Happy Holidays

Happy Holidays

Senator Barack Obama has the makings of a good idea with his call for a ninety-day national foreclosure moratorium.  Such an action would give homeowners and mortgage holders time to work out more equitable loans and keep homeowners in their houses, keep houses off the market, keep housing prices from sinking as fast and keep mortgage holders out of the red.  The only problem with the Senator’s plan is that it is not immediate, aggressive and audacious enough.  As Robert Skidelsky wrote two Sundays ago in the Washington Post, this is a crisis John Maynard Keynes would have seen coming a hundred miles and sixty-two years ago.  These economic problems confronting the nation call for a Keynesian solution.  Indeed, it’s practically screaming for Keynes on fiscal steroids.

So far the government’s response has been the antithesis of Keynesianism.   I recently wrote that the Reagan revolution amounted to a subversion of Keynesian demand-side economics (which originally called for using government borrowing and fiscal policy to push money into the hands of working families and consumers) into supply-side Keynesianism: using government borrowing and fiscal policy to push money into the hands of investors and producers.  The government cut trillions of dollars in taxes on the investment class by borrowing trillions of dollars to pay for the tax cuts, pure and simple.   Now the government is engaging in supply-side socialism, using over a trillion dollars to shore up the assets—buying them, as necessary—of the investment class.

Senator Obama has realized correctly that, ultimately, the American economy is not dependent on the health of Wall Street.  Rather, Wall Street is dependent on the health of Main Street, the place where the two thirds of economic activity driven by working consumers takes place.   The Senator has not, however, been able to fully and boldly shake the shackles a generation of faux-Laissez Faire Reaganomics has placed upon our collective public policy consciousness.  He has not advocated the Keynesian solution in its entirety.  What is needed is a massive program of historical scope to shore up the financial stability of average Americans and stimulate aggregate demand.

To this end I recommend his immediate advocacy of what I call the National Housing Holiday—a ninety-day national mortgage forbearance period which will allow time to return stability and credibility to both mortgage markets and household finance.

The Plan

The President, by executive order declares a ninety-day national foreclosure and mortgage holiday—a National Housing Holiday.  This order will be subsequently codified by national statute.  Ideally the NHH should begin effective November 1.  Politically, December 1 would be a more realistic date.  Waiting until after the inauguration will pretty much guarantee a long and deep recession.

All homeowners will be allowed to defer any mortgage payments due during this period.  Homeowners would, however, continue to receive tax deductions applied to the current tax year as if they’ve made the required payments for the period.

Mortgage holders, meanwhile, will be allowed to carry these loans as paid in full on their balance sheets for the Holiday period. Mortgage holders will also be allowed to write off from taxes due the value of the mortgages missed as a permanent loss and/or qualify for a federally issued or backed bridging loan in the amount of the forbearanced mortgages to alleviate/eliminate cash flow issues for these lending and investment institutions.  The amounts received will not be levied as taxable income.

During the ninety-day holiday every mortgage in America will be recalculated to a base fixed rate to be set by Federal statute under a National Fair Mortgage Act  (FMA).  Any loss on current mortgage income endured by mortgage holders is to be offset or mitigated by either applying it against future tax liabilities or by direct one-time Federal payment as set by Federal statute.   New regulations on future mortgages concerning allowable ARMs, loan qualification standards and such will be established under the FMA.  The FMA will also create requisite effective governmental oversight of the mortgage industry by either retasking existing Federal agencies and departments or by creating a new, integrated National Mortgage Authority (under the auspices of the Department of Treasury or Federal Reserve) to facilitate the provisions of the FMA.

Under new FMA rules, the three months of mortgage holiday will be amortized under the new loan conditions set for each mortgage across a loan period extended by the three-month non-payment history.   The tax credit received by homeowners over the three-month period will be in the form of a prebate against future taxes due:  its value will be repaid to the government over the remaining life of the loan.  Losses by mortgage holders (without reference to any government assistance during said period) recovered over the life of the loan will not constitute a tax obligation on future year taxes.

