The “Two Year Liberty Plan”:
(A basis for discussion)
Introduction:
Did Walt Disney Co. (DIS) buy the United States of America because Congress seems to be acting like an attraction in Fantasyland! A plan that benefits no one; initially could cost $700 billion and doesn’t address either consumer confidence or housing. Is this bailout package a Fantasyland version of the Intolerable Acts of 1774?
I don’t understand bank financing, which is this alleged mechanism of needing liquidity so that some banks can lend to other banks so they in turn can lend to others. If this is the “crunch”, why not cut out the middleman? If the Fed can “give a gift” of $700 billion to the Wall Street super rich, with absolutely no benefit to the economy or Main Street, why can’t they as an alternative make these funds directly accessible to regional and local banks for the sole purpose of making credit available for mortgages and business purposes? “It’s not the credit crunch, stupid; it’s consumer confidence”!
Before this collapse in consumer confidence leads to the next depression, we have to figure out a real solution to the problem of getting the economy moving and prevent a worldwide collapse which, all Congressional b.s. aside, appears to be on the horizon.
Whatever solution, or plan, is proposed it must deal with all Americans fairly, not just the privileged few. In reality, it must provide for the future stability of the country and also try to protect our retail banking system and current investors to the best degree possible.
Mortgage backed securities, (“MBS”): They once were a legitimate form of investment that because of greed and a complete abandonment of any underwriting standards have become “toxic”, whatever that really means. Congress wants to pay $700 billion to buy some of this “toxic” paper and yet some MBS may contain everything from good mortgages, with real value, to mortgages that are the result of deceptive and predatory lending practices, and mortgages whose documentations were falsified by brokers/lenders for the purpose of defrauding investors. The taxpayer should not be asked to pay for, or reward, criminal activity.
One of the proposals in the “Two Year Liberty Plan”, as set forth below, provides for a two-year period of practical, financially sound procedures whereby these “toxic” investments are “detoxified”. The end result of this two-year detoxification process is the dissolution of all MBS and return of the underlying mortgages to their originators where practical. The immediate goal here is to put a floor under the real estate market, provide a mechanism to protect investors, restore credibility to Wall Street investment banks, (if any are left), and show the average American that Wall Street is not their enemy.
The key element here is not $700 billion or $1 trillion, or whatever; it is time. If we put the “toxic mortgage-backed securities” aside and deal with them sensibly over the next two years, we can then move forward with restoring the real estate markets and dealing with the so far unmentioned problems resulting from student loan abuses and predatory credit card practices; both of which are crippling American families unnecessarily and contributing to mortgage delinquencies and defaults.
However, if Congress wants to give the Wall Street investment banks, whose greed created this mess, a $700 billion gift of taxpayer’s money, let them do it. They can answer to the voters. But it isn’t going to create liquidity; nor make affordable credit available to Americans; nor will it revive the overall economy; nor will it stabilize let alone revitalize housing; and the gift to the super rich will absolutely further erode, and perhaps even destroy what’s left of consumer confidence.
We are dealing with perhaps the most complex financial crisis in our history. Wall Street greed, not the sub prime mortgage problems, caused this crisis. Restoration of consumer confidence in housing, and in the Government, is the key to a solution, not a $700 billion dollar gift to Secretary Paulson’s friends. The problem is, the solution may be way beyond the normal fixes and approaches as practiced in the past and restoring consumer confidence rests completely on stabilization and restoration of the housing markets, not a rescue of the so-called “toxic mortgage-backed securities” that were gambles to begin with. If some credit default swaps can be just “torn up” as was reported on CNBC, then it shows their complete lack of any intrinsic value.
When Secretary Paulson and Chairman Bernanke laid out their case for an immediate financial bailout package to stop an upcoming financial Armageddon, what they were really doing was something analogous to painting over rusted metal or rotten wood in order to sell something – some people might call that fraud.
