Thursday, February 19, 2009

Economic fix that should've been done months ago

Job loss is a by-product of the problem not "the problem". Here's an explanation of why, imo, removing the so called "toxic" assets (toxic due to an illiquid mkt) would stimulate the economy:

In a nutshell...
1. It would allow banks to stop accounting for those assets (this is, by default, bank recapitalization).
2. The actual money paid for the assets would be a direct recapitalization.
3. Private equity would invest once the question mark associated with those assets was gone (additional recapitalization).
4. 1-3 would enable the financial co's to provide huge amounts of lending capital to businesses & consumers. This would generate a lot of growth and, as a by-product, JOBS.
5. Those jobs cause increased consumer confidence and spending.
6. Increased spending causes increased demand which causes increased production, more jobs, and housing stabilization. This becomes a self feeding circle of recovery.
7. This recovery causes the "toxic" assets to rapidly become "non-toxic" and the gov't makes money on most of the assets it bought.

I believe we'd be in much better shape today if this had been done 5-6 months ago.

Regarding politicians: The same people demanding passage of a quick (an ok, but not perfect) stimulus plan should be demanding we buy those non-trading "toxic" assets for a "reasonable" price! A reasonable price should be one that is reasonably assumed to be correct with a certainty of 70-80 percent (i.e. paying an ok, but not perfect price). That price would probably be somewhere in the .50 range.

Do you agree? Disagree? Don't care and just hope we'll eventually crawl out from this problem?

P.S. I'm also in favor of 1. Mortgage modifications and 2. A Social Security stimulus that would basically give SS recipients 3yrs worth of check increases "up front" (as in now). They'd get their next check increase after this "advance" was accounted (approximately 3yrs from now). These two things could add “oomph” to the recovery process. The SS stimulus is practically no cost to the gov't because it's basically "an advance".

Economic Fix Part Two

(I oiginally wrote this months ago (before I used this blog) but the info is still pertinent.)

1 comment:

  1. More economic fix thoughts:

    We could have fixed the economy already if:

    The almost $1T already (in direct recapitalization and guarantees to financial co’s) had been spent on buying mortgages directly(at avg of .50 on dollar), lowered interest rates to 4%, wrote down mrtgs where necessary, and sat on those loans for the 5-10 yrs it would have taken to clear up the mkts.

    The govt could have done this with 10yr bonds at an avg rate of 4% so the interest write down would cost them nothing.

    The principal write down would most likely avg out to "a wash" between the mrtgs that turned out to be worth less or more than the .50 they were bought for.

    Net-Net this would have been MUCH less expensive in the long run IMO but too many people refuse to be willing to do what they see as helping "others" when in fact it "helps them" (and everyone else) as well.

    If someone wants to argue this idea by saying "we had to re-capitalize the banks" please realize that buying the mrtgs from banks "would" (in and of itself) be recapitalizing them (twice, in fact). Once with the money used to buy the mrtgs and once by the fact that removing those assets from their books means they don't need as much offsetting capital (re-capitalizing them by default).

    The only reason a majority of people tend to think it would be a mistake for the Govt to buy MBS's is that those "avg Joe's" have no idea how the economics of the situation plays out and they are simply basing their opinions on visceral responses (emboldened by many in the media) to the thought of someone, other than themselves, getting help they "may" or "may-not" deserve.

    To think otherwise about the reasoning of the so called overwhelming majority is to give those "avg Joes" (people who don't follow the markets or economics "at all") far, far too much credit. For Pete's sake, even some of the "masters of the universe" don't understand the economics of the past or current situation (that many of them played a part in)...