way to do that would be to have the Fed take over all residential home loans.
Currently the government loans money to banks cheaply so that the banks can make a profit by turning around and loaning the money to us at a higher rate. The problem is that banks don't want to lend money any more, though given the poor choices they made in the past, the problem could have a silver lining. We could solve the home ownership lending crunch and make real progress toward keeping families in their homes (instead of just talking about it) by having the fed offer to refinance any residential loan at 4%. At that rate, the Fed would get a higher return than they are getting now, but homeowners would get a lower monthly payment or they could afford a higher total price. This would partially reinflate the bubble while giving people a legitimate shot at saving their home. If you can't make payments at 4%, you don't deserve to stay in that home. Buy something you can afford at 4%.
Any plan has to account for human nature. I know many couples who only used one name on their deed so that they could abuse first time homebuyer incentives to pick up a second property. We might as well plan for this practice up front by creating a simple rule: One loan per social security number. Couples can apply for two mortgages, one on their own home and one on another home. No questions asked. This increases the risk of speculative bubbles slightly, but it pales in comparison to common stories about investors taking out "owner occupied" mortgages on a half dozen different properties during the recent boom. What about responsible people who own their homes free and clear? Well, they're welcome to use their 4% loan to buy a second property or they can take out a home equity line of credit at 4%. This solution is pretty fair to everyone who has income.
Demand for housing would increase immediately. Who doesn't want to borrow money for housing at 4%? Prices probably wouldn't increase to bubble levels because those levels were supported by unconscionable "teaser" rates that should be eliminated forever. Prices would stop falling however, and the bubble would probably refill enough to discourage people from abandoning their mortgages as long as they can still afford to make the payments on a 4% loan.
Socialism? We've crossed that bridge. We're already a socialist country, so before we start taking equity positions in all of our financial institutions, we should sit down and think about how to implement socialism properly. We could go beyond the 4% rule and simply garnish 25% of gross income to be placed into a personal mortgage fund. The only way to spend the money would be to take out a 4% loan from the Fed on real property. If you can't afford a home today, the Fed will start saving your down payment for you, though given the Fed's unique ability to collect, a Fed loan wouldn't require a large down payment anyway.
Find something you can afford and buy it at 4%. Does that sound like a bad plan?
Thanks for reading!
Frank Jewett
