Monday, December 29, 2008

Reboot: Let’s Party Like It’s 1999

Someone needs to tell me what’s flawed about this or admit that maybe it isn’t.

The following is intended as a practical solution to the “credit” crisis. I have been trying in my limited time to think through the problem, this solution, and the consequences of doing it this way. I mentioned it briefly in an earlier post and since then I haven’t been able to come up with major practical flaws in it. Politically it may be a different story but we seem to have entered upon times where maybe, just maybe, good old American practicality will trump the ridiculous ideological wars of the past generation.

First, the problem with the economy is not a credit problem as described in the mainstream media and by the still “in charge” administration. A lack of flowing credit is not the problem but in fact an over-abundance of credit is what created the problem. Too much went to too many for too long and it was secured by too little. The problem is that there is not now and likely never will be enough value to meet the obligations that have been made against it. Our assets are nowhere near as much as our debt. That is the definition of bankrupt. This nation is bankrupt and needs to act accordingly. But the means must be such so that once the plan is in place, it doesn’t relegate us to a second-rate risk for the rest of time. Here’s my plan:

Assuming most of the problem arises from the housing market, the idea is pretty simple. It’s time to reboot. The real estate market went haywire sometime between 2001 and 2003 and pretty much everything after that promises that can never be kept. A house bought in 2002 for $150,000 topped out in value around 2006 or so at maybe $300,000. That level of appreciation is insane and the reaction is that the values are plummeting back down. But it’s happening at such a pace that it’s hard to tell when (or if) it will ever stop and what the value will be when it does.

I suggest deploying an army of appraisers and determining the value of effectively the entire housing market, neighborhood by neighborhood, then offering everyone --- yes everyone --- the chance to refinance (or renegotiate if you prefer) the actual principle of their current loans. Whether they are upside down or not, whether they are in default or not, whether it’s a second home or an investment property or not.

We are not making value judgments on the character of the people who took out the loans, we are not investigating if they committed fraud when they took them out. We will check to see if they have the ability to pay the loan at the new value now and if so, they can have it without any recourse for the difference. It cannot be allowed to affect their credit histories or the plan will not succeed in rebooting the economy.

People who cannot afford a loan at the new value should immediately sign over a Deed in Lieu of Foreclosure to preserve whatever creditworthiness they have, or be foreclosed on and take the usual consequences. The recent notion that everyone in America should own a home is just plain wrong. Everyone is not well-placed, for any number of reasons, to own their own home and theirs nothing wrong with that.

On its face this is a very simple plan and it’s the simplicity that concerns me. On the other hand, the simplicity should make it easy to criticize but I haven’t been able to generate any yet other than that it seems too simple to be viable. But sometimes a simple solution is the best one. Hopefully putting it out here will start a discussion that can either knock this thing into better shape, deem it in good shape as-is, or knock it out altogether. Here are the consequences as I see it so far:

1.It puts appraisers back to work;

2.It sets a floor on the plummeting values;

3.It allows the banks to get back in the business of quality loaning;

4.More people will need to be hired to handle the enormous, legitimate business at the banks;

5.Title companies, surveyors, lien search companies, assorted couriers, and any other business connected with assuring the quality of ownership will shift into high gear with heavy hiring going on;

6.The tax base of cities, counties, and states can stabilize, assuring that services can be maintained and people don’t lose good jobs;

7.At reasonable prices, houses can be bought and sold again between people who can afford to do so. Teachers, firemen, nurses, and cops can live near the communities they serve. And it has a further bolstering effect on the local tax base.

8.When homeowners can lower their mortgage payment, they will end up with more money in their pockets, which will inevitably be spent even if some folks have been spooked into actually saving by this crisis. The economy will still improve with the return of disposable income;

The obvious missing piece here is: what happens to the missing debt obligations? Who takes the hit when a $300,000 mortgage gets knocked back to $150,000? There is the challenge and I suspect the answer that isn’t being discussed yet. Someone with better access to the figures and a better handle on the math than me can do the calculations. I’m guessing though, that the before and after difference will contain somewhere in the neighborhood of the number of zeros which have been flung around for the past few months saving the guys near the top of the pyramid in this giant Ponzi Scheme that the world economy had become. Accordingly, if fairness is folly enough to be included in this scenario, then it only makes sense to throw a similar load of cash out to directly assist the folks on the so-called Main Streets of the nation. And this plan makes it a relatively quick transition from total fear to complete relief and back to (smart) business as usual.

