Recapitalizing We the People

SANFORD (jbeech) – The fastest way out of our economic ditch is placing the incentives where they’ll do the most good, with We the People.

Lamenting the lack of jobs, the President is neglecting the big picture because lack of jobs are the symptom of our troubles, not the cause.

This isn’t a garden variety business recession. It’s what’s called a balance sheet recession. Consequently, doing what’s worked before, e.g. lowering interest rates, hasn’t worked.

Efforts to mitigate the effects on the banks have been tried too, like changing mark to market rules. However, while it made things look better, it didn’t change the facts.

In short, as housing went into the toilet, the banks found themselves loaded with toxic assets, or loans on collateral not worth the amount loaned. This because folks found themselves owing 100 on something worth 65. Since this wasn’t the deal anyone counted on, unsurprisinly, they quit paying.

Predictably, banks (not being in the business of owning homes), cried foul. So the government rejiggered the rules for mark to market (an accounting fix). They also opened the discount window (the idea being to help the banks heal their balance sheets). This didn’t change the basic facts either. The banks had made bad loans.

Worse, the Fed continues to turn a blind eye to banks borrowing at 0.25% while buying 30-year Treasuries at 3.25% (in effect making 3% for doing nothing). This creates a new problem because it’s easy money. Easier than working for it and thus, the banks aren’t lending.

The consequences of this are the housing problem is getting worse. It’s because home prices have to drop so folks can qualify for loans because the banks are tightening lending standards. Thus, we have a chicken or egg situtation.

Meanwhile, the pundits parrot the bank’s line in blaming consumers for taking on too much debt while neglecting the obvious fact. The banks played a role in lending it to anyone with a pulse because the government encouraged it. But they weren’t innocent because they got greedy.

Yes, greedy because banks were complicit in a fraud. The game was rigged between them, realtors, and the appraisors. Thus, prices skyrocketed and consumers never stood a chance. Small wonder they’ve been blindsided.

Ultimately, a fix involves an issue of fairness. We’re working to help the banks and neglecting the people. Sure, there’s plenty of blame to spread around but instead of engaging in finger pointing, it’s time for thinking outside the box.

How’s this for a novel idea? Since recapitalizing the banks hasn’t got people spending, what about recapitalizing We the People and healing their balance sheets instead?

Consider how Americans are struggling with home mortgages, which feature rates of 6%, and higher. Meanwhile, Japanese consumers finance homes at less than 2%. Why such a big difference? Especially when the Federal Reserve is presently loaning banks money at 0.25% via the discount window?

Simply put, what happens if we cut everyone the same deal as the banks get? Yup, everyone’s monthly payment goes down in half. And before long folks will be doing what they always do when there’s money burning a hole in their pockets. They’ll go out and spend it.

They’ll spend like crazy and this, quicker than any other half-measure, will jumpstart the economy because the reason we don’t have jobs is another chicken and egg situation. Basically, employers won’t hire because there’s no demand, and people won’t buy because they’re afraid for their jobs.

Remember, the heart of the problem was consumers weren’t savvy enough to realized the game was rigged. E.g. there was more than coincidence at play when the appraisal conveniently came in at the sale price – no matter what the price.

Meanwhile, absent write downs, nothing fixes this problem. However, at least by making consumers the same deal the Fed gives banks it lets them afford the pain easier. It helps their balance sheet. This gets them spending again. After all, between Freddie Mac, Fannie Mae, VA, and FHA we already backstop nearly all of the mortgages in Amercia anyway, so what’s the downside?

Also, while we’re at it, let’s do it with minimal monkey motion. E.g. more worthless paperwork like appraisal, verification of income, etc. because we’re already in the homes. The upside is we’ll be spending before Christmas 2011 (and certainly in time for elections next year). The alternative (more of the same) means we won’t be hiring back the folks laid off from 2007, 2008, 2009, 2010, and 2011.

Also in the alternative, we probably won’t be hiring for maybe another 5 to 7 years because the deleveraging process of a balance sheet recession will still be going on by the end of the decade. In fact, I suspect the argument, which beats the Democrats in 2012, “Are you better off now than 4 years ago?” will likely sweep a Democrat back into office in 2016 because Republicans will continue with more of the same.

We all know the Gordian Knot is housing. The solution of relieving the banks of their toxic assets has put the incentive in the wrong place. Instead it should be on relieving the people of their toxic asset, or the pain of it. Thus, let’s place incentives where they’ll really work.

In a way, the President is right, the issue is jobs. I know because I am an employer and I won’t hire until folks are clamoring for my product, which at present, they’re not. It’s because they are broke.

It’s time to help heal the consumer’s balance sheet. Lower refi rates significantly for everyone. It’s time for an all-in solution because we’re out of time for half-measures. Placing our bets with We the People (instead of doubling down on the banks) is smart because we’re still the little engine that could. We just need to lighten the load.