Rationale

The NHH will accomplish three things directly.  First, by establishing a process to revalue mortgages under the FMA, confidence can be returned to investment and credit markets.  Uncertainty and risk are the twin demons of destruction in credit markets.  The resulting lack of confidence in credit institutions is the very devil of the system. At the heart of much of the global credit crunch is the uncertainty over the value—or lack thereof—of mortgage-associated investment instruments.  Establishing a stable, fixed value for the underlying mortgage assets will remove this uncertainty and the obstacles it presents to the normal function of credit markets thereby returning confidence to these markets.

Second, establishing a viable mortgage structure   will effectively end the current foreclosure crisis bringing greater stability to housing prices across the nation.  Housing prices significantly over-inflated during the housing bubble; a significant correction in prices to more sustainable and historic levels should and will happen.  A precipitous drop in price, however, runs the risks of both ultimately undervaluing houses and over-decapitalizing households.  Foreclosed properties not only drag down the bottom line of mortgage holders; they serve as a depressing factor on property values across the broader neighborhood, community and nation.  Factoring subprime-driven foreclosures out of the process should allow housing prices to reach a true median in a more orderly way with less collateral damage inflicted on the broader economy.  In particular, a more orderly transition in housing prices will have a less deleterious impact on state and local property tax revenues, in itself a significant concern in a weakening economy.

Third, redressing the fundamental imbalances that have been generated in household income flows because of massively inflated mortgage tied to predatory ARMs will provide significant demand-side stimulus.  The initial Housing Holiday will free up three months mortgage payments for millions of American homeowners.   Calculating roughly fifty million qualifying homeowners with an average mortgage of less than two thousand dollars, the stimulus would amount to $100 billion per month and over $300 billion over the period of the NHH.  That amount is double  the size of the tax credit passed last spring which itself accounted for perhaps up to a one percent boost in second quarter economic activity.

A large portion of the $300 billion will undoubtedly be used by households to pay off debt and/or shore up savings.  In doing so, however, millions of households will be provided the economic cushion needed to return to financial stability and credit worthiness once mortgage payments resume after the recalculation of mortgages and the end of the three month forbearance period.  Tens of billions of dollars, however, will still find their way into the consuming economy helping to keep retailers retailing across the nation and helping to keep this Holiday shopping season from being the grimmest in a generation or more.

The Cost

The public cost of the NHH stems from the cost of lost tax revenues from, and loans/direct payments to, mortgage holding institutions during and after the three-month period.  Even if the entirety of the mortgage forbearance costs during this period are ultimately absorbed by the Federal government, the cost of this immediate stimulus package would be, at $300 billion dollars, less than a third the amount of the trillion-dollars in Wall Street stabilization funding authorized to date.  Unlike the trickle-down bailout, which still has not resulted in a substantial, observable impact on average Americans, the NHH will have an immediate and direct stimulus impact.   The NHH will also be revenue neutral on household taxes.

Other costs associated from the plan will result from however the National Mortgage Act is ultimately structured and implemented.   Mortgage holders, even with government stabilization through the NHH and NMA, will undoubtedly see the value of a significant amount of mortgage assets decline.  This, however, amounts to paper losses that can be mitigated to some degree through tax write-offs and other fiscal mechanisms.  In any event, the value of many of the underlying mortgage assets—and not just those limited to subprime lending—is suspect and unsustainable under current conditions.  The gains in confidence achieved by establishing a solid valuation for all mortgage assets with the resulting return of more stability to investment and credit markets will offset, at both the macro and individual level, the costs of mortgage asset devaluation.   In other words, mortgage holders, having the choice of sucking it up and seeing some devaluation of assets under a NMA or risking the prospect of massive devaluation of said assets under foreseeable market conditions, would be wisely placed to, simply, suck it up.  There are more medium and long-term profits to be made in an economy returned to prosperity than one mired in recession. Or worse.

The Politics

Implementation of a National Housing Holiday and passage of a National Mortgage Act will be, by any measure, a particularly audacious political act.  Indeed, the NHH and NMA represent nothing less than a return to fiscal Keynesian economic and the first steps towards a systematic repudiation of the excesses of the Reagan revolution.   There will be pushback, to say the least.

