Thursday, October 30, 2008

What we need to do NEXT

By Ed Smallwood

My most recent blog entry is so long that I'm going to have to divide it into several entries. I'll be posting one part per day until the election. First up is a quick overview, followed by what we have to do for the economy.

In the next several days we will have selected a new President. I can only hope at this point that good sense will take over and Senator McCaint will be shown one of the most humiliating defeats in U.S. History. I can also only hope that the Democrats get their Filibuster-proof/veto-proof majorities in both houses of Congress.

My biggest fear should this happen is that the Democrats will celebrate until late January, and then fall victim to infighting as to what should be done. This would be just what the Republicans would like to see. Divide and conquer. All the Republicans need is for the average citizen to believe that the Democrats are ineffective in ruling to take back Congress the following term.

This is what Congress needs to do in the next 4 years. If the Democrats take over, then we stand a chance of some of this being done. If the Republicans hold on just a little bit, our chances of this happening are slim.

The Economy

We must take care of the home mortgage crisis. This should be the number one concern of Congress right now—doubly so if we have to wait until late January. Corporations and the rich have had their bail-out, and its clearly not trickling down. In fact, in an article in the New York Times published on October 24th, Joe Nocera detailed an employee conference call he sneaked into with an executive of JPMorgan Chase where the executive stated pretty bluntly that the money they had received from the Federal Government was going to be used to purchase other banks, not to free up lending to individuals.

People have no money to buy things because they are paying so much of their income (more than half for some families in the Silicon Valley) for housing. This is leading to layoffs at companies because people aren’t buying products. If we don’t stabilize this now, we stand the chance of having a depression, not just a recession. Just ask the auto industry. I can’t keep count of the dealerships that have been going out of business around here lately, and Chrysler just announced that it would be laying off 25% of its staff, and is actively looking into a merger with General Motors just to survive.

The reality is that the banks are going to have to write-off some of the value of the homes they financed at exorbitant rates in the last few years. Nobel Prize winning economist Paul Krugman said last March that he thought home values in this country might drop by as much as 7 Trillion Dollars. You can make all kinds of arguments about who needs to pay for this loss from all kinds of angles, but the fact is the banks are going to have to lose some of the value on these properties. The government doesn’t bring in anything like enough money through taxes or bonds to cover these mortgages. This is, in fact, several times the annual GDP of this country, so nobody makes enough money to cover this loss. No reasonable suggestion as to how to deal with this has gotten around this fact. Yes, the government can buy up these loans, but if they buy them at face value, taxpayers are going to be stuck with a whopping big bill that could sink our government.

The best option, then, is for the banks to lose some of the value on the bad loans they made either from greed or stupidity, the homeowner should absorb some of the loss for taking out the loan they never would have been able to pay back anyway, and the government should absorb some of the cost as well. This frees up the maximum amount of capital to allow the economy to recover.

The alternative is to throw the homeowner out into the street, let the bank take the full loss on the loan when they sell the foreclosed property at distressed rates, and watch property tax rates plunge for the local government. Are you ready to watch crime rates soar because the city has to lay-off police officers due to declining property tax revenues? Meaning the former officers can’t make their mortgage payments. Making the economy worse. And so on.

I’m not depressing you, am I?

So, if we don’t take care of the housing mess quickly, we won’t have the ability to deal with the looming corporate credit crunch (which sounds like a name for a candy bar.) We also will not have the capital to do other necessary things, which will be covered later.

No comments: