Posted by Michael A. Kamperman on April 18, 2011
S&P has made a huge mistake by downgrading the outlook for the U.S. credit rating from stable to negative. We won’t waste space rehashing how they rated liar loans AAA. The fact is S&P has an agenda. They want to force the U.S. to be more aggressive in cutting its near term defict, or risk losing its cherished AAA rating. But the whole S&P charade has already backfirred. In today’s trading the dollar went up and interest rates on Treasuries went down after the S&P downgrade. This is the opposite reaction expected from their warning the chicken littles that the sky is falling. In fact, CNBC Senior Economist Steve Liesman interviewed a representative of S&P about the possible downgrade. He specifically asked if the negative outlook and potential downgrade would amount to S&P stating they believed the chance of a default on its debt by the U.S. has increased. The spokesman said yes, that’s exactly what it means. Steve Liesman proceded to ask how it is possible for the U.S. to default since it was able to print the currency it owes, making the risk of a default all but impossible. The S&P person said that S&P had reviewed history and that in fact it matters what the fiscal and monetary policies of a nation are, even one that is able to control its own currency minus some chataclismic event wiping the U.S. off the face of the earth. It is impossible to understand what S&P reviewed since no country in the position of the U.S. that owes everyone in their own currency that they can print has ever come close to defaulting. Basically, Steve Liesman pointed out on international televion that the U.S. cannot default because it can print dollars. This is the first time I have heard this clearly stated.
What will follow is a complete re-examination of the risk of the debt position of the U.S. If the U.S. can never default, then federal debt cannot be an existential threat to the U.S. If the debt is not a threat, then the deficit must also not represent an existential threat to the U.S. If both the debt and the deficit are not threats, then why is the U.S. voluntarily placing itself into a position of significant economic underperformance when it doesn’t have to? S&P has unknowingly forced the country to face the truth about its true fiscal situation. And the truth will end the mass hysteria to rush into austerity.
The country, and the global community, recently had a mass hysteria that proved to be a false alarm. That would be Y2K. Remember when everyone had to update their computers by New Years day 2000 to avoid the computers from being rendered unoperable? Anyone who said this wasn’t necessary was considered a lunatic. When the date came the sun came up the next day and computers that weren’t changed low and behold still worked. The hysteria about federal government spending and the debt level is just like Y2K, at the end of the day if we do nothing to slow the deficit and the rise in the debt, nothing will happen. Japan is in the same situation as the U.S. They owe everyone Yen, a currency they control. In 2002 S&P downgraded Japan’s credit rating from AAA to AA. So what’s been the result. Today Japan has the highest debt to GDP ratio in the world at over 200%, far higher than the U.S. Yet Japan also has the lowest interest rates in the world and a strong currency. The reason this is possible is because S&P’s ratings of sovereign U.S. and Japanese debt is a sham. Not surprisingly S&P simply doesn’t know what it is talking about. By forcing an honest assessment of out true fiscal position, S&P has greased the skids to turn away from austerity, which of course wasn’t their intention. God Bless Them.
Posted by Michael A. Kamperman on April 16, 2011
This morning I read a fascinating article about job gains in March for the Greater Waco Area. Somehow in one month we added 2,300 jobs, which is huge considering we only have 117 thousand people in the workforce. We supposedly added 600 government workers and 400 workers in education and healthcare. This seems odd since the newspaper is full of stories about cutbacks in State funding impacting numerous governmental agencies, especially local school districts. It turns out the Texas Workforce Commission used to compile the data, but starting in March the federal Bureau of Labor Statistics started doing the calculations. According to a story in today’s Waco Tribune Herald, “with this transition the BLS implemented several methodological changes to standardize the estimation across states. The use of these procedures allows the BLS to rely less on individual analyst judgement and more on the use of standard statistical methodology.” Now, its possible the TWC was not estimating Waco’s workforce properly and this represents a one-time adjustment. It is also possible the new methodology is flawed. A person (analyst) would note that government agencies and schools are cutting back employment. But the new mathematical model programmed by the BLS only calculates numbers and avoids common sense. This is the same type of modeling that was used to justify rating subprime loans AAA. The unemployment rate has dropped a surprising 1% in the last few months. Could it be the new methodology, which lacks all common sense, is the reason so many people seem to be voluntarily dropping out of the workforce in hard economic times? Afterall, if a husband loses his job and his wife stays at home, don’t most families now have two people looking for a job rather than one, or none?
