There was a big misconception that if you give banks billions of dollars, that they'd trickle it down through the economy. Trickle down Economics works in a growing economy but doesn't work in an economy where private industry is sinking. Bailouts should only be offered when we've reached a bottom. Consider the consequences if the government gave money to someone who was living well beyond their means. Need I say more?
Bailouts from the TOP down are not going to work in this spiraling economy. There must be a reward on both ends of the Mortgage industry for a successful turnaround to occur. That is why I'm proposing the following plan.
The first proposal in my plan addresses the borrowers. The government must come up with a plan that is good for borrowers, good for lenders and promotes home ownership even during hard times in which a home is upside down. Recently, borrowers have begun questioning how much good credit is really worth. With home prices in some regions in the United States 40 to 50% below market highs, borrowers are comparing their 700 plus credit score to their $200,000.00 net equity implosion on their home loan. I've spoken to several borrowers who care less about their credit in these conditions.
The second proposal in my plan addresses the economic equity crisis in our banking institutions. More and more banks are nolonger capable of lending money even to good borrowers simply because they don't have money to lend. Most Americans with good credit and good income can attest that they've recently been denied credit by their banks. Often times they are for reasons that are unclear and unexplainable. American Express, Bank of America, CITI Corp, and many other banks are begining to lower credit lines, close lines of credit, and deny applications to credit to both good and bad borrowers.
The answer doesn't lie in providing these banks a blank check. The policies of Corporate America are NOT to give away money in poor economic conditions. Their first objective is to appease investors. It's in their best interest to use the money that is given to them by the Feds to instead buy more banks that have fresh deposits. Rather than become more vulnerable through lending, there objective is to get as much cash in to their balance sheets as possible.
ALL THREE PROPOSALS ARE NECESSARY FOR IT TO WORK:
FIRST PROPOSAL:
Provide an incentive to borrowers to pay their mortgage. Right now, borrowers are being given an incentive to NOT pay their mortgage. This is resulting in bad borrowers walking away from their good credit and homes. Providing incentive is simple. Mortgage companies need to adopt a Principle payment BONUS incentive program similar to a matching corporate 401K plan. It would begin by banks offering to match up to 20% of the additional principle payment. For example, if a borrower pays $1000.00 in additional principal above and beyond their normal monthly mortgage payment, it would look like this. Normal monthly payment $2500.00 + $1,000.00 additional principal. Once the borrower pays that additional principal payment of $1,000.00 on a mortgage with a balance of $480,000.00, the lender then deducts the $1,000.00 off the balance of the loan and additionally matches it by deducting another 20% of the principal payment, which would be $200.00. So, any additional principle would be matched by 20%. So the end result of this transaction would look like this. $480,000.00 minus $1000.00 = $479,000.00 minus the 20% of the additional principal payment ($200.00). The total amount due on the loan would then be $478,800.00. Every month that the borroer pays additional principal on their loan, the bank lowers the balance of the loan by 20% of the principal payment.
SECOND PROPOSAL:
As a result of Proposal #1, banks would NOT need an injection of equity into their balance sheets from the Federal government. They'd in a since be giving themselves an injection and they'd be saving a snowballing mortgage crisis from developing any further. This would encourage borrowers to continue paying on their existing mortgages and would discourage defaulting. Over the long haul, borrowers would be getting 20% off of their existing mortgages and lenders would receive a quick and LARGE injection of dollars from borrowers. But in return for providing this incentive to borrowers, the government would provide a substantial TAX cut to lenders. Providing these TAX cuts would encourage lenders to participate in the program. The lenders would be receiving an injection from their borrowers through additional equity payments, and the lenders would be rewarded with a Corporate TAX cut.
THIRD & LAST PROPOSAL:
Make this program good for 5 years to all borrowers. Allow borrowers who are behind on their mortgages to Reorganize in Chapter 11 Bankruptcy. Only allow participating banks to receive TAX cuts. Put a freeze on all adjustable interest rates.
To prevent further distruction of our Economy, I believe that the government needs to impliment this program IMMEDIATELY. Otherwise, borrowers are going to bring this economy to a hault by defaulting on everything from home loans, credit cards, and autos.
For several months, I've been brain storming on ideas that would change our energy crisis. Oil prices continue to rise without good reason. Although there are days where reservers appear to be lower and then there's announcements that there's more reserves than normal because of a 2% drop in Americans driving behavior. In either situation, you see the prices rise modestly. It's a trend that is being driven by speculation.
Although Obama has spelled out some amazing proposals to fight off oil futures speculation, there's an even simpler solution. Just raise the Capital Gains tax on oil futures trading. It would set the tempo for those risk takers who'd likely invest less if the incentive was less than par. For example, when Capital Gains taxes are raised on home ownership, investors are less likely to risk money on something where the return is taxed away. This had an effect on the bubble that we've experienced over the past 5 years.
I propose that they raise the Capital Gains tax on OIL futures trading. As a result, speculators will head towards the exit doors and the price of oil will drop to levels that are consistent with supply and demand. Assuming that other factors proposed by Obama are also met, we could be seeing oil at the historic $60.00 per barrel.
Let's compare Gold prices. Although there is an abundance of GOLD throughout the world, the GOLD commodities price is extremely high. But prices for jewelry are still reasonably low. This should be the same for GAS. The retail market price for oil is significantly higher than what the real market would bear if not for speculators. The cost to make GAS has not changed....and neither has the wholesale cost of OIL. This would explain why Exxon is making record breaking profits quarter after quarter. Let's NOT tax the oil companies...but lets nip this in the butt by increasing capital gains on oil futures.
Ken
