President Obama, yesterday, talked about a home owners backing in his plan to stave off foreclosures .
This is a CERTAIN step in the right direction, in regards to putting faith back into the economy of the US. The measure will have in it: "The three key elements of the proposal include a program that would allow 4 million to 5 million homeowners with little equity in their homes to refinance into cheaper mortgages; a $75 billion program to keep 3 million to 4 million homeowners out of foreclosure; and a doubling of the government's commitment to Fannie Mae and Freddie Mac to $400 billion" (Washington Post, 2008)
I said on a blog entry nugget two weeks ago that the American government has to beef up people's homes, one way or another. This plan, while far short of comprehensive and certainly, more important details will be revealed when he unveils all of its splendor, is a good start.
Jamie Dimon of Morgan Stanley, seems to think so as well. In fact, he is elated.
The best way and the most obvious way- even though it costs allot- is to help stave off foreclosures and, not just that, increase the equity in homes at a time when equity in homes and neighborhoods are going south.
The great true first step. You can forget the merits of TARP for a second and, certainly forget about the stimulus plan. This is the saving grace, if he can pull this off.
The next big step is to reverse the credit accounts in arrears and in deep red as well as help companies, sort out their consumer credit facilities. This is a harder sell, but must be done.
This can only be done with cooperation from the financial companies. They have to have some way to profit off of it, and, trust me, they would find a way regardless--but, to avoid another scandal to cripple the industry when Wall St. finds a way to get around the system, the government, should work with them to make the profit making of such a risky venture, legal; and taxable, to a marginal extent.
Subscribe to:
Post Comments (Atom)
5 comments:
Hello Youri,
Reading your last post it seems that you take a pro-stimulus position. What I'd like to understand is how this works in the medium to long term in any kind of sustainable way?
The government will have to raise the money for these stimulus plans in one of two ways, tax or borrowing.
1 dollar taken from the private sector in tax or borrowing is 1 dollar that now cannot be spent by the private sector. Thus, 1 job created by the public sector, is 1 job removed from the private sector.
So the question is, who is better at distributing resources to where they are most needed in the economy, the free-market or the government? Thanks to the failure of successive communist command economies we have the answer already.
Now, the quantitative easing folks will say, ha, not a problem. The government will issue treasuries which the FED will buy with new money created from it's magical printing press. BUT as we are now seeing printing more dollars doesn't create wealth, just more dollars, so that won't help either. If it did work then the FED could just print up enough to pay off everyone's debts and we'd all be happy?
Regards,
Tim
Hi Tim,
Thank you for stopping by.
As for my position on the stimulus, you can read my first analysis on the stimulus plan here on this blog: http://globalviewtoday.blogspot.com/2009/01/stimulus-plan-really.html
I am hardly a proponent of the stimulus plan. In fact, if I were a US congressman, Democrat (never happen) or Republican, I would have voted against it.
It is filled with pork "bacon bits" and, it does not do enough to stimulate the industries we have now; manufacturing, in regards to lowering taxes on their import needed materials and; automobile, which will get another bail-out type plan, which will, most likely, make the issues in Detroit, worse.
Also, it is filled with inconsistencies. Then, when you point that out, people say "oh, nothing is perfect" and "oh, you just don't get the change the Obama admin is trying to administer"...hogwash!
For example, transportation is getting a dollop of stimulus, as is, while a good 50% of the stimulus focuses around renewable and new energy creation. This is inconsistent and if you read my first article on this issue, you will see why.
QE (Quantitative Easing) worked for it's time, but had a minimal effect. Some people say we are in a liquidity trap (Krugman). But, it had to be used, to do something about the drastic situation, which could have turned full blown category 10 disaster if something was not done.
We need to bolster homes. This has to be done. Homes in regards to the housing market and the credit to consumers (credit cards, store to consumer credit facilities and company based worker/consumer credit expansion).
Best,
Youri
Hi Oct3,
Thank you for popping in.
The deficit is not as important now; I get that now. the potential for US creation, even within the next 2 years, with or even without stimulus, just as is, is enough for us to have confidence that the US will never default-among other reasons, as well.
And, you are right--countries do go through this from time to time. Some countries, like the Latin American countries, go through this ever 10 years or so--maybe even less.
The "Revolution", is always a year away in LATAM countries. LOL....but, that's what it is; reform now, by government intervention or have blood on the streets.
Take your pick!
Thank's for the link.
Youri
Hi Youri,
I didn't intend to misrepresent your position on the stimulus plan & thanks for the link.
What I'd like explained is how, in economic theory, a stimulus plan can actually provide a net gain to the economy in terms of wealth creation?
A government can only spend what it borrows or takes in tax, and borrowing and taxation represent a transfer of wealth from one part of the economy to another, not a net gain. In concrete terms, money that private investors give to the government is money that they don't use to create businesses and jobs themselves, or lend to other private individuals to create businesses and jobs.
If we only focus on the money that the government spends then we don't see what doesn't get spent by the people and institutions that gave the government the money to spend.
If a government can only transfer resources from one part of the economy to another, where is the gain and how will a stimulus plan, any stimulus plan make any sustainable difference?
Regards,
Tim
Hi Tim,
Tim wrote: "What I'd like explained is how, in economic theory, a stimulus plan can actually provide a net gain to the economy in terms of wealth creation?"
I think any country operating in an open border economy, like many of the countries working under the Anglo-Saxon market economy, should go through bust's from an irrationally exuberant bubble and then they would have to stimulate like a Keynesian should.
One reason being, when the private market exhausts itself and, more importantly and in this case; the private market puts itself in a position where they have gotten to a sophisticated means of bending the rules, the market actors, lose confidence in one another.
The market is stuck as it is now, because investors don't trust one another--for any various reasons. The chief reason for me is that they don't know which company is exposed to risk and how to assess that risk, because, the risk models are grossly misleading.
At this time, until regulation for open and transparent trading comes into being, the government is the only entity that can keep things going. They have to keep things going.
The market can't sort itself out this time. Or, if they try to, they will take a God awful long while--with allot of pain and unemployment in the middle of it--before it corrects itself.
Time wrote: "If a government can only transfer resources from one part of the economy to another, where is the gain and how will a stimulus plan, any stimulus plan make any sustainable difference?"
Well, "finance" is all about reallocating money. In many cases, companies (and you really have to think about the government as a company), reallocate money from one strong revenue stream to fund other components of their organization; R&D or some other service along the value or supply chain.
Then, also, you have to take into consideration the economics of increasing returns. Allot of times, a strong revenue creating machine, out-performs it innovation or ability to innovate. However, revenue proceeds are still strong.
To put it all in short form, there is no need to invest and re-invest, in a component of a company or economy, if it is self sustaining--as many landed wealthy individuals are or; the behemoth financial corporations, who will NOT be innovating anything any time soon.
While they [financials] lost money, many of them are still in good financial shape and can sustain their way of life.
So, for me, I am all about saving the economy through sustained productivity, rather than to not do it.
JMO!
Youri
Post a Comment