Do the Math

Comment by Scott Hays

February 7, 2009 @ 12:55 pm

On second reading, I like your plan better than I originally stated. You did ask for downsides, and I think I gave you one (or more than one) … if that means my glass is “half empty”, well, that’s what you asked me to describe. That is why I provided my own “half-full” plan, in exchange I do see another downside to your plan, though (second-readings are helpful that way). There are an awful lot of Americans who have either been foreclosed upon, are about to be foreclosed, or are rapidly moving towards foreclosure (you can bet, for example, that at least SOME of the 598,000 Americans who lost jobs in January now are at risk to keep up their mortgage payments). Some of these people, as we have been told, deserve whatever it is that has happened to them. They were greedy, stupid, or both. I tend to think that this group is a relatively small group, and that the majority of people caught up in the credit crisis did so in good faith and/or were misled by their lenders. I can elaborate if you wish … I just take that statement as a given.

Okay … so we give them a year in which their mortgage is paid. The reason, in your plan, is that they will now have free cash and they will begin to demand products or services that the stalled economy will be stimulated to provide. This may be true. But if it is, then these people are merely robbing Peter to pay Paul, and at the end of the year will be back where they started. The economy may be doing better, they may even have a job (hence more income … but not much more than what they earned that got them into the mess in the first place) … but they will still be faced with monthly mortgage payments at the same rate as before the “bailout” system went into effect. On the other hand, if they are prudent and save up the money they earn during the bailout so they can apply it to paying down their mortgage at the end of the year … well, I am sure you see the problem. They will not be spending money, and they will not be stimulating demand.

The other problem of the super wealthy benefiting the most from the program also remains.

Both of these possibilities present a problem. Now … if instead of paying the mortgage for a year, the government FORCED the lending and financial institutions that took (or are still to take) government bailout money to immediately renegotiate the loan, I think we make faster headway. In the first place, the government has already provided a stimulus to the financial institutions, and needs to provide no more. It can take the $850 billion (or $790 or $1.5 trillion … whatever is eventually settled on) and use it to stimulate the economy through massive job production and tax incentives; the mortgage “solution” is a solution provided directly by the banks.

I would prefer that LOCAL banks do all of the renegotiation, and we reinstate the regulations that kept the commercial banks and insurance companies out of the business. They may need to provide some of the initial help to local banks so they are fully capitalized, but that is the price they must pay for influencing legislators to give them the powers they wrongly have now. Anyway. Homes are renegotiated at current market value, for thirty-years at a modified fixed rate. In the first year, there is no interest paid on the mortgage. In all subsequent years, the interest rate can be raised to a maximum of 5%, whereupon it is fixed and cannot be raised any higher (an end to usurious interest rates also needs to accompany this plan). The lending bank is compensated for its loss(es) on each mortgage by the bailed out institutions seeking to buy up the toxic mortgages by using the following calculation:
(original appraisel value) – (current appraisel value + equity already in the home).

So now, people are paying a more reasonable and fair mortgage on their homes, and have a good chance of hanging on to them. The housing market stabilizes and credit begins flowing. The rate at which credit is offered is brought back into non-usurious levels. Local banks are strengthened (and local business is far better … and easier to monitor … than international cartels). Even the big banks at least get their books back into kilter. And, owing to the parallel programs from the federal government, there are more jobs. Widespread employment in which working Americans are paid a living and fair wage is what will increase demand for goods and services. “Supply-side” voodoo economics can be laid to rest, and actual laws of supply-and-demand will return. Hopefully, we will end consumer credit as the driving force behind our economics.

Comment by Peter

February 7, 2009 @ 7:37 pm

Initial comment by Scott Hays

I initially liked your plan … but on closer examination, am not so sure it is equitable. I will speak mostly from my own situation. I and my wife are retired, living on pretty small retirement pensions as public educators. We saw the writing on the wall, however, and have prudently saved in order to pay off most of our mortgage. We purposefully left a small principle from which we can deduct the interest payments, and usually have enough to itemize rather than claim the standard deduction. With your plan, we would be able to save a little over $6000 during the coming year. While $6000 isn’t anything to sneeze at, it also isn’t going to do much to stimulate a whole lot of other people or businesses. In addition, I will lose one of the major deductions I now am legally able to claim that reduces my income tax burden.

