problem
The economic situation in the United States is becoming increasingly dangerous. Values of residential real estate continue in free fall. Credit markets remain frozen. Bank balances are under increasing stress, and there is a real danger of some bank failures. Consumer loans of all kinds are more expensive and more difficult to obtain. Household budgets are shrinking because of the cost of energy, food and health care, which leads to lower discretionary costs. GDP is flat or declining. Inflation is accelerating.
Unemployment is at its highest in years and is increasing. And the decisions prescribed by regulators, the Congress and the Administration over the past six months, do not seem to work.
Perhaps the combination of forces weighing the economy — the collapse in asset value, the associated credit crisis, which spread to all sectors of credit markets and the economy as a whole, the uncertainty of the institutional investor, record commodity prices, slack dollar and accelerated inflation — are unresponsive to traditional solutions? Maybe some of these decisions may even make things worse before they get better - for example, inflation? Let's go closer.
The Fed lowered the rate of the Fed to 3% and pumped hundreds of billions of dollars into the banking system. Nevertheless, we are witnessing an increase in market rates, an acceleration of the dollar and an increase in inflation. The Treasury implemented the Hope and Lifeline project. But they affect too few people, and foreclosure trends are only getting worse. Congress and the administration went through a very impressive stimulus package. But the economic push is eroded by the HUD implementation rules and delays in shipping taxes. Despite these various government actions, the economy continues to deteriorate.
Residential Property Values
Housing prices and unit sales continue to decline across the country, as stocks outpace demand. With buybacks in record quantities and financing unaffordable to many potential home buyers, this situation will not change in the near future. The reduction in rates will not change this situation and there will be no tax rebates of $ 600, and the project “Hope for the Project” and “Project Lifeline” will not affect too few borrowers to have a significant effect.
Credit markets
Credit markets remain generally illiquid due to investor concerns about the value of assets. Regardless of whether it is a commercial paper, secured by securities, secured by debt obligations, mortgage-backed securities or insured municipal bonds, investors are not sure about the authenticity of the value of the securities due to concerns about the quality of the underlying asset, the possibility of default or potential rating. When investors are not sure that they are far from the markets, and now investors are rejecting the entire risk transfer model and the associated risks of leakage and counterparty. Lower rates and liquidity injections will not change that. This will only make the credibility of the underlying asset value.
Consumer loan
Bank balances are under stress due to losses associated with subprime mortgages and securities. Now banks are facing growing problems in their consumer lending ports. As a result, banks raise interest rates and limit credit for all borrowers, especially for the consumer. Even when the Fed aggressively cut rates, banks raised rates on virtually every type of consumer loan, increasing pressure on household budgets. Obviously, lowering the Fed rates and increasing the money supply do not help the consumer. In fact, they can have the opposite effect, as lowering rates reduces the value of the dollar and increases inflation, thereby further reducing household budgets.
inflation
Inflation accelerates due to a weak dollar and a commensurate increase in prices for all imports, especially commodities. Last week, it is obvious that the more the Fed lowers the rates of the winner, the dollar will be and the greater the inflationary pressure. In this regard, the reduction of the Fed rates was counterproductive for the economy as a whole. As soon as the effect of the stimulus package is on, melt inflation is likely to worsen.
unemployment
Unemployment is 5% and growing. No longer being fired, limited to financial services, housing, real estate, and related industries, many companies respond to a slowdown in consumer spending by sending pink blunders. This is another area where lower interest rates and an increase in the money supply have brought no benefit. With rising unemployment, consumer spending will shrink, and the negative cycle will continue.
It is clear to me that the aggressive measures taken by regulators, the Congress and the administration have so far been a waste of taxpayers' money. It is also clear to me that the stimulus package of $ 168 billion will be too late and will only contribute to the growth of inflation. This is due to the fact that none of these measures affect the root cause of such a large dislocation - rapidly deteriorating indicators of residential real estate, which led to a significant deterioration in the quality of bank balance sheets, disrupted the normal functioning of credit markets and negatively affected the cost and availability of consumer credit at the same time. a time when household budgets are already under stress from rapidly rising prices.
Instead of simply throwing money at the consumer or lowering interest rates to the detriment of the dollar and inflation, those who control such things should consider policies that eliminate the underlying problem, rather than trying to minimize the consequences of the underlying problem. I propose an aggressive plan to eliminate cancer now as an alternative to its treatment with an extended rate of inflation reduction, liquidity injections and fiscal stimuli.
Proposed solution
Federal intervention in the residential real estate markets by creating a state-owned corporation, similar to the Trust Trust corporation, which would acquire, control and ultimately sell the former real estate. Such a scheme would be effective. put asset value by asset value, restore investor confidence, minimize losses of financial institutions, improve consumer confidence, reduce pressure on the dollar and put the economy back on the path of steady, low inflation ,
Background
On August 9, 1989, Congress adopted FIRREA, and a Resolution Trust Corporation (RTC) was created. [1] RTC was a limited-life corporation (5 years) that would acquire, manage, and allow insured depository institutions under the supervision of the Federal Insurance Corporation (FSLIC). The general supervision of the RTK was assigned to the Supervisory Board, but operational control remained in the RTK itself. RTC had a board of directors headed by the FDIC board of directors, the head of OTC and a member appointed by the president of the United States. RTC did not have its own employees and mainly relied on FDIC personnel to fulfill its mission. These personnel worked in the private sector when such services were available.
