Neither Republicans nor Democrats seem to understand the current economic problem, and the Democrats seem to only be interested in blaming Republicans and rewarding their constituencies, which will only have a small short-term impact on some of the symptoms of the current economic problem; whereas, fixing the root of the problem will also fix the symptoms, and fixing the root of the problem will also be much faster and cheaper.
Root Cause
The root of the problem is that home values are declining, which has lead to reduced consumer spending, increased foreclosures, and bank losses on credit default swaps. Reduced spending, increased foreclosures, and bank losses have led to a loss of confidence.
A loss of confidence has led to politicians trying to further reduce confidence for political gain, and it has led to artificially low values on Mortgage Backed Securities. Financial institutions that owned artificially devalued Mortgage Backed Securities experienced unexpected margin calls as a result of the mark-to-market regulation, and those margin calls caused sudden insolvency.
The sudden insolvency of big financial institutions caused a small market crash each time, but most businesses were still growing, which led some politicians to try to increase confidence by claiming, “ the fundamentals are sound”. Then, the sudden insolvency of Lehman Brothers was the catalyst that caused a huge and sudden loss in confidence, which caused the huge stock market crash in September 2008.
Loss of confidence and wealth sharply reduced home purchases.
All of this further reduces home values, and because reduced home values are the root of the problem, we are now in a self reinforcing downward spiral.
The Fix
The government could have altered the mark-to-market regulation at any time before that, and we would already be out of this economic mess, but now most of the damage has been done, and such a move would have relatively little impact.
Today, the most honest and effective way to quickly fix the current economic problem is still relatively simple – make everyone believe that home values will increase for the next two or three years. Of course, to sustain the recovery, home values must actually bottom and increase for 2 or three years, and then they can level off.
As housing values declined, there was probably a point at which the most honest and effective way to quickly cause home values to bottom and start rising again was this one simple rollback of government – allow homeowners to deduct their entire mortgage payment.
This one simple deduction is probably no longer sufficient, but the only additional policy needed would be to allow home owners to deduct a percentage of the value of their home.
Sure, a few people and a few banks would still go bankrupt because of their bad decisions, but at least the affected people could get a jobs and loans and start over again – instead of sucking up handouts.
If Congress announced that it was dropping the “stimulus” bill and replacing it with these two deductions, everyone would believe that home values will increase for the next two or three years. The immediate effect would be a stock market recovery, rising home equity, bank solvency, and restored confidence.
To some, I suspect this is obvious, but others may be asking, “How will all of this happen, and how will it happen immediately?”
If home owners can deduct more from their income, then they will have substantially less taxes withheld from their paycheck, and thus home owners can afford more expensive homes, higher interest rates, more consumer goods and services, and more investment in stocks. Also, everyone will know this; therefore:
- Homes values will instantly stop falling and starts rising.
- People who were waiting for home prices to stop falling will buy a home.
- Everyone will expect home owners to have steadily increasing equity in their homes for the next few years.
- Home owners with bad mortgages can refinance more easily.
- Home owners will feel more confident about buying consumer goods.
- Businesses will feel confident about future sales, and thus feel confident about buying assets and hiring employees.
- Less unemployment means more consumers.
- Banks could charge higher interest rates, give loans to less risky people, and have fewer defaults.
- The confidence in Mortgage Backed Securities will increase, and thus their daily market value will increase, which means the mark-to-market rule from the post-Enron regulation will no longer cause banks financial institutions to suddenly become insolvent.
- Increased confidence in profits and bank solvency will increase confidence in the stock market, which will increase the value of personal savings invested in stock s and in retirements accounts invested in stocks.
Note some of the mutually reinforcing cause and effect relationships:
- More consumer wealth and confidence leads to more buying, which leads to more business wealth and confidence, which leads to more hiring and higher salaries, which leads to more consumer wealth and confidence.
- Higher consumer and business wealth and confidence and higher business sales and profits all lead to more investment in stocks, which leads to a higher stock values, which leads to more consumer and business wealth and confidence.
Government is the Problem
Why don’t politicians want to try a simple solution to increase home values? The reasons are:
- It creates no opportunity for politicians to give money to their special interests.
- This tax cut reduces government, and Democrats sincerely believe that government is the solution to every problem.
- The Democrats are in power, and although this tax cut is fair and balanced, and although it would help everyone, by coincidence it would help Republicans more than Democrats because people who made better personal decisions tended to vote for Republicans.
Obama said on January 9, 2008, “There is no disagreement that we need action by our government, a recovery plan that will help to jumpstart the economy.”
As I explained in The Great Depression of 2008, the current economic crisis was caused by a housing bubble and then a crash, which were both caused primarily by government action, so how can the solution be more government action? The SEC, Fannie Mae, the Community Reinvestment Act, planned growth by cities and counties, the Federal Reserve, post-Enron regulations, the War in Iraq, and politicians reducing confidence for political gain – are all government action. Obama himself is part of the problem with Fannie Mae, the CRA, and his efforts to reduce confidence to win the election.
What about more recent government action? Obama continues to reduce confidence to magnify any future improvement, to blame his failure on Bush, and to blame a previous lack of government action. His efforts to reduce confidence are especially corrupt and damaging given his vast following of true believers and his unprecedented support from the mainstream media.
Do those who support more government action know where the TARP money went? Has the government actually improved the economy thus far? Are the Democrats proposing anything new or anything that has ever worked before?
Obama’s recent campaign style tour to sell us his “stimulus” bill not only fails to address the root causes of the economic problem, but he mostly just blames the problem on a lack of government action by Bush and Republicans. He did this three times in his press conference, but the only related specific Obama gave was that Bush’s tax cuts helped cause the current economic problem. He also never acknowledged that some spending creates more or better jobs than other spending. He even said that he knows everything in the bill, which is 1588 pages. He then assured us that it contained no pork or earmarks.
How stupid does Obama think we are!? Then again, Obama doesn’t necessarily think we are stupid. Maybe Obama is just really incompetent.
The stimulus bill will basically borrow money from us and our children, and that money will go to unions, Democrats, rich people, European Banks, and the Chinese. Most Americans hate the idea of politicians borrowing trillions from the Chinese and more trillions from other countries, so that these politicians can reward special interests and people who make bad decisions. This is not restoring confidence, nor is it increasing consumer wealth.
Conclusion
Again we see that the reality is that government is the problem, and less government is the solution.
The Promise of Reality is Freedom.
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