Problem is, there is nothing in this package help cure the housing/credit crisis. They act as if it doesn’t exist and they know better. And yet, for as long as I can remember, housing was the key to the economy – when housing was good, durable goods and jobs were also. So what’s different now? The difference is Congress’s misguided concern over how to protect only Wall Street’s investment banks, and not even the investors let alone average Americans.
But, in my opinion, and I’m nowhere near an expert, there is a permanent fix but it involves far more than the simple self-serving “plans” the Congress and Secretary Paulson are pushing.
Within a few weeks, perhaps even days after this ill-advised financial bailout package is enacted we are going to wake up and realize something more is needed, something for Main Street and even for the legitimate areas of Wall Street, not the vultures and predators.
Here’s the new idea. It’s a little complicated and I think can really help, that is assuming it is a valid plan to restore consumer confidence and liquidity, stabilize housing, prevent future foreclosures, help people keep their homes and get the economy moving again.
The “Two Year Liberty” Plan:
Here are the details – subject to discussion and modification of course.
First: To stabilize and revitalize the real estate markets:
Immediately convert every mortgage and home equity loan to a 5.5%, 50-year, fixed rate mortgage! (Except those who have better terms and those who elect not to participate). No prepayment penalties, no balloon payments nothing but a straight 50-year mortgage. After 24 months allow rates to rise one-half percent, per year, if the market justifies it.
Why “every mortgage and home equity loan”? Because this crisis in the housing market has been allowed to spread so that it adversely affects every American homeowner unjustly, and any plan has to cover all homeowners. This does not involve any taxpayer monies going to one class of borrowers at the expense of others, but does offer relief and protection to all homeowners while the Government decides to investigate this situation. The only ones who pay a short-term price here are the lending institutions and the investors in the “toxic mortgage-backed securities” etc. But the “detoxification” plan should lessen some of the damages here.
Immediately halt all foreclosures for the next 24 months, add the delinquent amounts to the principal of the mortgage, apply this new interest rate and 50 year amortization, and give people a chance to work things out. This should stop the flood of more distressed properties from coming on the market and further destabilizing the housing industry. This should stop cold the future “resets” that are going to be the final blow to housing and consumer confidence.
Forbearance to Sell: At any time within the next 24-month period allow those who can’t afford to stay in their homes a one-time 12-month forbearance to sell rather than foreclose. This should further stabilize prices by keeping these distressed properties off the markets.
This proposition to stop foreclosures by itself should help restore consumer confidence right away.
Disregard Sinking Home Valuations: Since home prices seem to double every 10 years and this is a long-range program, the underlying value of homes should increase once the real estate market is again stabilized. Set appraisals at current market values based on the established system of “comps”. Since the potential for upside vs downside is greater, this should work. This should stop the need for the “mark to market’ write downs.
New mortgages: Allow only 5.5%, 50-year fixed rate mortgages for at least 24 months. After 24 months allow rates to rise one-half percent, per year, if the market justifies it. This should help sales and revitalize the real estate market especially new construction, which is the key to jobs and economic growth.
Proposed Tightened Mortgage Lending Regulations: Here’s a new idea! Let consumer banks set their own lending standards under flexible programs based on factors such as LTV’s, credit scores, income etc, and let the consumer banks evaluate the character issues.
New Mortgage Serving Guidelines: Simply put, you originate the mortgage; you service it.
Current Mortgage “Servicing”: Current mortgage servicers are nothing more than “debt collectors”, as they tell everyone who calls. This plan calls for a two-year detoxification process and the dissolution of all MBS and return of the underlying mortgages to their originators where practical. The end result should be no need for mortgage servicing firms. Mortgage servicers can assist in this program. The plan calls for all new loans to be serviced by the originators, and current mortgages, which survive the detoxification program, will naturally be back in the hands of the originating lenders or assignee.
Insuring Consumer Bank Solvency: Capping interest rates for the next 24-months may create bottom line problems for legitimate consumer banks. Instead of giving billions to investment banks, why not use Federal assistance to support cooperating consumer banks if they experience real losses during this period?