Issues such as contracting, auditing and reporting, asset allocation and the RTC funding mechanism were provided for by incentive legislation. Asset acquisition financing was provided by Congress through direct treasury investments (balance sheet) and bonds issued by the Correction Finance Corporation (RefCorp). The working capital requirements of RTC were financed by short-term RTC notes. Both bonds and notes carried complete faith and credit from the US government. This structure minimized the contribution of the Treasury and, as a result, the negative impact of the budget deficit. RTC refineries and debt obligations were extremely serviced by disposing of the assets acquired. At the end of its statutory life, all remaining assets and RTC operations were transferred to the FDIC.
Learning experience
Those of us who run financial institutions from 1989 to 1994 now remember the RTC as an effective solution to what was then considered the biggest threat to the US financial system in a generation — the collapse of the S & L industry as a result of the explosive real estate bubble. The problem was solved within five years with minimal costs for the Treasury (compared to the potential cost) using a combination of regulatory authority and private sector experience. This solution provided stability for the financial services industry, ensured calm in capital markets and, possibly, minimized the duration and severity of the 1990 recession.
Of course, such a solution can be applied to the current problem. Legislation legislation still exists (FIRREA), it addresses relevant issues related to funding, organizational structure, management reform, accountability and social policy, the RTC model, provided it stands and kinks in the model are processed for more than five years experience. In addition, many people involved in its organization and implementation are still in work and accessible.
Sentence
It is necessary to create a vehicle similar to RTC in order to acquire, manage and dispose of mortgaged residential property in an orderly manner that does not disrupt the markets. Call it Foreclosed Real Acquisition Corporation (FREAC). FREAC, like the RTC, will be under the control of an independent board consisting of members of the FDIC board and other appointed members. He will rely on FDIC personnel for oversight and operations, but will use private sector resources to carry out his mission. FREAC will have a 10-year statutory life at the end of which it would be dissolved, and the remaining assets and operations absorbed by the FDIC.
Unlike RTC, FREAC will not acquire non-performing institutions, but rather real estate assets. Funding will come from the sale of FREAC or the sale of RefCorp, like a third party, for 10-year banknotes that fully trust the US government. This financing will be off-balance and will not contribute to the budget deficit. The interest on the notes will be serviced from the rental income and the principal from the final sale of real estate.
FREAC will offer to purchase the mortgaged property at 90% of the remaining balance on the 1st inscriptions. The sale of FREAC real estate will be at the discretion of the note holders, which will allow holders to realize a higher value if it is available on the market. FREAC will retain local leasing agents and property managers for leasing and property management that complies with social policy guidelines. He will rent houses at market rates, preferring privileged owners. FREAC will own properties for at least five years or until the time when their sale back to the public sector is destructive to a normal market.
Creating a vehicle such as FREAC will have many advantages over the current policy. lower interest rates and fiscal stimulus, which seems to be not working and has serious negative consequences Unlike the current policy, it will be non-inflationary and will not increase the budget deficit. This will be self-financing through the issuance of notes, which will be serviced at the expense of net rental income and capital gains realized in the sale of real estate. With the goodwill of Congress, this can be created relatively quickly. Simply announcing that it will have an immediate positive impact on the real estate market and lending. The advantages and benefits of such a fund are outlined below.
advantages
- Stabilizes the value of residential assets
- Limits the loss of financial institutions
- Recovers investor confidence
- Restores liquidity in credit markets
- Limits the bloodbath of consumer wealth
- Increases consumer confidence
- Reduces the need for further rate cuts by the Fed or additional financial incentives
- Reduces dollar pressure and commodity prices
- Measures inflationary pressure and expectations
- Can prevent the failure of one or more federal insurance agencies.
Benefits of the program
- The announcement will have a direct stabilizing effect on the value of assets and credit markets.
- This will provide rental housing for people in need.
- This would prevent the “ghettoization” of other viable areas.
- This will help maintain fast-growing rental rates.
- This will reduce the overhang of the housing market.
- This will bring people back to work, thereby creating an income.
- Economic and related industries
- Name, escrow and other related enterprises
- Leasing agents and property managers
- This would increase income tax revenue.
- This would increase property taxes to state and local governments (or at least stop reducing them)
- It would be neutral for the federal deficit - self-financing through rental income
- This will probably lead to an increase in government profits on temporary sale of real estate.
- It would not be a salvation in the calculation of the taxpayer - it does not “save” any side.
- Foreclosed homeowners will still lose investment and have foreclosures on loan documents
- Bondholders will still suffer losses, but losses will be reduced
- Banks and Wall Street will still suffer losses, but losses will be reduced
Disadvantage
- This may require new or amended legislation.
- This is a major program that will impact medium-term credit markets.
- Some people will see this as saving the parties that created the problem.
The economic environment in the United States is becoming increasingly dangerous and runs the risk of jumping out of control. Current economic and fiscal policies do not work and in many ways are counterproductive. It is time to stop pouring taxpayers' money into the sewer system and take a bold step towards eliminating the root cause of the problems. A deal with asset pricing and other stresses will be much easier to manage. But the time for an effective solution is running out, and the economic burdens continue to grow.