Unfortunately, the economic policies being pursued by the Whitehouse invites the possibility that these “changes” are not random, but designed. The President and his political advisors know he cannot get re-elected if unemployment doesn’t fall. Yet he is pursuing job reduction policies rather than job growth policies to win over the angry middle of the electorate upset with bailouts and spending. Why? Most of the electorate is ignorant of the fact that everything would be much worse, but for the bailouts and the spending. Still, the President would rather placate them to educate them. The only response I have to the new methodology to calculate the unemployment rate is “Oh Really.”
What with $100 plus oil and the Japanese nuclear plant meltdown, a strong consensus if growing that the economy is slowing. Estimates for first and second quarter GDP are falling. At this point the stimulus plan and QE2 were supposed to achieve escape velocity whereby the economy roars back on its own without government support. Yet while that’s not happening the President has joined the ”we must have government live within its means crowd.” Sorry, but the federal government is already living within its means. The federal government has the capacity (means) to run large and sustained deficits, just like its doing now. What the President should be worrying about is how to make sure the next time something is invented in America, that it also gets made in America.
Posted by Michael A. Kamperman on April 9, 2011
The President, who has no economic soul, has moved in two short years from one in favor of Keynesian style stimulus to one in favor of Austrian style austerity. He told the Country last night that America needs to live within its means, and he hailed historic budget cuts as necessary. Hoover took the same austerity tack and look at how that worked out for him. Britain has recently taken significant austerity cuts and the economists who predicted an upswing in private sector confidence are shocked to discover an unfolding economic downturn. In Texas, our legislature is fighting over who can out Tea Party who. The result is our local Waco School District just announced they have told 200 teachers they can either resign, or be terminated for the next school year, by Monday. Headlines like these are the result of austerity. It doesn’t actually instill confidence now does it. This is what the President is congratulating Congress for doing and saying is necessary. If no Democrat challenges the President in the primaries, then the Democratic Party will simply prove that they crave power over principle. The Republican Party has left many people, including me. Ronald Reagan preached about Morning in America. He talked about what the U.S. could do. Now, our party simply focuses on what the U.S. cannot do. By stripping education funding they are forfeitting our future. By stripping mortgage funding they are laying waste to Middle Class wealth. Apparently the old saying is true: “there’s not a dimes worth of difference between Democrats and Republicans.” Where are those who believe our country has the resources to solve our economic problems supposed to turn to?
The austerity cuts have not hit en masse yet. The stimulus plan is still funding many things through this summer, then for the most part it is over. The teachers being let go won’t have a job come August. In Texas it is anticipated that over 300,000 jobs will be lost if the legislature cuts the $23 billion the House passed last week. That would increase the unemployment rate by almost 3% in Texas. All of this is on top of a Middle East that is on fire pushing oil prices past $110 per barrel. Oil will go higher as long as the political fires rage in multiple middle east countries. Also, we still don’t know the impact of the Japanese Tsunami and subsequent nuclear meltdown on parts or suppplies in multiple industries. An economic downturn looks baked in the cake for the second half of 2011 even if the Fed moves forward with QE3. If they cave, then the downturn could turn real ugly. Probably not as ugly as the post Lehman downturn, but plenty ugly.