The first objection to the proposed NHH is its potential cost to the Federal treasury.  As discussed above, the anticipated cost is significantly less than that already allocated to the current Wall Street bailout packages.  The United States is, however, already over ten trillion dollars in debt.  Additional Keynesian fiscal stimulus as provided for under the NHH will add another half-trillion or more dollars in debt to this mountainous pile.  Deficit hawks and average Americans alike stare in shock and awe at these almost incomprehensible amounts.

Debt, however, is not the issue here.  It is the ability to maintain and service that debt which is.  If borrowing an additional half trillion or so dollars from domestic and world markets helps keep the world’s largest economy from slipping into an economic downturn of generational proportions than it is money well-borrowed.   If the government does not borrow additional funds to stimulate the economy and the economy does then fall into a major downturn the domestic and global ramifications will truly be historical—and, potentially, unprecedentedly painful—in scope.

Slippage in the American economy is already translating into a softening of global demand resulting in a corresponding softening in global supply.  China’s economy is showing signs of declines.  As a result, global commodity prices are dipping rapidly.  Such economic rapid upheavals and deflationary pressures in the past have always been accompanied by more than their share of political mischief, instability and conflict.   Given the global challenges this economic situation presents, mitigating or avoiding entirely the worst potential impacts by accumulating an addition five to ten percent in national debt is a reasonable and, arguably, economical price to pay.  And, given the fact that in this crisis the world really has no other choice but to maintain its support of American borrowing, such funding will be made available to the American Treasury.

Ideology will play a major role in debating the NHH and NMA, to be sure.  Knee-jerk reaction from reactionary Reaganites is as certain as the next sunrise.  Witness how Senator Obama’s merest mention of any consideration of revisiting and revamping the progressively regressive tax structure of the past generation draws immediate declarations that he is a socialist.   The proposals will divide the nation directly down partisan ranks with a not small measure of Reagan Republicans opposing them if for no other reason than they are being advocated by Democrats.  And, more cynically, those politicians and pundits with an eye on 2012, whomever wins this November, may not want to see fast and effective solution to the economic problems that will bedevil America in 2009, 2010 and 2011.

Given the magnitude of the economic challenges confronting America, it can be argued that this nation is once again poised on the brink of a major trans-ideological moment when a new, national consensus may be created.  Such was the case in the 1930s when the 19th Century Laissez Faire orthodoxy collapsed into a Great Depression that gave rise to the almost half century dominance of Keynesianism and the political New Deal Coalition. Such was also the case when, by the 1970s, the excesses of New Deal politics and systematic changes in the global economy undercut Keynesianism.  The stagflation and recession of the late 1970s and early 1980s propelled the Reagan Revolution to economic pre-eminence and the Reagan Coalition to economic dominance. Now, a generation later, the excesses of the Reagan revolution and intensified structural changes to the global economy have undermined that paradigm as well.  We find ourselves in 2008, as in 1932 and 1980, once again on the doorstep of a fundamental, substantial and systemic change in economic paradigms.   Ideological and partisan challenges to a Keynesian shift are being eroded—and will, ultimately, be swept away—by the deluge of the current and growing economic downturn.

Fairness—both its reality and perception– is a major issue that must be addressed in any economic stimulus and recovery plan.  The great, national populist outcry against the so-called Wall Street bailout packages was driven directly by a common sense of unfairness.  This outcry almost derailed the attempt to bring short-term stability to American equity and credit markets.  For the more ambitious and audacious NHH and NMA to fly, all Americans—homeowners and non-homeowners, investors and workers—must be convinced that everyone will share in the cost and everyone will share in the benefits and that each individual and groups share will be equitable, if not equal, to that of others. To this end additional tweaks, incentives and sweeteners may, by necessity, be considered.

The approximately 46 million of Americans who rent housing or own homes without mortgages receive nothing, directly, by the proposed NHH.  To redress this, a tax credit/rebate/prebate   that could be claimed by such households and received in the form of direct money-transfers from the Treasury—as was done with the spring tax rebates—should be considered.  The more the amount might approximate the value of NHH to homeowners and mortgage holders the greater the cost (perhaps up to six undred billion dollars) such a program would be to the Treasury.  But so, to, the greater the fiscal stimulus and the greater the political acceptance of the overarching plan.  Additional fiscal offsets for investment institutions not directly benefiting from the NHH might need also be considered.  The point is to provide both as much fiscal stimulation as will be needed to keep the economy from deflating into depression and as much political  buy-in as will be needed to command rapid public assent.

