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  • Tankosphere Today: Dec. 10, 2008

    More measured commentary from The Huffington Post, in this case the long-time labor activist and writer, Jonathan Tasini…

    The United States Conference of Mayors sent this porky wish list to the Hill yesterday. They’re calling it “America’s Mayors Report to the Nation on Projects to Strengthen Metro Economies and Create Jobs Now.” I’m calling it a joke…

    The National Association of Home Builders (NAHB) announced this week that they are cutting their budget by $11.5 million, primarily by firing 28 employees and eliminating 24 vacant positions…

    The latest international test results were released this morning, and the U.S. is getting favorable early coverage for scoring anywhere between the top 3rd and the top 6th of the pack, depending on the subject and the grade…

    Posted in Ongoing Priorities [slideshow_deploy]

    One Response to Tankosphere Today: Dec. 10, 2008

    1. Peter Asher says:

      A Stimulus That Keeps On Stimulating

      Before viewing a solution one most first have a correct picture of the problem.

      This recession was not caused by a credit crunch and it was not caused by the subprime crises. These were effects! The cause was that the economy was built on a debt bubble of loans where no loans had gone before! The capability to produce goods and services expanded to the money supply allotted to it. Debt service now claims a substantial portion of that overall purchasing power. The portion remaining to drive the economy is therefore now LESS than it would be even on a no-credit, spend-it-as-you-earn-it basis.

      What has expanded to fulfill the demand of earnings plus advanced payment, must contract to the demand of earnings minus debt service. What for decades was “Buy now, pay later” has now evolved to — Pay now, buy later!

      Statistics on sales, from lattes to car purchases, indicate that, as with the stimulus package, people are curtailing spending and are saving or paying debt with earnings. Yet one person’s earnings are created by another person’s spending. When there is no spending, there are no earnings! Now, as the numbers of unemployed swell, more unemployment is triggered as those former wage earners no longer contribute to other peoples earnings. This is feeding on itself and is potentially a downward spiral into a full blown depression.

      The bailout devotees claim that frozen credit markets are holding this recession in place. Infusing hundreds of billions of dollars into the banking system was going to result in making available new credit (which has not occurred) but it is the extent of credit already granted that has brought about the situation in the first place. More credit, which can only be issued to the degree that there are those who can still qualify for it, can provide a temporary stimulus, but after that there is that much more debt load to be serviced.

      The proportion of credited purchasing power relevant to the total economy is far greater than any other time in history, a direct result of qualification standards being lowered more than any other time in history.

      The housing bubble was really a replay of the 10% margin phenomena that created the 1929 stock market bubble. Highly leveraged purchases of equity highly overvalued by, let’s call it, mob psychology! People do not so much forget history, they have not learned it. I doubt there was a single money losing home flipper who knew of the Dutch tulip bulb mania which escalated to where someone sold their town house to purchase one allegedly exotic specimen!

      All of the bailout proposals, including the tax holiday, create new debt. There is no quantitative difference between giving consumers more indebted credit directly or having them be indebted by the taxes that will come due for stimuli. The only difference between a tax holiday and government issued checks is the method and apportionment of distribution.

      The one stimulus that creates new purchasing power without creating new debt is refinancing existing debt at lower interest! Paulson has proposed this as a possible 4.5% interest mortgage rate but that has been acknowledged as only available to those individuals qualified for the current strict lending standards in place.

      Someone rolling over a $300K mortgage from 6.5% to 4.5% would be “stimulated” by a reduction in debt load of $500 per month/$6000 per year for decades. That is a much more powerful stimulus than a single Government check for $1200 or even a two month tax holiday that saves an average of maybe $4000, one time only. Also, while Government stimuli empirically result in additional taxes, reduced mortgage payments immediately result in reduced interest deductions whereby tax revenues increase even before the flows from a re-expanded economy. Unfortunately, the numbers of people who will be able to obtain these possible refi’s are nowhere near enough to generate the purchasing power necessary to give the required “Jolt” to the collapsed economy.

      Currently America's internal and external debt is about $60 trillion, almost 500% of the country's annual GDP of a bit over $14 trillion. Of that total, family debt (including mortgages)is about$15 trillion, financial firms $17 trillion, non-financial firms, $22 trillion municipal debt, $3.5 trillion, and national debt, $11 trillion.

      Leaving aside the fact that all of that debt must be paid back from the flows of personal and business earnings, the $15 trillion family debt, if owed by say, 60 million households, averages out to $250,000 each.

      If mortgages are running 6% to 11% and credit cards up past 30% we could, for purpose of discussion, estimate the median interest rate to be 7.5%, which comes out to $1562.50 per month for that average family. That’s $1,125 trillion of interest per year which is 8% of the GDP. If that interest could be cut in half it would stimulate the economy by a growth factor of 4%!

      Now rollover loans at 3.75% might seem extraordinarily low but if the Fed rate were held, long term, at ½% or zero, that lower interest rate could be brought about.

      If the lending institutions actually making the loans could be paying say 0.75% for their funds routed to them from the Fed, they would have a 3% spread for profit and overhead. If they weren’t willing to do that, perhaps some “Jawboning” or direct stipulation from their TARP benefactors would do it.

      Failing that, (Thinking way outside the box here) The Government could bypass the banks and create a direct from the Fed lending entity to give one time rollover loans to all who were fully current on their debt as of the first of the year. The loans could refinance both mortgage (Home owner only!) and credit card debt and in return the debtor would agree to a credit bureau reported stipulation that they were unqualified for further credit until some time, well off in the future, when they had flawlessly reduced their loan balance. Those that lost their jobs or had major business setbacks could be given a year’s grace period 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 while simultaneously the economy was recovering sufficiently to provide the opportunities needed.

      This Fed-direct plan would initially require new funding into the system, but every loan paid off would route those funds to the banks or credit card and housing bond holding entities. The banks, having their customer base reduced by the competing loan rollovers, would have excess capital inventory. Money “printed” for the fractionalization expansion could be required to be funded back to the Fed. The bond holders would have their bad and risky loans paid off, be recapitalized, have new funds to lend and their “mark to market rate” would recover. There would no longer be a need for bailout funds; it would have been done in reverse order!

      Naturally there would be many loans that were not fully collateralized, but collateral value will immediately rise upon the implementation of the program as foreclosures would not be glutting the market and qualified buyers would be re-establishing the home construction sector.

      Certainly, the banks and credit card companies would strongly object to a plan that would severely contract their business However, if one can grasp the magnitude of the threat of debt, default, deflation and depression one can see that survival at a smaller size is preferable to being larger and defunct!

      All of the above, aided by a re-visitation of usury laws, could lead to an economy, and a society, less dependent on spending not yet earned money for the needs of the present moment.

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