It is all so unnecessary. It is the result of believing that our country is at risk because we owe China a piece of paper worth $1 trillion. We don’t owe anyone oil, gold, wheat, pharmaceuticals, computers, or real estate. We don’t owe anyone a single tangible asset. We simply owe paper that we can print out of thin air. We don’t even owe anyone their paper, we owe them ours in which we remain in full control. Washington is now a lot like the story of Chicken Little. Everyone is running around saying the sky is falling, the sky is falling. Panic, hysteria, over nothing. A powerful country with the wherewithal to solve its own problems shrinks in the face of fear itself. The solutions being offered are to feed our young to the foxes and the wolves. Sad, really sad. So many easily solved problems deemed insurmountable because of a deficit we could and should run. Save us Obi-won, save us.
Posted by Michael A. Kamperman on March 29, 2011
A debate has erupted between Paul Krugman and James Galbraith over whether or not deficits matter in the long run. The debate centers on the utility of Modern Monetary Theory, which in a nutshell is the usefulness of the federal government printing money to stimulate demand. While I agree with Galbraith, the specifics and nuances of the debate are not important (they can be found on Paul Krugman’s blog). What is important is that the debate is taking place. On the national level no one is talking about the federal governments ability to print money and end the current depression. All of the talk is about the debt and the deficit and the existential threat they make to the United States. Of course such thinking is hogwash since we can pay all of our debt by pushing a button on a computer, and we control the computer printing press. We still think and operate as though we are on the gold standard and bound by the physical laws of nature. We are no different than ancient people who would sacrfice a community member to apease the gods and try to make it rain during a drought. Basically, we are economically sacrificing so many people; students and teachers, construction workers, the disabled, the poor, and so many more. The reason for the sacrifice is because we are afraid our currency and economy will collapse into bankruptcy and hyperinflation when we reach the point where we are unable to pay back the debt caused by large deficits. It matters not whether the number entered into the computer to print is $1, or $10, or $10 million, or $10 trillion all that is required for the U.S. to pay back its debt is to enter any number and hit print. It’s not like gold, we cannot run out of the stuff. Yet we are willing to close nursing homes and school libraries and let college graduates move back home with Mom and Dad with nothing to do all day but play video games because we are afraid to use something that we have an unlimited supply of, which is dollars. If we would use those unlimited dollars, then whole country could go back to work in weeks.
Hopefully this debate will be joined by others giving it a chance to make it up the chain to the policy maker level, because no one at that level is talking about it. They need to start talking about something besides austerity. Imagine you are a young man with 5 minutes to get to your Valentine’s Day date at a fancy restaurant with a girl you’ve been dying to go out with. You realize you forgot your wallet and you ask me for help. I offer you a choice of my wedding ring made up of $500 worth of gold, or a $500 bill. If you want the date you have to grab the paper, because the ring can’t buy you dinner at the restaurant and the paper can. So why in the world are we worshipping the ring and obeying its rules rather than using the paper and following its different set of rules?
This country desperately needs this debate. For starters, we need QE3 and a big new stimulus plan. Home prices are still going down because it is too difficult to get a mortgage. I know of a young couple who applied for an FHA mortgage and were turned down on their own and needed a co-signor. They both graduated from college and had no debt. They both had full-time jobs in their field of study and they both had a good credit score. But because they had no debt they had very little credit history. Under the new rules you cannot get an FHA mortgage without two years history on three different credit lines. Your rent cannot be used as evidience you will pay your mortgage. What you really need are three credit cards. It is unfathomable that the federal government, which already back-stops 90% of the mortgages in America, would have policies keeping qualified borrowers out of the market over a fear of the taxpayer losing one more dime. Even though the federal government can mint the dimes. We need sanity to return and this debate may return it. As an aside Bob Herbert has left his position as a New York Time columnist. He got the problem. His last words were about how we need new leadership and new ideas. Ditto!
