I've been good at criticizing what is wrong with the economy, let me take a moment and say what I would have done differently to try to prevent us from getting to where we are right now. The answer starts in the approach - I would have attacked the problem from the bottom up, not the top down. There are a number of steps that could have been taken back when all this started to isolate the economic harm and create a gradual downturn instead of what did happen, which resulted in the economy falling off a cliff. This would not have been without pain, but a lot of the pain would have been absorbed by the lender, borrowers, and investors who took agreed to the risk of pain in the hope of financial reward. However, I think the result would have been fewer foreclosures and less people out of work.
Ironically, both the Bush Administration and the Obama Administration have talked about trying to reduce foreclosures, but neither has any significant accomplishments. That's because they tried a "trickle down" approach to solving this problem. They have been pouring money in at the top - giving money to AIG, Goldman Sachs, Citibank, and others, hoping it would trickle down to the little guy at the bottom. My approach would have been just the opposite.
But to understand my approach it is important to remember how this situation progressed. The mortgage crisis was triggered by the Federal Reserve raising interest rates in 2007, which caused adjustable rate mortgages to reset to a higher interest rate in late 2007 and early 2008. This meant that huge numbers of homeowners in primarily four states - Florida, Arizona, California, and Nevada - now were faced with monthly mortgage payments that they could not afford. Slowly but surely, the number of foreclosures started becoming a severe financial problem for many lenders, investors, and insurers - like AIG. These financial problems then started effecting the rest of the economy as our C0untry was as dependent upon credit as a drug addict is on their next fix and the troubled finanical institutions stopped making loans of any kind. It culminated in a stock market crash of last fall, which resulted in people and companies losing a staggering amount of savings.
Now to what I would have done. First, I would not have sat on my hands the way the Bush Administration and the Federal Reserve did, waiting way too long to react to the economic disaster everyone else clearly saw happening. They took tiny measures along the way instead of doing something significant at the beginning to, as Barney Fife used to say "nip it, nip it, nip it in the bud."
Before the end of 2007 (I think my timing is right on that), economists on the Kudlow show on CNBC were calling for the Fed to reset interest rates to a lower level -- that should have been done. Had it been done, mortgages would have reset to a lower level in 2008 and 2009 and helped homeowners. Second, these same folks called for eliminating the "Mark to Market" standard to ease the crunch on financial institution reserves. Those actions should have been taken right then when the folks on the Kudlow show suggested and not much, much later when they had little effect.
Next I would have created a mechanism that would have allowed many people to save their homes. The Government should have adopted a law allowing Bankruptcy judges to rewrite mortgages. This would apply when dealing with a bankruptcy involving a person who was unable to make their mortgage payments because of an increase in an adjustable rate mortgage. The law should have allowed the Judge to reset the mortgage rate to the interest rate that the homeowner was able to pay and convert it to a fixed rate mortgage. Now this would only be done if the Court determined that the individual could afford the mortgage - and the reality at that time was that many people could afford their original mortgages, they just could not afford the increased mortgages.
This would also only apply to a "real" homeowner - not an investor or a speculator, and not to someone's second or vacation home.
At the same time, I would want the process to be a liquidation bankruptcy not a restructuring of debt bankruptcy. Make the homeowner go through the process of liquidating all non-essential assets to pay off as much of their debts as possible. Wipe out unsecured debts - including unpaid credit card debts and any second mortgage values that exceeded the value of the home at the time of the bankruptcy.
This process would mean that for a person to save their home they would have to suffer a lot of pain -- lose many of their discretionary household purchases like expensive TVs and have a bankruptcy on their credit rating for 7 years. Lenders would obviously suffer too - credit card companies and mortgage companies would take a spanking - losing a lot of anticipated profits. But these creditors would have gotten some money out of the liquidation process. Also, mortgage lenders and investors would not have written off 100% of the mortgages that ended up being foreclosed and they would still be getting monthly mortgage payments from the homeowners.
An approach like this could have attacked the problem immediately and where it was occurring at its worst - in the four states mentioned earlier. Would it have prevented all of the economic problems from occurring - probably not. Our nation was overextended on credit, so my approach would have softened the blow but clearly the lenders and the borrowers in the country would have seen what was going on. Available credit and purchasing on credit would have changed, which would have diminished the economy. But I think the impact would have been much less dramatic.
As importantly, my plan would have allowed homeowners - many of whom were families - to stay in their homes. It also would mean that lenders (and investors who bought up mortgages as investments without looking at the risk) would suffer. Neither the Bush Administration or the Obama Administration has been effective at either of those things - very few homeowners are keeping their homes under the government progams and some big lenders (e.g. Citibank) and investment firms (Goldman Sachs) are doing very nicely today.
Could this have been done easily? Some parts but not all. First, the Fed changing interest rates can be done by the Fed. Eliminating the "mark to market" rules on financial institutions could have been done by the Regulators adopting a new rule. However, giving bankruptcy court judges the power to change mortgages would have required the Democratic Congress to work with the Bush Administration and overcome the whining of banks and lenders lobbying against the measure. That might not have happened.
Finally, perhaps you noticed that I did not mention any government spending programs. I would have used the mechanisms that exist today for resolving what happens when someone takes risk and loses (e.g. Bankruptcy Courts) to handle the problem. To be fair to all concerned, I think the Federal Government would have had to appoint a number of new judges and create more court locations in those four states to process the increased volume of bankruptcies on a timely basis. So that would have represented increased spending.
