By now we should all know the urgent economic stimulus package is not an urgent economic stimulus package. Yes, it does contain immediate job stimulation to the tune of about 35% of the package (I am being generous – the Wall Street Journal thinks it is less) . Even the 35% job stimulation portion can be considered questionable depending on how it is administered. Why will this economic stimulus package not work? There is a better way! To find out read on.
If you haven’t taken time to read about the package or to look at it yourself, you should. Just as in the great depression where similar spending and jobs programs actually served to extend the depression beyond what a normal recovery would have been, this package is even more toxic to the overall economy of this nation. The overall concept that government can either borrow money, print money, or raise tax revenue to stimulate an economy is seriously flawed. An economy is not a government’s economy. Rather, it is the natural cycle of commerce, trade, production, and consumption brought about by the people. Starting in the twentieth century, this natural cycle was supercharged by the money supply expansion brought about by credit.
The sudden stoppage of available credit brought the natural cycle of commerce, trade, production, and consumption – the economy – to a screeching halt. Why did credit suddenly disappear? The desire for more and bigger returns in financial markets and the rise in securitization of credit instruments brought about plentiful and easy credit. Banks and other lending institutions now had a market to place their securitized mortgage and automobile credit portfolios. This was asset backed lending at its best and worst. The focus of this piece is on mortgage backed securitization. The residential property as collateral was the asset. The key is “asset” in asset backed lending – this was the equity in the deal that made the lending possible.
The lack of credit quality brought about by the easy credit had artificially inflated the value of the collateral securing or anchoring the basis for lending. What was the “pin” that burst the balloon? It was the sudden and prolonged increase of the price of gas at the pump. This sudden dramatic increase of economic pressure on household budgets pushed the weakest of the borrowers into default. This started the foreclosure cycle. As foreclosures grew faster than the market could absorb the foreclosure sales, the supply of homes increased and the demand dropped creating a downward spiral of residential home collateral values triggering big equity lending losses for the banks other lending institutions, and insurance companies who had guaranteed the mortgage backed securities. A Securities and Exchange rule called “mark to market” forced the banks to immediately devalue the remaining mortgages held in their portfolios causing a rapid loss in capitalization. This severe loss in capitalization put the brakes on lending. The Federal Reserve requires national banks to maintain a minimum capitalization and state banking regulators require the same of state chartered banks. As the downward spiral of home values continued it created a downward spiral of bank capitalization due to “mark to market”. With the loss in capital on a downward spiral, the Treasury under Bush and Paulson with the help of Geitner swung into action and asked for TARP money from the Congress. It was intended to buy up these devalued assets so that banks would be stabilized and start lending again.
It failed! One would think that Paulson and Geitner would have known that the regulators’ regulations requiring a certain level of capitalization at the banks would force the banks to shore up capital with the money and that banks would not lend. If I knew this, why didn’t they?
Now Geithner, the tax scofflaw, wants to create a bad bank to buy up these assets from the banks to stimulate lending. Why will buying toxic assets at toxic asset prices improve bank capitalization sufficiently to re-establish lending? If I have an asset on my books that was worth $100 and is now worth under “mark to market” $2, I have lost capitalization and cannot lend. If I sell that asset for $2 then I have not improved my capitalization and still cannot lend.
The Congress and apparently president Obama are apparently overly concerned with those in foreclosure, many who probably should have not been given easy credit. No one seems at all concerned with the real problem in this country – the many millions with decent credit who bought homes in the last few years who are incredibly buried in their homes financially. The home values do not allow refinancing to a lower rate and literally trap these people into their homes – they cannot sell. They cannot sell to seek a better job in another area. If they lose their job, they cannot move to take a job in a new location. These folks are in debtor prison, yet as long as they pay their mortgage as they are supposed to, they can get no help. President Obama says he is worried about the middle class. These folks are the quintessential middle class and no one is helping them.
Instead we have a stimulus package of nearly a trillion dollars that we cannot afford that is nothing more than multiple earmarks (okay earmark like) on steroids – it is history’s largest pig – it is just filled with pork (okay pork like) – purchased with borrowed money. Didn’t president Obama promise that this package would only contain true economic stimulation programs and would contain no pork? Didn’t he say that he would root out the pork? This package is not intended to stimulate the economy for all of us. It is intended to foster Democratic social engineering. It is intended to create a “nanny state” with the populace always dependent on the central government for support. This is exactly what happened for eight years during the depression – it was interrupted by World War II.