Posted by Michael A. Kamperman on March 8, 2011
The question is why, not when. We know when happened after Barack Obama won the Presidency in November of 2008. Earlier in 2008, McConnell, Boehner, and Cantor joined the vast majority of Republicans and Democrats in voting for the Economic Stimulus Plan of 2008, which was signed by President Bush. This was the fist stimulus of the depression and basically mailed out a few hundred dollars in tax refunds to millions of Americans. It was pure Keynsean Economics, which is have the government stimulate demand when the private sector is unable to. It will never be clear if the revolt in the House was purely freedom from party discipline, or a desire to derail President Obama. Whatever, the recent abandoment of Keysean Economics has opened the flood gates to Libertarianism in the Republican Party. Put simply, the Republican party has moved from the party of less government to the party of almost no government. In moving they have left moderates in their wake. Moderates like me. When it comes to choosing a quality education for our children versus lower taxes, I choose the children.
My thoughts are the Republican leadership has a tiger by the tail and at this point risks being eaten if it lets go. The objective of this blog is economics. But politics has a significant effect on economic outcomes by dictating policy. Because of the rise of the Tea Party the Republican Leadership dares not let go of that tiger’s tail. But let go they must if they want to see economic prosperity in America. Firing Teachers is no way to create jobs in the near term, nor the long term.
The point is the abandonment of Keynes is not based on intellectual rigor, it is based on pure politics. Those playing these politics don’t understand the obstacles they are placing in front of economic recovery and job creation. Shockingly, the Obama Administration has decided to play anti-Keynsean lite rather than confront head-on the return to Hoover style early 1930′s economic policies. Texas, my home state, desperately needs the federal government to pass another stimulus plan. The state is slated to cut $15 billion over the next two years because stimulus funds will soon run out rather than increase the budget by the $13 billion needed to maintain current services based on population growth. Texas already is run lean, so they will be cutting into bone, not fat. Republicans used to believe government needed to be run efficiently and effectively. Now they not only preach government is not the solution, they preach government needs to be all but eliminated. I’m sorry, my niece and nephew need a quality education and my family needs the highest moral authority charged to any state…national security. Republicans danced with the devil when they abandoned Keynes, now many of them rue the day they did.
Posted by Michael A. Kamperman on March 6, 2011
The old saying is believe nothing of what you hear and half of what you see. The collapse of the American economy continues to unfold right before our eyes even as the spin doctors try to convinve us otherwise. For instance, take the recent 8.9% unemployment rate. The four numbers you need to know are 4, 5, 6, and 7. We have 4 million fewer people counted as wanting a job badly enough versus 4 years ago. Currently, 5% of the U.S. adult population has been dropped from the labor force versus 4 years ago. There are 6 million people (of those still officially counted) who have been out of work 6 months or longer. And sadly, 7 million fewer people have a job in America today than did 4 years ago. That’s any job, part-time or full-time, low-skill or low-wage. A hidden truth behind the numbers is we have lost more than 7 million good paying jobs with benefits and we have replaced some of those jobs with part-time, low-wage, low-skill jobs. Not exactly Morning in America. This despite the Fed printing money (though not enough) and the Stimulus funds still flowing out of Washington (though not enough). One long time measure of the health of the economy is Industrial Utilization. A measurement above 80% usage of exisiting facitlites is a sign of needed expansion of additional facilities. The economy has only recovered to a 76% utilization rate, which means we still have a ways to go before we need to add new net plant and equipment. Another measure of economic vitality is the health of the housing market. Sadly, this sick patient is on the verge of falling into a coma. The mortgage industry and the federal government have totally botched a decades old system of success. The White House response is to remove the federal government from 90% of a market it now controls and turn 90% of it over to the private sector. Has anyone in Washington figured out that in most instances the taxpayer and the home-owner are one and the same?
We are on the cusp of the second leg down of the New Great Depression. The stimulus that has propped up state and local governments ends this summer. We have already seen 330,000 state and local government workers lose their jobs with stimulus funds. The real cuts are coming this summer to a school district near you. The President should be ashamed to talk about how educating our kids is a bi-partisan shared priority. Shared by whom? The Republicans who want to cut $100 billion a year from federal spending for things like education, or the Democrats who are willing to meet them “half-way.” How about the President standing up and saying they will only cut one dime from education over his veto? If Ben Bernanke loses his back-bone and is unwilling to push QE3 in the face of two or more no votes on the Fed and screams from the Congressional Austerity Crowd, then the downdraft will be swift. If he stands tall in the saddle then it will be drip, drip, drip. At least in Wisconsin both sides have found a back-bone and hopefully wisdom will prevail and they will find common ground.