Also, with 2008 being an election year, some economic stimulus would very likely have been passed as well. But I would not have spent the trillions of dollars that both the Bush and the Obama Administration have spent in the last two years. Trillions of dollars that have made the rich richer while doing very little to keep average Americans in their homes.
Ironically, both the Bush Administration and the Obama Administration have talked about trying to reduce foreclosures, but neither has any significant accomplishments. That's because they tried a "trickle down" approach to solving this problem. They have been pouring money in at the top - giving money to AIG, Goldman Sachs, Citibank, and others, hoping it would trickle down to the little guy at the bottom. My approach would have been just the opposite.
But to understand my approach it is important to remember how this situation progressed. The mortgage crisis was triggered by the Federal Reserve raising interest rates in 2007, which caused adjustable rate mortgages to reset to a higher interest rate in late 2007 and early 2008. This meant that huge numbers of homeowners in primarily four states - Florida, Arizona, California, and Nevada - now were faced with monthly mortgage payments that they could not afford. Slowly but surely, the number of foreclosures started becoming a severe financial problem for many lenders, investors, and insurers - like AIG. These financial problems then started effecting the rest of the economy as our C0untry was as dependent upon credit as a drug addict is on their next fix and the troubled finanical institutions stopped making loans of any kind. It culminated in a stock market crash of last fall, which resulted in people and companies losing a staggering amount of savings.
Now to what I would have done. First, I would not have sat on my hands the way the Bush Administration and the Federal Reserve did, waiting way too long to react to the economic disaster everyone else clearly saw happening. They took tiny measures along the way instead of doing something significant at the beginning to, as Barney Fife used to say "nip it, nip it, nip it in the bud."
Before the end of 2007 (I think my timing is right on that), economists on the Kudlow show on CNBC were calling for the Fed to reset interest rates to a lower level -- that should have been done. Had it been done, mortgages would have reset to a lower level in 2008 and 2009 and helped homeowners. Second, these same folks called for eliminating the "Mark to Market" standard to ease the crunch on financial institution reserves. Those actions should have been taken right then when the folks on the Kudlow show suggested and not much, much later when they had little effect.
Next I would have created a mechanism that would have allowed many people to save their homes. The Government should have adopted a law allowing Bankruptcy judges to rewrite mortgages. This would apply when dealing with a bankruptcy involving a person who was unable to make their mortgage payments because of an increase in an adjustable rate mortgage. The law should have allowed the Judge to reset the mortgage rate to the interest rate that the homeowner was able to pay and convert it to a fixed rate mortgage. Now this would only be done if the Court determined that the individual could afford the mortgage - and the reality at that time was that many people could afford their original mortgages, they just could not afford the increased mortgages.
This would also only apply to a "real" homeowner - not an investor or a speculator, and not to someone's second or vacation home.
At the same time, I would want the process to be a liquidation bankruptcy not a restructuring of debt bankruptcy. Make the homeowner go through the process of liquidating all non-essential assets to pay off as much of their debts as possible. Wipe out unsecured debts - including unpaid credit card debts and any second mortgage values that exceeded the value of the home at the time of the bankruptcy.
This process would mean that for a person to save their home they would have to suffer a lot of pain -- lose many of their discretionary household purchases like expensive TVs and have a bankruptcy on their credit rating for 7 years. Lenders would obviously suffer too - credit card companies and mortgage companies would take a spanking - losing a lot of anticipated profits. But these creditors would have gotten some money out of the liquidation process. Also, mortgage lenders and investors would not have written off 100% of the mortgages that ended up being foreclosed and they would still be getting monthly mortgage payments from the homeowners.
An approach like this could have attacked the problem immediately and where it was occurring at its worst - in the four states mentioned earlier. Would it have prevented all of the economic problems from occurring - probably not. Our nation was overextended on credit, so my approach would have softened the blow but clearly the lenders and the borrowers in the country would have seen what was going on. Available credit and purchasing on credit would have changed, which would have diminished the economy. But I think the impact would have been much less dramatic.
As importantly, my plan would have allowed homeowners - many of whom were families - to stay in their homes. It also would mean that lenders (and investors who bought up mortgages as investments without looking at the risk) would suffer. Neither the Bush Administration or the Obama Administration has been effective at either of those things - very few homeowners are keeping their homes under the government progams and some big lenders (e.g. Citibank) and investment firms (Goldman Sachs) are doing very nicely today.
Could this have been done easily? Some parts but not all. First, the Fed changing interest rates can be done by the Fed. Eliminating the "mark to market" rules on financial institutions could have been done by the Regulators adopting a new rule. However, giving bankruptcy court judges the power to change mortgages would have required the Democratic Congress to work with the Bush Administration and overcome the whining of banks and lenders lobbying against the measure. That might not have happened.
Finally, perhaps you noticed that I did not mention any government spending programs. I would have used the mechanisms that exist today for resolving what happens when someone takes risk and loses (e.g. Bankruptcy Courts) to handle the problem. To be fair to all concerned, I think the Federal Government would have had to appoint a number of new judges and create more court locations in those four states to process the increased volume of bankruptcies on a timely basis. So that would have represented increased spending.
Also, with 2008 being an election year, some economic stimulus would very likely have been passed as well. But I would not have spent the trillions of dollars that both the Bush and the Obama Administration have spent in the last two years. Trillions of dollars that have made the rich richer while doing very little to keep average Americans in their homes.
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