Ultimately, the NHH and NMA is, to quote the oatmeal pitchman, the right thing to do and the right time to do it.  Redressing the fundamental inequities of the last generation that have left American households less well off in financial terms and with diminishing future prospects is both economically, politically, culturally and morally necessary.  At the end of the day, even if mom and dad knew they were buying more mortgage than they could really afford, there isn’t one child in America who is responsible for the ensuing problems.  And, as we head into the holiday season, is seems unfair, uncivilized and even un-Christian (not to mention un-Jewish, Un-Muslim, Un-Buddhist, Un-Hindu and Un-every religious and secular based system of morality) to lay the price of our national profligacy on our on progeny.

Immediate passage of the NHH means no child in America will be evicted from hearth and home this holiday.  It means no family in America will ring in the new year by losing their homes to face an uncertain winter  wandering the streets in search of shelter.  It means that we Americans really meant it when we put into the constitution that “We the People” will “provide for the common defense” and “promote the general welfare.” As we look to celebrate  the coming holidays with our families, let us remember that we are also an American family.  And, as residents of our 50th State now,  family means “Ohana”: no one gets left behind.

Next Steps

The National Housing Holiday is a stop gap measure to return stability and liquidity to both mortgage holding institutions and, more importantly, American households.   By itself the actions taken to establish clear value for mortgage-related investment  instruments and financial solvency for millions of working and consuming households will have a stabilizing impact  on the real economy significantly beyond what the current investor-driven  economic stabilization packages have had or will have.  Yet,  like the initial steps towards a New Deal taken by Franklin Roosevelt after his inauguration,  the proposed National Housing Holiday and Fair Mortgage Act are only the first steps towards a  21st Century American  Deal.  The ultimate goal of a Keynesian recovery is to not only stimulate the middle and consuming class incomes in the short term but to create an economic foundation guaranteeing expansion of these classes over  the long haul.  To that end, additional policies need be considered.

At the operational end of things would be programs like a National Fair Credit Act which would redress the usury terms lending institutions have been allowed to charge for revolving consumer credit—interest rates which in previous generations could only be charged by loan sharks and mobsters—and return them to a level that is fair and, even,  moral.  Credit relief would further enhance the buying power and standard of living of the tens of millions of American households significantly in consumer debt.   A National Housing Appraisal Standard should also be considered to prevent a return to predatory lending practices of recent years.  The task of providing greater accessible to homeownership without  compromising credit markets as occurred with the subprime debacle must also be redressed.

Of greater significance are the structural changes which need be made to an American economy.  For the last generation America has been transformed from a diamond-shaped income distribution (a broad middle class with narrower  upper and lower classes) into an hour glass economy (broad upper and lower classes and a diminishing middle class). In recent years,  as income and ownership have pooled upwards,  this hour-glass economy is giving signs of shifting into the more traditional pyramid economy, with all the potential social and political consequences such economies have engendered across history.  This transformation has been the result of twenty-seven  years of national fiscal, monetary and trade policies that have systematically favored investment classes over working and consuming classes,  capital over labor.  These policies must be reversed.  In the absence of a resurgent,  reinvigorated  middle class any economic recovery achieved over the next few years will prove to only be an expensive chimera leaving America  in an ever weakening position, domestically and globally,  over the balance  of the century.

We Americans, by sins of commission, omission or ignorance,  have dug ourselves into a very deep economic hole.  Climbing out will take time, cost money, and require sacrifice.  For a while all of us may find ourselves, to paraphrase former Federal Reserve chief Paul Volcker,  living less well.  Actions taken now, however,  can minimize this downturn and set the foundation for a true and lasting economic recovery.  A return to Keynesian policies will also be a return to the growingly prosperous Middle class America that dominated society and politics after World War II.  An economic  recovery  that economically recovers  an American middle class in decline for a generation will guarantee broad economic prosperity for the next generation—and beyond.  Staying the course with our supply-side Keynesian/socialist model,  however,  is a sure path to national economic deprivation.

And global economic irrelevance.

