The MGH Report

Michael G. Haran, Proprietor

IT’S STILL ABOUT HOUSING

Posted by on Mar 9, 2009

IT’S STILL ABOUT HOUSING

For the life of me I don’t know why everyone in Washington is surprised about the fact the banks aren’t making more loans. Like banks making loans will turn the economy around. Get this straight – banks don’t lead they follow. A core banker (not the mathematicians known as financial engineers that turned the financial sector into a big Ponzi scheme) makes money off other people’s money.

It was kind of funny watching all of these financial “experts” in Washington give the banks $165 billion dollars and wonder why they have used the money to buy other banks, shore up their balance sheets and not make loans. It was also funny watching Congress bash the bankers and wonder why they weren’t making more loans. But it wasn’t so funny listening to Timothy Geithner, the new Treasury Secretary, saying that he doesn’t have the slightest idea how to fix the problem.

The reason the banks haven’t made more loans is because there is currently very little to lend money on in this economy. We are still in a deflationary cycle and banks won’t lend now because businesses and people need the loans. They won’t lend on real estate because home prices haven’t yet stabilized; they won’t lend to consumers because they could still lose their jobs; they won’t lend on cars because of the instant devaluation. As the old adage goes banks will lend money to you only if you don’t need it.

To shore up the nation’s insolvent financial system numbers as high as $1 trillion are being thrown around. The banks want the money to attract private investors so they can make more loans. No investor is going to invest in an industry that is so stupid they pay out billions of dollars of taxpayer money in management bonuses, buy golden toilet paper fixtures and not expect a public backlash. No one’s going to invest, that is, without a government guarantee.

I got a better idea. Let’s focus on the best ways to put the money into the economy from the ground up (not the top down) to jump start the economy. Cash will be flowing again and the banks can get back in the ball game making money off the productivity of others. The thing to remember it doesn’t start with the banks.

As far as Mr. Geithner goes it’s hard for him to see the forest through the trees. As a Wall Street insider he argued against reining in the financial manager’s excessive pay (I guess someone has to support the upper-end real estate market). But that’s small potatoes considering what’s facing this nation. I know Obama wants transparency in his administration and I’d rather have a few gaffs like this as opposed to the clandestine nature of the last administration. However, I think sometimes a little political “speak” would do better than a remark like “I really don’t know how we are going to do this,” which freaked everyone out.

The problem is Mr. Gaither is still trying to find a way for the financial sector to be a leader in getting us to the bottom of this cycle. Well it isn’t going to happen. You could give the banks all the money the treasury could print and it’s still just going to sit in their vaults. They’ll continue to cry that they can’t value their losses (lets take a bundle of mortgages or credit card debt; apply an algorithm to inflate the value by $50 trillion; let investors buy in at different values; and gee, what went wrong?). They’ll want the taxpayer to give them more money so they can attract private investment so they can be in a position to not make more loans.

No, this is not going to work. What should happen is that the government should give the banks just enough money so they can stay solvent and tread water until the economy bottoms out. The feds could hold the remaining bank bailout money as a reserve for the stimulus package. Money should be available to the Small Business Administration because even in good times, banks won’t make a small business loan unless the government guarantees it. The proposed Consumer and Business Lending Initiative, which is intended to foster consumer and small business lending, would be a good thing. More tax incentives should also go to venture capitalists for it is they, not the banks, which fund innovation.

Other than job creation all the stimulus and bail-out funds should go toward housing. It’s obvious that congress really doesn’t get this since the last thing they eliminated from the stimulus bill was the $15,000 tax credit for buying a home.  This credit was supposed to be temporary and used to help bottom out the housing sector which should be the feds top priority.

The Legacy Asset Partnership Bank (LAPB), which would be a government agency designed to acquire bank’s toxic assets, could be another good thing. If the feds took all of the banks liabilities such as non-performing loans and REO (bank owned real estate which to a bank is a liability and not an asset) at cost, the government could hold them until the economy turns around and then sell into a healthy market at no loss or even a profit. It worked in Sweden and it could work here.

Let’s say the LAPB bought every one of the 8 million foreclosures that are expected this year. Loan modifications will forestall about 20% of these foreclosures but there will still be many people that will lose their homes. The treasury should take every foreclosure and hold the properties until the market justifies a sale for the amount of the defaulted loan.

A U.S. housing cycle usual encompasses about five years. The housing market normally goes along; the population grows; lack of supply causes prices to rise; builders build to meet this demand and overbuild; the market weakens; prices stabilize; and the housing market goes along. This cycle will be longer because of the artificial over supply of homes but it doesn’t matter since the government isn’t going anywhere.

This way, not only will we be quicker to bottom out the major cause of the devaluation that’s paralyzing our economy but we also might also make some money in the bargain. After all, I wouldn’t mind owning a one 300 millionth share of some 8 million homes. Of course the money would go to pay off our budget deficit but wouldn’t that be a nice gift to our children.

The LAPB could also take all of the so called derivatives, pull them apart and sell the parts that are performing and either hold the non-performing loans or write them off if the borrower has gone through bankruptcy. This way I think the government could attract the investors that the banks are courting with our tax dollars. Who wouldn’t want a bottom line partner like the U.S. Government? Once the banks are healthy again and the economy has turned around these investors could once again invest in the private financial sector.