So I guess what I’m saying is that all of us together, by way of our government absorb some of the loss. But if the upside of it is that our economy strengthens and we are all able to pay the national debt down because of it then there’s another benefit.

The banks themselves must take a substantial piece of it as well. Here is a point where someone more knowledgeable than I can help. I feel like some change in accounting rules must be possible so that the losses sustained can be spread out over time instead of taken all at once. That way the loss can eventually be met by the actual returns on the now-safe loans out there generating interest that is being reliably paid back.

Finally, we’ve been led to believe that by far the largest part of the national debt exposure at this point is held by China. Well guess what? China is going to have to eat some of it too. Everyone here is taking the hit to an extent and my view is that they can either go along with this and lose some of their investment, or refuse to participate in some loan forgiveness and thereby end up losing it all. Their economy is not nearly mature enough to absorb domestically the consumer goods they currently ship here. Not that we need more lead painted train sets or melamine flavored dog chew toys, but they have nowhere else to sell it. And if we sink we take pretty much all of the developed world with us anyway.

Perhaps Bono can go to China and lend his voice to our cause…


Pudgy McCabe said...

Well, this is certainly optimistic. For the sake of argument, let's assume it could be implemented along the lines you suggest: We would still have the problem that too much of our economy is geared to a "service" sector (not to mention "finance") which presupposes a robust supply of money or credit. Take away the housing bubble and you effectively remove the fuel supply for a large number of workers who otherwise lack practical skills. With manufacturing largely moved abroad, how are these people to make a living to service even an adjusted debt load? (I'm assuming that we haven't begun to *really* see the kind of large-scale unemployment that is now inescapable in 3-6 months.)

These two articles, which I have recently linked elsewhere, elaborate:

The Sotten Libertine said...

I hold very little credential to comment upon the credit situation with any authority. However I would say that in regards to the calamitous handling of the housin sector this seems like a reasonable appraoch. Selling the idea of a reboot to the vested interests at the top of the pyramid sounds like you might need to put a gun to their heads.
Enticed into all this easy credit, in addition to the mortgages the Credit Card companies still have American families in their icy grasp. Many people earning only a living wage are only able to make minimum payments. The Banks are collecting $39 fees so the card issuers ensure people will continue to carry credit card debt. With this kind of easy money there is no incentive for the Banks to want the consumer to pay off the debt. So people are still left treading water working hard just to pay their minimum payments.
America's other economic sectors still need a good dose of medicine. As Pudgy McCabe has pointed out. The American economy in selling it's manufacturing Know-how and jobs overseas has effectively dissolved these sectors at home. We must reclaim the basic ingredients of what built this nation in the first place.

Anonymous said...

I believe that you left out one giant elephant in the room: if America has so much debt, why don't we try to give out less money to other nations and take care of ourselves instead? I understand that politically speaking, we may need to squeeze blood from a stone at times. We certainly don't need to slash open our arteries, though, especially when there are so many on our home turf who are bleeding to death. Seems like a reasonable place to start.

As far as a nationwide appraisal goes: appraisals are dependent on the values of other homes in the neighborhood. With the drop in values, not to mention forclosures, that we are seeing these days, I'd be concerned that this idea may backfire. Instead of assisting people and finding a happy ending, this may instead cause those who still have their heads above water to lose even more equity in their homes than the market has already lost for them. Also, markets greatly differ throughout different regions. How do we compare apples to whoopie cushions? Although the idea is interesting on paper, I am skeptical about it actually working. Keep dreaming up alternate endings, though. You may come up with one that we can all live with!