Second: Credit card abuse:
The predatory practices of the credit card companies are exacerbating this crisis and must be dealt with.
Immediately fix the interest rate on all credit cards at 9%. Curtail so-called late fees and penalties to no more than 1% of the payment due. The current system of late fees, over-limit fees, penalties, and criminally high interest rates is out of control, thanks to our government.
This restoration of fair and reasonable credit should help Americans pay down their debts, prevent most charge offs and restore our retail credit market to normal – again, my apologies to the vultures – but tough “bananas”, this is a matter of National emergency and also a clear and present danger to our country.
Credit Limits: Fix individual credit limits at a percentage of the adjusted gross income reported on the prior year’s tax return, with provisions for incomes derived from sources other than wages. Let’s say the limit is set at 10%, then penalties should be established for individuals who try to exceed that by use of multiple cards.
One other connected item. An extensive review of the credit reporting system is urgently needed. For too long is has contained an exorbitant amount of erroneous information mostly derogatory and has been used by unscrupulous creditors and collection agencies as a tool for extortion and retaliation. This system has no validity in determining he creditworthiness of borrowers.
Third: Student Loans:
The following is really an outside the box idea!
Immediately forgive all student loans!! (For the record I never had any except a small parent loan decades ago).
Net immediate effect? If you have to ask, I don’t know what to say. Can you imagine how many families will all of a sudden have enough money to pay their mortgages, credit cards and regular household bills? As to those who have been able to repay their loans I’m sure a grateful government will allow a reimbursement through income tax credits etc.
The current student loan program is not what it was intended to be many decades ago. It has morphed into nothing more than a commercial loan program of no long-term benefit to either the borrower or the United States. Its administration is predatory, and riddled with greed and corruption.
Instead of “donating” the $700 billion of taxpayer money to a few super rich, earmark it for Main Street. Put that much money as a down payment towards forgiving student loans and you’ll have an immediate real “stimulus package” for the economy.
Fourth: Energy Trading:
The greed in human nature being what it is, you can bet that once any knowledge that this plan may be considered becomes public, there will an immediate run-up in energy futures. The solution:
To finish off the unjustified buying of oil and energy futures by speculators, who have no intention of ever taking delivery on a contract, you just can’t shut down the exchanges like Nymex. There are legitimate users of necessary energy products that need to establish future costs for either manufacturing or transportation purposes, among others. Other than that, there is no need for anyone else to buy futures.
The solution to eliminating this greed in the energy markets really lies in a simple change to the Federal Tax Code.
Legitimate Users of energy products: Define a user as one who actually takes delivery on contracts and uses them for legitimate internal business use, such as diesel for truckers and farmers, refined oil products for manufacturing. No change in the Federal Tax Code needed here.
Hoarders a/k/a “buy and hold” speculators. Treat them like we are under wartime conditions. Simply seize their holdings and sell them at auction. Disallow any losses for tax purposes and impose fines as would be appropriate if we were in a war.
Speculators: Loosely defined as anyone who buys and sells futures and who doesn’t take delivery for legitimate self-use. Tax their profits at 80% and tack on an additional 25% surcharge to help support the search for alternative energy sources. Any losses realized in trading energy would not be recognized for Federal Income Tax purposes.
Those three proposals should eliminate all dangerous energy speculation.
Conclusion:
As a nation, we have become very good at defining problems; not so good on solutions. Our Government and the network and cable “newsertainment” media are more interested in the flavor of the day stories than following up on the issues that are destroying the future of all Americans. I am a 67 year old retiree with no set of credentials to speak of, but this plan, I think, is logical, well thought out, is fair to all parties, does not involve taxpayer money and to say the least is “innovative”.
Action Plan: What is needed to get consideration for this plan is a nationwide telephone, fax and email campaign directed at every member of Congress calling for them to act IMMEDIATELY! The campaign must be overwhelming, consistent, and continuous, and not stop until Congress acts. If they don’t, there’s still time before November to “change out’ the bad parts of Congress.
Bill Maxstadt,
October 3, 2008
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