I also wonder who will be getting the largest relief from this approach? It seems to me people with the largest outstanding debts will get the biggest breaks. Some of these people, of course, will be those who borrowed more than they could afford to repay … another subtle way of punishing me for being more prudent. But the majority will be those living in MacMansions and already doing relatively well, thank you. I do not mean to suggest that they do not deserve to be a part of the stimulus effort, but somehow this looks more and more like another way for the rich to become richer.

I think it would be a whole lot simpler just to allow anyone to refinance their existing home mortgage at an interest-free rate (for the first year), adjustable to say 3-5% in the next year and adjustable over the course of the next 28 years to a maximum of 5%. Taxpayers have already bailed out most of the major lending institutions, and this would be a concrete sign that they were doing something positive with the money they were given. I would prefer a plan that negotiates the new mortgage at the home’s currently assessed value, but would see why the banks might object to that plan. In this case, part of the $850 billion Recovery and Reinvestment Act could cover the difference between the originally financed amount and the current value (minus any equity accrued in the previous life of the loan).

Comment by Peter

February 7, 2009 @ 7:40 pm

Answer to Scott’s initial post

Scott:

You can see the glass as half full, or half empty! Your $6000 reduced later by your tax burden is still found money. Also those living in the ‘mansions will also be contributing back.

I suggest the tax recovery as an offset and as a sweetener to opponents. Do the plan without it; Fine!

Your plan works too. I like the no interest at all in the first year as it give a better initial jolt but a think it requires more intervention to bring about.

Comment by Peter

February 7, 2009 @ 8:39 pm

Scott:

The “glass half empty” was about your tax on the $6000.

As to struggling people who may rob Peter to pay Paul, no plan can be just right for everyone. There’s an expression about rejecting the good because it’s not the perfect.

Benefiting the super wealthy can be prevented by a cap, say @ $700,000 and the affluent need to get a boost also because they drive the stock market, whose recovery is essential.

From “THE AMOUNT OF ECONOMIC EXPANSION” post.

“The stock market crash is not just a loss of asset value; it represents a contraction of the spending derived from wealth transfer. Monetary velocity is a phenomenon of goods and services being delivered in return for money; ergo, no commerce, no velocity. Velocity is slowed down due to falling asset prices because those wishing to sell assets (savings) so as to become spenders reluctantly remain savers. They do not want to spend the assets at a depressed value.”

Re your — Now … if instead of paying the mortgage for a year, the government FORCED the lending and financial institutions that took (or are still to take) government bailout money to immediately renegotiate the loan, I think we make faster headway. In the first place, the government has already provided a stimulus to the financial institutions, and needs to provide no more.”

Of course, that is the plan in the Stimulus post at the bottom of the list. I posted the latest as a “Well if you are GOING to spend the money, this is the best way to do it.” By he way that plan (3.75%) included a method for your 1st year grace period.

“Those that lost their jobs or had major business setbacks could be given a year’s grace by amortizing a year’s interest into the loan which would only raise the interest rate to 3.9%. This would allow them to keep their homes, which would greatly enhance their ability to focus their energies on reestablishing earnings. Simultaneously the economy would be recovering sufficiently to provide the opportunities needed.”

One thing about reducing the principal to a lower appraised value is the borrower would owe tax on the forgiven loan amount. He received it from the lender as purchase funds; when the debt is forgiven, it becomes income.

Any plan that both lowered interest AND principle would have must less potential to be accepted.

Comment by Scott Hays

February 8, 2009 @ 10:24 am

Peter … I think you might want to reread my proposal a little more carefully (or maybe I should explain one provision of it a little more clearly). To assess an income tax on the borrower in order to address the forgiven loan amount would, in essence, be an unfair tax (not that taxes are always “fair”). To wit:

• A local bank buys the home at the original assessed value (the value upon which the original, now or soon-to-be defaulted, mortgage was based).
• The bank now offers a loan to the owner at the current assessed value. This is a thirty-year adjustable rate mortgage, with caveats. The first year interest is set at zero percent (see * below), and over the remaining life of the loan the interest rate can adjust upwards to a maximum of 5% (see ** below).
• The local bank is reimbursed for its loss with a simple formula: (original assessed value) – (new assessed value + equity already in the home). The “loss” can be covered in one of two ways: (a) any one of the large financial institutions that has received (or is receiving) TARP bailout money can use the bailout money for this purpose because, theoretically, that was one of the originally stated purposes of TARP (the actual institution serving each local bank TBD); or (b) Congress can set aside funds in the current Recovery and Reinvestment Act to do the same thing. Obviously, since the money has already been expended to save the Big Banks, it is only fair that they show their appreciation to America’s taxpayers by opting for option a.