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Told You I Was Going To Tell You

Last week I published a post entitled “Brass Backwards.”  In it I laid out my belief that the current supply-side focused economic stability and stimulus plans being implemented fail to fundamentally redress the root of the current American economic downturn. I argued what was needed was a National Mortgage and Foreclosure Holiday and  promised you a followup explaining the plan.  Well, life happens and I got delayed in publishing it but have finally gotten a chance to flesh things out.  Read the following post, “Happy Holiday.” It’s a work in progress–I’m still tweaking the numbers–but your feedback is welcomed.

Soooo Right

The running theme of the last week of conservative AM shock jocks and op ed columnists (example)   has been that reports of increasingly virulent racist attacks on Barack Obama have been nothing more than the product of left-wing media’s agitated agitprop.

(From the Sacramento Republicans’ Website as Reported by Fox News.)

(From the October newsletter of the Chaffey Community Republican Women, Federated, reported Here.)

Gee,  Dennis Praeger, Rush Limbaugh, Sean Hannity, Charles Krauthammer et al. are soooo right!

Right.

Boo Boo

When I read on Satuday that Sarah Palin was going to drop the puck at a Philly Flyer’s game I  told my wife (she’ll vouch for me!) that if the Alaskan Great White Hope got booed on the ice by hockey fans–her own  self-described peeps and homies–the election is over.  Obama wins by 5 to 10 easy.

Check out the U-tube of the booing here.

So, what are you going to wear to the Obama inauguration?

(And why isn’t the Hockey clip being run right now as an Obama ad?)

Brass Backwards

Okay, let me see if I’ve got this straight.  The world’s credit markets have seized up creating a  global lack of liquidity—in other words, no-one wants to lend to any one.  As a consequence businesses, governments and individuals can’t borrow sufficient funds to keep businesses, governments and individuals doing what they need do to keep the economy—global and domestic—from heading into the tank,

The reason for this is that banking and investment  institutions around the world  are holding trillions of dollars in potentially worthless–or, at least paper worth less than when obtained–investment instruments that included mortgage-based securities heavily laden with  subprime obligations.   These subprime mortgages are problematic because they consist of hundreds of thousands—millions—of loans issued by financial companies flush with excessive liquidity a few short years ago to hundreds of thousands—millions—of borrowers whose personal income and assets should otherwise of precluded them from receiving said loans in the first place or receiving them for substantially lower amounts under substantially different conditions.  Moreover,  most of these loans were structured with massive balloon payments–Adjustable Rate Mortgage or ARM–which, apparently was financial shorthand for “we’ll loan you the money now cheap but come back and break your arm  in a couple of years if you can’t pay.”

All this loaning was based on three assumptions.  First, global financial liquidity would continue to pour endless amounts of money into American financial houses.  Second,  home prices would continue to rise across America in an endless bubbling boom allowing subprime mortgage investors to endless refinance their ways out of their massive ARM  balloon payments  thanks to constantly rising home equity.  Third, there really is a Santa Claus/Tooth Fairy/Easter Bunny who  will make every thing right no matter how colossally unrealistic/self-delusional assumptions one and two might be.

In other words banks with way more money than they new what  to do with gave way to much cheap up-front money to too many people with way too little income to afford the loans they were taking. Once the housing bubble popped people unable to refinance due to sinking equity were also unable to pay their massively ballooned ARMs.  And now that debt, bought up in fancy sounding but ultimately simple–as in “this security is backed up by the ability of a truck driver in Detroit making thirty thousand dollars a year to continue to make five thousand dollar per month mortgage payments”–bonds and funds produced and traded  by the best  and the brightest products of the Wharton School, Harvard Business and University of Chicago, is poisoning global finance like monetary e-coli  outbreak.   The reality underlying the subprime mortgage meltdown is not rocket science.  The rocket science lay in taking a five thousand dollar a month morgtage held by a truck driver making thirty thousand a year and turning it into a security that did not scream insolvency.  Once upon a time I think they had a word for that.  What was it?  Oh yes.  Fraud.  But I digress.

