Getting Serious About Solving the Economic Mess – March 2009

The stock market continues to tank. Banks are teetering on the brink. General Motors’ auditors say that it likely will end up in bankruptcy. Meanwhile the new Congress and President are settling in for their very familiar dance. As I’m getting tired of hearing the same ol’ same ol’, I think it’s time that we just deal with what needs dealing with.

Here’s the thing: the government does have the responsibility of stabilizing the situation so that healthy patterns of commerce can resume. This will take some money. However, being someone who is Fiscally Frugal (i.e. someone who wants to spend as little as necessary will still getting the best value for what it spent) I don’t want to see hundreds of billions of dollars just tossed about willy-nilly in the hope that maybe something might happen…no doubt due to shear dumb luck. I mean…a hundred billion here, a hundred billion there…pretty soon you’re talking about real money.

The Loans

There is but one focal point in this entire fiasco: money lending. Money lenders played fast and loose with their responsibilities. Loan recipients overestimated their ability to pay and under-thought the contracts they were signing. I blame both sides. So, now banks have defaulting loans and people are losing their homes. Worse, banks (even solvent ones) aren’t lending money so businesses are closing because they can’t make payroll or pay their suppliers. It’s been one hell of a game of dominoes.

Clearly we have to first look at the caustic mortgages that started all of this. Lenders cooked the books and mis-represented a mortgage’s true impact to consumers. By not backing these loans with actual capital, a collapse was bound to happen (and was buzzed about in the background by some of the more savvy analysts). Many of these corrupted institutions, or at least the culpable divisions within a large institution— regardless of the magnitude of their name—should be allowed to fail. If we are to embrace the concept of free enterprise and capitalism as our Republican members often espouse, then failure must be an option…even among the mighty.

But what of the outstanding mortgages? Audit the outstanding mortgages that are in the crosshairs of foreclosure (recent, or soon to be). If the lendee obviously can’t pay, let them out of the contract. However, given the numbers involved and the number of people that would be displaced, it might be necessary to be creative. Immediately turn the property into rental owned jointly by the bank and the government. The payment for rent will be sufficient to cover the principle part of the loan (or more, if rental rates in the area for an equivalent home are higher) plus a fair tithe to be paid back into the general fund that Congress used to bail out the bank.

Banks do not like having to hold foreclosed property. Tossing people out of these homes would do just that. It would litter the country with empty houses that aren’t being kept up. After a year or two of no occupancy, the houses have to essentially be written off because the cost of repairs begins to approach the value of the property. Frugality then informs us that the best value is obtained if the house is occupied. By having a rental payment (less than the mortgage payment is implied) the banks and the government get necessary capital. The people get a place to live. The only hit is that the residents lose their equity and don’t gain any equity. Such is the way with renting. However, upon foreclosure they lose both their equity and their home. They’ll still need to find a rental somewhere.

This is one of those solution that I think finds the correct balance as both sides takes a hit, but neither side gets destroyed.

What of the loans that aren’t in imminent default? I think it’s then case-by-case. You have to evaluate if the residents can afford the deal. If not, then the above option might be possible. If they are close, then some creative refinancing that doesn’t better their stake in the loan (e.g. extending a 30-year mortgage to 35- up to 40-years) might make all the difference.

For the foreseeable future, it’s important that any new mortgages be fixed rate only. Also, and I’m a strong advocate of this, the interest must be an accurate reporting of the interest percentage over the life of the loan. As I’ve previously exampled in other posts, that 6% 30-year mortgage actually turns out to cost the lendee a little bit more. Of all the money paid, over 52% will be for interest. People understand that. It’s clear and it’s simple. That should be the number that lenders must tell their customers.