Where is the person in Washington who is willing to say we don’t have a spending problem, we have an unemployment problem. If we put the 7 million Americans back to work who have beend discarded, and we find jobs for the 4 million Americans who have graduated and shown up for work but found no room at the inn, then we flip from a country with 44 million people standing in bread lines called SNAP (food stamps) to a country with 11 million more tax-payers not needing federal help for food and a roof. America used to see itself as a beacon of light to the world. We used to see ourselves as the Greatest Nation on Earth. We viewed ourselves as a can-do people. Now, our leaders only talk about what we can’t do. They talk about our limits, not about our aspirations. We used to beleive the secret to success was growth and now we are being sold a bill of goods that says the secret to success is cuts. Where is our yearning for excellence? Where is our confidence that the next generation will be better off than we are? There are multiple ways to move our country forward and none of them include the concept of retreat preached by the Austerity Crowd.
Posted by Michael A. Kamperman on February 15, 2011
Forget Keynes, he is so yesterday for the Obama White House. The President has ditched stimulus spending to revive economic growth in favor of deficit reduction. He is out Hoovering President Hoover. The only thing currently unknown is if the transformation is due to a lack of intellectual gravitas on the part of the President and his advisers, or due to a lack of common sense, or due to a shrewd political calculation to get the President into the center for the 2012 elections at the expense of students, the unemployed, and the poor. What is certain is that this White House won’t be fighting for more aid to the states, for more aid for the unemployed, or for more aid for the housing market. The states will be making massive spending cuts to offset the loss of stimulus dollars this summer. Texas plans to cut billions out of public education potentially resulting in the loss of 100,000 jobs for teachers and administrators. Now, on top of those cuts are even more cuts from the federal government. The Obama Administration has nothing meaningful for job creation in his budget and he has bought into the argument that unemployment is a structural problem. Finally, the White House is proposing to reduce the role the federal government plays in supporting mortgages from 90% of the market to only 10% of the market over the next 10 years. They have lost their housing mind.
The President has embraced the argument that its only private sector export jobs that really matter. He has embraced the argument that a country with a fiat currency that owes everyone dollars should run an economic policy akin to a country on the gold standard. He has embraced what’s good for global corporations at the expense of what’s good for small businesses and for workers.
The Great Depression ended from the largest Keynsean stimulus experiment ever called World War II. We do not need a war for the federal government to put everyone back to work. History has proven this is the way to go. The arguments the President has embraced were the same arguments Hoover embraced in the early 1930′s. It is well known the Great Depression entered a second major economic slump after President Roosevelt decided it was time to balance the budget in 1937. The White House is well acquainted with this history. Therefore one must conclude that the President and those around him care more about his re-election than anything else. If any of his advisers were willing to do what is right for America they would resign. Christina Romer resigned, now we know why. President Obama will find out the hard way in 2012 that the public cares more about jobs than about deficits. Just ask Hoover historians.
Posted by Michael A. Kamperman on January 29, 2011
It is time for the feederal government to step up and assume all funding and responsibility for Medicaid. The federal government spent approximately $290 billion on Medicaid in 2010. The states spent roughly $130 billion on Medicaid in 2010. This included stimulus aid to the states whereby the federal government picked up an extra $50 billion in Medicaid expenditures on behalf of the states. That aid, along with other stimulus aid to the states, ends July 1, 2011. That is when America will hit its real auterity moment if change we can believe in doesn’t come. Most states, and all the large ones, simply cannot afford the ever growing costs of Medicaid in an era of depressed tax revenue and high unemployment. Most states have already made deep cuts to education, which the President emphasizes should be a priority. They will make much deeper cuts to education after July 1 when the stimulus dollars runout. Traditionally liberal states with Democratic Governors like California and New York intend to make cuts to their respective Medicaid programs. The best way to assist the states fiscal burden is for the federal government to end the Medicaid mandate and assume full responsibility for the program.