Geithner said that “governments are terrible managers of bad assets – there is no good history of governments doing that well.” Well, I got news for Mr. Geithner all you “brightest and best” better learn pretty quick because it’s the government that’s going to re-regulate the financial system and it’s the government that’s going to manage the jump-start of the economy. And there is a history of the U.S. government doing this well as in the Great Depression, WWII, and the S&L scandal in the late 1980s. And the government has an extensive history of managing foreclosures through the FHA, VA, Fannie Mae and Freddie Mac. Like it or not it’s the government time to pick up the bat and step up to the plate.

This is exactly why we believe in our system of government and this is exactly why we support it with our tax dollars. Once the economy is running properly again and the financial system has been re-regulated, the feds can slowly turn the economy back to the private sector and the banks can once again do what they do best.

Read More

OINK!

Posted by on Feb 26, 2009

OINK!

Most of the time legislative “pork,” the process of lawmaker funneling taxpayer dollars to pet projects back home, is looked upon as not a good thing. But with the country teetering on the biggest meltdown since 1929 it is critical that Congress use all of its political skills to implement the stimulus package. Some times bad is good.

Now that the legislators are through beating their chest as to who’s the biggest stimulus pork cutter in Congress and the bill has passed, you just watch those same politicians fight to get their hands on that money.

In 2007, congress overhauled the ethics rules requiring lawmakers to disclose, for the first time, their earmarks – taxpayer dollars that are doled out as favors. But being the good politicians that they are, and since the scandals had died-down, they managed to exploit loopholes in the rules or just ignored them altogether.

The 2008 defense bill contained $8.5 billion in earmarks of which $3.5 billion were hidden. The amounts, which were cut by about 25%, still accounted for 2,043 earmarks. Give a politician a bill and they’ll earmark it. The 2009 $410 billion omnibus spending bill has approximately 9,000 earmarks totaling about $5 billion.

Independent Senator Joe Lieberman and Democratic Senators Christopher Dodd and Jack Reed all took credit for a new submarine that will be built by General Dynamics in Groton, Connecticut. The military never asked for the $588 million project which was the largest earmark in the defense bill.

This congressional cat and mouse game of “button, button who’s got the button” is as old as politics. It’s kind of crazy since everybody knows what’s going on but it’s really what they were elected for – to bring home the bacon. But at this time the whole nation is now every congressman’s “home” district. Regardless of where they are located the stimulus money has to go first to where home forecloses are the worst and the unemployment rates the highest. Places like Fort Meyer, Fla., Sacramento, Ca. and Elkhorn, Ind.

Now a teapot museum in Sparta, North Carolina isn’t exactly a big job creator but, as an example, the Ketchikan, Alaska “Bridge to Nowhere” could be. The “Bridge” project would create immediate jobs and it would stimulate the private sector. But it would have to be disqualified because there are other areas in the nation where foreclosures and unemployment are more critical and because the project would fail to create long term growth.

This money should go into projects that will create not only primary jobs but also private sector ancillary and tertiary jobs. The more jobs created the more taxes are generated which will go toward repaying this massive debt. Because of the size of our economy (say $13 trillion) at full employment we should be able to grow out of this mess.

Infrastructure is the quickest way to get people to work and revive retail trade. Labor is that sector of our society which will spend their paychecks because they can’t afford to save. There are over 3,000 infrastructure projects permit ready and they only need the money to get started. Congress should focus on those projects that can create three to five secondary jobs for every direct job created by a stimulus project.

The WWII stimulation of the private sector is what finally ended the Great Depression. This time around “Green Technology” should be our WW. The jobs that create not only immediate stimulus but also lead to long term economic growth should take priority. We should get a “and that’s not all” for our buck.

In Ithaca, N.Y., Connect Ithaca is trying to make this college town the first podcar community in the U.S. These driverless, electric, lightweight vehicles ride on their own networks separate from other traffic. A rider enters a destination on a computer pad and a car would take the person nonstop to the location. They reduce the use of fossil fuels, reduce traffic congestion and free up space now used by parking.

How about putting those metal strips in all new roads. These “smart” strips can communicate with the future generation of cars for such things as traffic, weather and alert information. If someone falls asleep on their way home wouldn’t it be wonderful if that person woke up in their garage rather than wrapped around a tree?

And isn’t it about time we built a water pipeline delivery system that will crisis-cross the country? The Great Lakes hold the world’s largest body of fresh water. It looks like climate changes are going to cause wider swings in drought/rain whether cycles so why not build a water infrastructure that could take the flood waters from the Midwest to the water starved areas in the West and Southeast. We could utilize the oil and gas pipeline right-a-ways that are already in place. It could be today’s federal highway system of the 1950’s.

And what ever happened to putting a solar panel on every flat roof commercial building in America?

A $588 million submarine project is not a bad deal as long as it creates a slew of ancillary jobs. Building some thing that the military actually needs would be nice but now we don’t need nice – we need jobs. No nice; no back scratching; nothing hidden just get he job done!

Is it the stimulus package big enough? Who knows – if not, we can always add to it later. Will it work? Who knows – the Great Depression bailout didn’t work until FDR started guaranteeing consumer credit at department stores which, by the way, started the old lay-away plans that caused a boom in the sale of home appliances. But don’t bet against the American businessperson. Give them an opportunity to make money and make it they will.

Our continuing credit stagnation is because we are still in a deflationary cycle. The stimulus is meant to artificially bottom out this cycle by jolting the private sector to life. So the money should be shoved down the economy’s throat as quickly as possible. And who best to do this? Why the only segment of our government experienced in this sort of thing – the U.S. Congress, of course. Oink!

Read More