With all of that as a framework, we can now turn our attention to the banks themselves. I personally feel that the men and women who thought these loan insurance programs were a good scheme should have to give restitution to the nation for their stupidity. There is no reason why they should get to keep the mansions, cars, aircraft, toys, and all else that glitters that was the result of playing games with the accounting. Mob guys go to jail for that. I’m not sure it does the country much good to lock up these “suits”. Better, I think, is to strip them of their ill-gotten gain. Now, I don’t suggest leaving them totally without. I’m sure there are some lovely three-bedroom foreclosures that could house them as well as the out-of-work receptionist of the company that just downsized. And there’s nothing wrong with buying a pre-owned sedan. People do it all the time.

As for the sharks that actually drew up the papers and developed the schemes that would convince the rubes that their no-money-down no-interest-until-you’re-trapped mortgages were sound deals. They need to be prosecuted to the fullest extent we can. Racketeering, BUNKO, fraud, etc. Whatever sticks.

As for what to do with the toxic loans still on the books even after some institutions are allowed to fold and the owner-to-renter deals are made…now is the time for the government to loan the money to the banks to absorb them over time. For each $5 billion dollars (the amount is flexible), the Treasury Department gets one un-paid voting seat on the board of directors. Forget all of those stock buys and other nonsense. That doesn’t do anything. Just as ships need new helmsmen at the till when in difficult seas, so too do these lenders. The more difficult the seas they churned up for themselves, the more government hands on the rudder.

Credit

The offspring of this banking/mortgage mess has been other lending. When most people hear about the credit problem, they mostly think about consumer credit, i.e. credit cards. While the total sum is considerable, the vast majority of it will be paid off in due course, so I’m not too worried about that at the moment.

More worrisome is the inability of businesses to get lines of credit for them to continue to do business. While I don’t agree with the guidebook for most types of U.S. businesses advocating a credit-based structure, the reality is that that’s the way it is. As much as I’d like it to, it won’t fundamentally change.So, for the time being we’re stuck with credit-based business.

When businesses are unable to get lines of credit from skittish banks, that’s when the economy starts to unravel. Payrolls cannot be met so employees have to be laid off. With fewer employees, the value of my product diminishes, weakening my business. The out of work employees have no money to fuel my business. As a result I have to go to the bank to ask for a line of credit to pay the employees I still have. And the cycle continues.

It seems to me that any infusion stimulus must begin with allowing business to continue with the business of business without having to drop consumers/taxpayers. Since the banks are unwilling, perhaps direct-to-business loans from the government could bridge the gap in the short term. I’m not talking the big conglomerates. They got themselves into this mess just as badly as the banks did. No, I’m talking about the small- and medium-sized businesses that are now starting to line our streets with boarded up storefronts. They are the ones we need…the community stores, services, and manufacturers who are the mitochondria of the cells of our community.

What about the big companies? Well, I’m really not seeing any that aren’t the victims of their own shortsightedness and/or greed. Whether it’s airlines, car companies, or retailers, the ones with management who invested in their companies, anticipated changing markets, and maintained decent-if-not-good relations with their American customers are still getting on OK. Entire industries aren’t collapsing—it just seems like it sometimes. The ones that are failing are precisely the ones that are supposed to fail in a free market system. You win by being smarter, luckier, and even (sometimes) better.

For the economy to quickly recover, offers of credit to sound businesses have to loosen up. Is there risk? Yeah, a little, but it’s much less than what it was.

Pensions

The iceberg that only a few financial analysts talk about are the myriad of under-funded (and sometimes raided) pension funds that don’t even come close to being able to pay their promised benefits. The situation here is likely even worse than is found with Social Security (see…and you thought the government couldn’t do better than business). I’m not going to go on and on about this, but I do want to remind everyone that it’s looming.

Accounting

One of the big factors that allowed the current crisis to happen was a lack of transparency with accounting practices. Current methods have become so convoluted that the information contained became all but invalid (and sometimes deliberately falsified). As has been noted, “There are lies, damn lies, and statistics”. We’ve just seen what happens when you massage accounts as if they were statistics in a fantasy league.