While this will increase the federal budget and the federal deficit, it will decrease state budgets and state deficits. The states must balance their budgets, whereby the federal government can operate with deficits, even large ones. The states cannot print money and the federal government can. Federalizing Medicaid will not create a new program, it will not create net new federal/state combined government spending, therefore it will not create an extra burden on the taxpayers who pay both federal and state taxes in one form or another. What it will do is end the political trick of claiming fiscal prudence while pushing the mandates for spending and taxes down the food chain to the states, who in turn push it down to the local level.
Despite the rhetoric and the acquisence of the weak minded who are legion amongst us, the fact is the federal government does not have a spending problem. It has an economy in a depression problem. Costs for aid to the needy and the unemployed haved soared, while tax revenues from paychecks have plummeted. Full employment would cut the current federal budget deficit by more than 3/4. Less money out and more money in. From there prudent fiscal management could easily allow economic growth to balance the budget by 2020. One way to ease the pressures of the depression is to remove almost certain draconian austerity cuts coming from state budgets starting July 1. How many kids in grade school can we cram into a classroom before seriously eroding their education and our country’s future? Texas plans to cut $5 billion per year in education funding. That amounts to around $1,000 per kid per year in a state that averages $7,000 per kid in overall education spending. Texas budget hawks looked seriously at withdrawing from Medicaid, but fortunatley reason and wisdom prevailed. Its not rocket science to figure out cutting $3 billion a year in health spending for the poor out of the state budget doesn’t offset foregoing the benefit of $17 billion a year in federal health spending for the poor in Texas. The President needs to step up to the plate and lead us on a path different from the path President Hoover led the nation on during the last depression. Despite current punditry I see him sharing Hoover’s fate at both the polls and in the history books if he doesn’t come forward with an agenda focused on creating good paying jobs with benefits for the middle class. Federalizing Medicaid won’t create new jobs, but it will help stop the bleeding, especially in the classroom.
Posted by Michael A. Kamperman on January 22, 2011
President Obama has just named Jeff Immelt, the head of GE, as the new chairperson of his Whitehouse Jobs and Competitiveness Council. In doing so the President has aligned himself firmly in the camp of Wall Street and Global Corporate Interests and against the interests of the American worker. What’s good for GE shareholders is not necessarily what’s good for American workers. GE considers workers as input costs and it will build its factories where-ever it can get the best deal. GE has created far more jobs overseas in the last few years pursuing cheap labor than it has here at home. Immelt is already pushing the President for lower corporate taxes as key to his strategy to boost GE profits and the value of his stock options under the bogus guise of creating jobs. President Obama is so aligned with these interests that he has chosen someone to advise him with a clear conflict of interest, a person that continues to run a major corporation that was bailed out by the Fed and still has billions of dollars of yet to be repaid low interest loans backed by the Fed. President Obama launched this intiative with a trip to a GE alternative energy plant seeking billions of dollars in federal government grants. There the President said that the key to America’s future was being able to build things here and sell them in Shanghai. Really, the key to restoring the American dream is to make things so cheap here that they will buy them in Shanghai ahead of products made by their own workers working for slave wages?
No, the key to restoring the American dream and creating good paying jobs for millions of Americans is to end free-but-unfair trade that gives countries unfettered access to our markets without unfettered access to theirs. And, that allows workers making non-living wages to underprice American workers in American markets. These policies are creating a two-tier class of citizens in the U.S.; the haves and the have-nots. Its great that GE stock is going up if you already own a lot of it. But its not great if you are a 99′er unable to find work, or just greatful to find a job paying far less than the job you lost. There is actually no better example of the downside for workers created by our trade practices than the iphone and ipad, which were invented in the U.S., but are now manufactured in China where labor is much cheaper and where rare-earth-elements are no longer freely traded to the highest bidder.