* The zero percent interest rate is the good-faith “thank you” provided by America’s financial sector.
** We have to begin taking serious steps to start undoing the damage caused by Milton Friedman theories and reestablish bans on usury. A ten percent cap on all forms of lending seems like a good move. If interest rates were brought under control, then a 5% cap on home mortgages makes a lot of sense.

With that said, there is a net “wash” between the forgiven loan amount to the borrower and the amount payed to the lender by the Big Bank to cover that amount. If in my limited understanding of tax codes this is not the case, then if the home owner (borrower) must pay tax on “income”, then so must the local bank. That seems like a double tax, to me, when in fact no money or income has been generated. We have, instead, just wiped the books clean.

Comment by Scott Hays

February 8, 2009 @ 5:35 pm

Peter

Well, I can’t disagree with your assessment of the economic conditions (for average Americans) during the Great Depression. But even with no assets and living essentially on a cash economy, people were without work (no cash) and many lost what few assets they had. Most people agree that the New Deal created a lot of jobs. While a few (recently) cited revisionists disagree with those conclusions (and in this modern world of instant refutation and immediate propaganda, 24/7 political haymaking has come to replace serious academic pursuit), they are in the minority and reputable economists and historians have dutifully refuted their conclusions. Will a new New Deal work today? It will, but only if we put enough people to work doing things that are lasting and meaningful (not just filling holes with shovels), if we continue to support it beyond the life of the recession, and if we simultaneously take drastic steps to modify or eliminate conspicuous consumption and the easy-credit market that sustains and supports it.

Converting to a war economy did, indeed put a lot of people to work. More importantly, it took an awful lot of young men out of the job pool altogether. But when soldiers returned, there were jobs available and the economy kept growing. We already have much too large of a military-industrial complex, so I would strongly avoid promoting a major war and a pumped up war production industry to stimulate jobs. But we CAN begin converting our military-industrial base towards a peacetime production process. As was said during the Inauguration, let’s break the tanks into plowshares and the missile silos into granaries. There is no need, for example, for the United States Navy to turn the entire Oregon coast and outwards up to 300 miles into a testing range and site for developing strategies to combat submarine warfare … where in the world is there a country with a submarine fleet against whom we must deploy such a large and well-trained force? And against whom do we spend more money for military defense than every other country in the world, combined?

But I look forward to your analysis of the stimulus package. I am not an economist, and actually have a very low regard for the so-called science of economics. We need economists, of course … but they should be functionaries, and not factotems. I should warn you, however, that I am of the opinion that EVERY cent spent by government serves as an economic stimulus (for someone). The secret lays in how to get the biggest bang for each buck.

Comment by Peter

February 8, 2009 @ 6:20 pm

I’m working on my final article on this doomsday machine being created in
Washington.

First part below and the balance will be mostly a composite of the other
posts you have been reading.

Runaway Train

Imagine the largest freight train ever assembled, careening down a mountain
side without brakes and 90% of the cars allegedly bearing gifts are carrying
lumps of coal. Should it be let free to plunge into the terrain below or
should it be derailed?

This freight train that we are metaphorically standing in front of is The
Stimulus Bill. Its debt impact will sweep away $780 billion dollars of
energy from the economy and deliver a tenth of that to replace it.

Those who have loaded this cargo lack the understanding and comprehension of
the economic mechanics that have created this current debacle because they
rely upon alleged historical comparisons that are in fact contrasts. They do
not observe the empirical data that is before them.

In the great depression, not only did most people not have much in the way
of assets, they had little or no consumer debt. Those that had mortgages
bought all their other goods and services for cash. We did not have an
economy like today that was built on advanced credit.

At the zenith of the recent boom, there was neither a shortage of jobs nor
an excess of inventory; the economy had risen in a state equilibrium.