And now a  financial crisis based on arcane , obtuse  hedge funds, derivatives, inverse derivative,  credit default-swaps and the like understandable to, perhaps, a few hundred Ph.D.s in advanced fields of math and science at any given time now threatens to spill over into the real economy that  employees people, produces stuff and, basically, keeps us all alive.  In summary:  The global liquidity and credit crunch and looming recession/depression is the product of financial institutions holding to much shaky debt issued to American homeowners.

Okay, do I have it right so far?

Meanwhile, facing the evaporation of global liquidity and the looming chasm of economic recession—if not financial and economic collapse—the governments of the world are collective pouring trillions of dollars into the gaping maw of the same global financial community that created the global financial problem in the first place.  In other words, the world’s governments  are attacking the problem from the top down.  Or, to use a medical analogy, they’re treating the most manifest symptom of the disease without directly addressing the underlying pathology.  It’s as if a doctor, seeing a patient wasting away due to advanced cancer,  recommends the patient go out and eat more Home Town Buffet instead of acting immediately and aggressively to cut out the underlying tumor.

Am I still on target?

But if the ultimate tumor in all of this are millions of mortgages with inflated payments and interest rates that average Americans can no longer afford, isn’t that precisely the place the surgeon’s knife of government must first be applied?  Unless you move to immediately and aggressively to cut out the underlying tumor won’t it simply continue to metastasize throughout the body economic? Even if government policy aimed at stabilizing the top of the financial system by subsidizing poisoned financial portfolios and buying direct stakes in busted banks works in the short term, what happens over the next three, six and twelve months as millions of Americans continue to see the equity in the houses slide, their ability to meet mortgage payments decline and their ability to access credit collapse?    Given the underlying weakness of the real economy—that would be the two thirds of it that is driven by what consumer like that of a thirty thousand dollar a year truck driver in Detroit spend —wouldn’t a prudent investment class take advantage of all these government bailouts and buyouts to cash out now before the real economy falls into the tank?

For what does it gain a nation to save its investment class in the short term if it loses its middle class in the long?

So what is to be done?  Senator Barack Obama had the makings of a good idea yesterday when he called for a ninety-day national foreclosure moratorium to give homeowners and mortgage holders time to work out more equitable loans that would keep homeowners in their houses, keep houses off the market and keep mortgage holders out of the red.  The only problem with his plan is that it is not immediate, aggressive and daring enough.

What Senator Obama should call for is an immediate ninety day Foreclosure and Mortgage Holiday.  Details of which are in my next blog, “Happy Holidays”

Dr. Seuss Explains the Meltdown

Perhaps a better metaphor for the current financial fiasco than the 19th century “Pyramid of Capitalism”  is the classic Seussian tome,  “Yertle the Turtle. “  King Yertle standing on the backs of his subject is, of course,  the American and global investment classes.  (Hey, nothing wrong with being king.  As Mel Brooks playing Louis XIV in the classic historical documentary, “History of the World, Part I” said, “It’s good to be the King!”  But not when it’s unsustainable and the entire kingdom collapses.

The American home-owning  laboring classes are, of course, the straining turtle at the bottom of the pile, upon who’s back the entire shaking economic edifice is propped.

And the middle classes’ knees are shaking and about ready to give out.

Which, upon reflection, points out the potentially fatal flaw of all the financial bail out schemes being tried around the world.  The AIG rescue,  the $800 billion Wall Street rescue,  the coordinated interest rate cuts by global central banks and hundred of billions more being used by G7 governments to buy up shares in major banks–saving Laissez Faire capitalism by socializing it—all of one theme in common.  The thought is if you can just prop up ol’ King Yertle with enough billion dollar 4x4s and share support scaffolding you can keep the overextended,  overbuilt global pile of  anxious amphibians from hurtling to the ground.

But the turtles on the bottom still have shaking knees that are about ready to give out.  And no-one is doing enough for them.  Or anything, really.

Until you redistribute the weight at the bottom, shore up the foundation of the pyramid, get the middle class some mortgage-guaranteed  knee braces, the turtles are gonna go  tumblin’ down.  More on how I think it can and should be done shortly.  For a hint, start humming “Happy Holidays.”

Friday Funnies

This (click here) was forwarded to me by the creator who, through a mutual acquaintance, thought I might get a chuckle.  He was right.  Yes, its partisan but, hey, funny is funny.  Happy Friday.