The President just doesn’t get it. We are not going to restore the American dream via exports to Shanghai. We will restore the American dream if and when we invent things in Cupertino, California, we then make them in Indianapolis, Indiana, and we then sell them in Newark, New Jersey. We will restore the American dream when the housing market is fixed and people can get a mortgage on reasonable terms knowing their investment will not collapse in value two years later. We will restore the American dream when a middle class family can buy a home, buy a new car, take their kids on vacation, and still afford to send them to college. The President can afford to do that. Its time he focused on making it possible for the rest of us to be able to do that rather than focusing on how to make the haves have even more. China is experiencing tremendous economic growth for two reasons. First and foremost, China’s policies benefit China first. Secondly, American trade policies benefit China first. Its time we change that.
Posted by Michael A. Kamperman on January 20, 2011
We will not revive the economy and create the millions of jobs necessary to put the millions of 99′ers back to work until we fix the housing market. Housing is the key, and the housing market remains broken. There is still a deep backlog of foreclosures. New home construction remains at levels comparable to 50 years ago despite a big boost in population. Because the Zombie Banks are sitting on numerous unrecognized losses from housing, they remain extremely conservative in lending new money to small businesses and consumers. The best way to end the foreclosure backlog and stabilize home prices is to refinace every mortgage in America without an appraisal, without verification of income, and without a new title policy. This means every mortgage, a change in my perspective, whether it is current or not. I now believe the housing market is so broken that just refinancing current mortgages is insufficient. The mortgage lenders can take mortgages that are delinquent and roll the amount of money into the loan and hot the reset button. Refinancing delinquent mortgages will give those who have fallen behind the ability to catch up and start over. Additionally, those that are underwater can request an appraisal. If the appraisal is more than 10% below the mortgage amount, then that mortgage would be refinanced at 3% with the payment based on a 4% 30 year mortgatge and the difference going to principal enhanced principal reduction. Going forward, those who fail to pay the new mortgages will be foreclosed upon. This will give the whole housing market the breather from foreclosures that it needs to gain stability.
It is important to remember that all of these mortgages already exist and we will not be creating “new” problem loans. The federal government already guarantees about 90% of all mortgages already between its backing of Fannie Mae, Freddie Mac, Ginnie Mae, the VA, the FHA, the FDIC, the SIPC, and the Pension Guarantee Investment Corporation. The taxpayer will be taking on less risk by refinancing 100% of the outstanding mortgages because the entire market will improve versus the alternative of maintaining the status quo. The market will be able to provide the money to refinance these mortgages because everyone who takes advantage of this opportunity will have repaid their existing mortgage. Refinancing all mortgages will improve the cashflow of all mortgage holders allowing them to spend or invest in the rest of the economy. By ending the foreclosure and short sales plaguing the market it will once again make sense to pay full boat and invest in a brand new home spurring construction jobs.
The President is looking for ways to jump start the job market on the cheap. This is because he believes that the risk of entering a depression is over. He is wrong. The risk of entering a depression is over only because we have already entered one. He believes we are not in a depression and that the natural business boom-bust business cycle has entered a recovery phase that will soon right the economic ship and create millions of jobs. Refinancing all mortgages at 4% is a cheap idea, because the federal government can currently borrow money for 10 years at less than 3.5%. And, the Federal Reserve can invest in these mortgages if no one else will because their souce of funding is unlimited and their cost of funds is zero. Every home owner, whether they have a mortgage or not, will benefit from a stabilized home market. Even if you own your home outright you don’t benefit if your neighbor moves out and squatters move in to the vacant unkept property next door. Construction jobs are a very important part of modern-day economies. We cannot expect to lower unemployment significantly if we ignore good paying construction jobs and all of the industries and service businesses associated with new home construction.