If our Congress and President really wanted to get this economy moving, they should work on the root cause of the problem. The continuing devaluation of residential properties, brought about by the flood of foreclosures which creates more foreclosures is the root cause.
• Take this Trillion dollars and create a tax credit for the purchase of foreclosures – a credit that is twenty percent of the purchase price – the property must be held for seven years or the tax credit must be paid back over ten years through tax filings.
• Take this Trillion dollars and give all homeowners who owe more than their property is worth a tax credit in the amount of the shortfall. This will foster refinancing at lower rates and more suitable fixed payment mortgages. This will provide immediate relief to those millions of Americans who are trapped in their homes and who pay their bills. A detailed appraisal must be obtained for the tax filing. The tax credit must be transferred (paid as a principal payment) to the financial institution holding the first mortgage. In the future, these homeowners must declare any gain based on the now adjusted tax basis for the home, as income. Alternatively, for two years allow these homes to be treated as an investment and allow the sellers to take a capital loss on the sale and carry it forward as needed on their tax return.
• Take this Trillion dollars and temporarily modify MACRS (Modified Accelerated Cost Recovery System). Add to the acceleration for two years to stimulate business infrastructure purchases, if the purchased content is 51% U.S. originated. Examples are new equipment with a 51% U.S. production content, building renovations, equipment overhaul and refurbishing, etc. – purchases that will stimulate our economy by buying American and employing Americans. These purchases will also prepare our business to compete in a world market in the future.
• Take this Trillion dollars and lower the business tax rate to 15% for two years and then each year over five years increase it by 1% per year to 20%. This will stimulate the economy and create jobs probably more than any one other stimulus.
Mr. President and Members of Congress, you can continue to turn this country into France, where no one can be fired or laid-off, where the economy does not grow, and the population is dependent on the government, or you can unleash this great economic machine. Surely some of you have at one time studied economics or heard the host of economists who say that you are building a bad, inflation prone, negative economic stimulus package.
The stimulus ideas found above will stabilize residential properties and stop the downward spiral of home values by creating demand – repairing the root cause of our economic crisis. It will use the “mark to market” to re-establish bank capitalization by 1) increasing home prices, providing increased equity value to the mortgage backed securities; 2) reducing exposure by fostering principal payments, paid through the giant tax credit; 3) and by reducing the number of foreclosures on the market with remaining foreclosures selling at substantially higher resale prices than today. The reinstituted lending, now that banks are adequately capitalized again, will allow businesses to borrow and spend utilizing the accelerated MACRS, creating lots and lots of jobs in the process. Only sound lending with no easy credit, please. These stimulus ideas will utilize the new lower business income tax rate and MACRS to bring production back to these shores, thus heavily stimulating economic growth and jobs for a long lasting healthy economy.
So where were you when the so-called economic and financial experts were providing their input if solution is so simple?
Well, Athena, while you were drinking the Kool-Aid in NYC, I was writing about this atrocity. You cannot stimulate an economy with government spending – government spending only contracts GDP. You stimulate an economy by putting more money in the hands of those who will spend it, the people, by using massive tax cuts. Time and time again, history has shown that when tax cuts are initiated, tax revenue actually grows and the economy expands.
Take a good look at the stimulus – 80% is not stimulative. Of the nearly $800 Billion in the Bill for supposed “shovel ready projects” only about $17 Billion has beeen injected into the economy – a dismal performance. Yet we are stuck with the continued non-stimulative spending for years to come.
Keep on drinking that Kool-Aid, because when the current administration gets finished with this economy, Kool-Aid will be all you can afford.
By the way, most financial experts said this was a bad idea. Only a small group of Obama people and Ben Bernanke said it was good idea. Obama’s economic advisor Larry Summers said that the stimulus must be targeted and must be fast – well it was neither.
Debt got us into this problem and so we are borrowing our way out? The debt Obama has taken on is nearly the size of our GDP – the equivalent of bankruptcy. The Chinese do not want to hold our Treasury Bills and Notes any longer – they are worrried about our solvency – the fix was a colossal disaster – worse than the elements that got us into this mess.