I propose a gross overhaul of accounting practices. Income, expense, credits, debits, investments, dividends, equipment amortization, and maybe one or two other categories should easily and clearly cover what needs to be known. Oh, many will cry that some fancy model needs to be employed so that blah, blah, blah. No. We are aiming for transparency here. Any Joe Schmoe who can keep a household ledger should be able to figure out even the largest corporation’s accounts. The only reason to make it more complicated is to obfuscate the facts.

Oh, and speaking of equipment amortization. These need to be real-world figures, not pie-in-the sky guesswork (unless there is no baseline…then guess until there is a baseline). For example, many companies will amortize a computer over 5-7 years. That’s ridiculous. In many fields, the life of a computer tops out at 2 years. I wouldn’t be totally against the idea that if a company chooses to amortize equipment, then that equipment must be replaced in timely fashion (i.e. no more than 1-2 years depending on the machine) so that the business stays up-to-date and competitive. Otherwise, a penalty must be paid to offset amortization. To amortize is to declare the useful life of the product you are placing under that category; to then make no further progress is to say that your amortization timeframe was totally false (i.e. you lied to the government and your investors).

Healthcare

Investments

I’m not going to do a lengthy rehash what I’ve already said about Healthcare and Investments. I think the right wing is wrong and that Healthcare should be a national one-provider system (i.e. the government). And investments should have a reasonable minimum time (e.g. 6 months) that shares are held before they can be sold. This is supposed to be about investing in a business, not trying to play games with Monopoly money.

Fear

This is the single most important factor that the government can’t help with. When addressing Americans about the Great Depression, President Franklin Roosevelt remarked, “We have nothing to fear, but fear itself.”

Those words are just as true today. Much of what is going on isn’t entirely due to the financial debacle that stems from the lending crisis. No, most of what’s driving the economy downward is simple fear. We individually and clannishly close ranks to protect what we have. Unfortunately, that’s not how societies work. The ability of a society to function is born from its member’s belief that the society does function.

While I don’t mind that the stock markets have dropped (well, maybe a little, my own portfolio isn’t nearly as rosy-cheeked as it was a couple of years ago), since they were built with money trying to make money instead of people making true investments, I think that we’ve passed the point of correction and are now in the territory of fear. Thankfully, it’s not quite hysteria, but that can change with the wrong bit of bad news at an inopportune time. How do we turn it around? If you want to invest, invest. Back a company that you believe in.

It’s Our Country

As for me, I’m still spending the money that has to be spent. Houses need to be maintained. That costs money. But, it also funds local business. That, in turn, pays my fellow citizens who can then spend those fund in a like manner as I did. No, I’m not going to turn the economy around by myself (would that I had that kind of money), but if 300 million of us just decided that We The People would put the economy back on its feet, then everything would be fine.

Of course we need to make sure that personal greed doesn’t again become the norm for giggly CEOs and ethically-challenged boards, but that’s doable. Mostly, we just need to believe and move forward. It’s always been about moving forward. That’s what we do. We move forward. It doesn’t happen if we just stand still, afraid to move. We have to take a step. And another. And now, we are moving. Just try to stop us if we stride confidently toward the future. It can’t be done unless we allow it.

I know it’s tough. I want to just hoard my pennies until the economic monsters are gone. Thing is, I know that the monsters are of our own making. But they aren’t invincible. If we start the economy moving again, it will move.

All I ask is that we expect more. Not just more from us, but more from our elected officials who totally dropped the ball. We are long passed the time when simple economic dogma should command a voice. Sensible tax cuts are great, but calling for tax cuts for the sake of tax cuts is just being a mindless blowhard. Conversely, the government can’t spend our way out of our current ills. I’m offended that they are that cavalier. That’s just as bad as yelling “tax cut” whenever the words “economic” and “legislation” are uttered in proximity to each other.

In the end, it’s up to us. We really have no choice. If we want jobs then we have to strengthen the businesses that provide those jobs by utilizing what those businesses have to offer. Business has to hire and not overwork (that’s soooo last millennium). And credit has to flow. It’s just that simple. And housing…well, that one is something that Congress and the President have to deal with.