CAUSE AND CURE FOR THE HOUSING AND ECONOMIC CRISIS
WHAT TO DO TO CURE THE CRISIS WITHOUT HUGE DEFICITS
1. Enact the Zero Inflation Taxation policy. This policy will increase confidence of investors to make long-term money investments in the economy, creating a market for 30yr mortgages. It will automatically change the income tax, as economic conditions change in our economy, from recession to the inflation economic cycle. This policy will help curb the excessive use of credit during the inflation cycle. (For a full explanation of the benefits of this policy change go to www economysflaw.wordpress.com/)
2. Create mortgages that have interest rates that are no more than 200 to 300 percent above the annual inflation rate. Maintain mortgage interest rates with Adjustable Rate Mortgages at no more than 50 to 100% above the annual inflation rate. Have the U.S. Treasury or the Fed fund these mortgages until the investor’s start investing in mortgage-backed securities. Lowering mortgage rates would be the fastest way to stimulate the economy. By decreasing mortgage interest rates by 50%, mortgage interest payments would decrease by 50% per month. A $1500.00 monthly mortgage interest payment would decrease by $750.00. That is like receiving a $750.00 stimulus check every month. Remember, the first payment on a thirty year, 0% interest rate, $200,000.00 loan is a $199.10 principal payment, the rest is all interest on an interest bearing loan. To increase people’s disposable income and increase demand in the economy, we must lower interest rates 2 to 3%. November 08 C.P.I. was a negative1.9%and going more negative by the month. A 3% mortgage rate would be 490% above the deflation rate. Eliminate the deductibility of expenses on non owner-occupied one unit housing units. This policy will increase home ownership in America.
3. Make using credit to purchase commodities contacts in commodities markets unprofitable. Credit should be available on the day of delivery. This policy will reduce speculation and hedging, which causes prices to increase and decrease very rapidly, and save our savings pool for necessary production and consumption.
4. After home prices are stabilized, increase the capital gains tax rate on homes, to the same amount as other long-term capital investments. If home prices are going up more that 2% a year, increase the capital gains tax rate on homes further. Increase down payment requirement, to reduce excessive demand in the market. Do not raise income taxes in general.
5. Make home loans assumable. Include all the terms stated in this stimulus plan. Increase the borrowers responsibility for maintaining the home. Encourage making repairs to the home by making the cost of the repairs tax deductible, in the year they are made. This provision does not include home improvements. This will increase economic activity and maintain the collateral for the loan.
6. Make interest on auto loans tax deductible again to increase sales. To encourage the stabilization of manufacturing cost, the auto industry would also be affected by the Zero Inflation Taxation Policy, by the disallowance of this tax encouragement to buy their product.
7. Currently, do not create a government jobs program or a Federal deficit so large that interest rates rise. Allow this stimulus plan to create more economic activity, then take up slake in the economy, if needed, at an efficient rate, to achieve the infrastructure we need for the future.
8. Do not use high interest rate policies alone to control inflation and inflation psychology. Use the income tax, which will not raise cost or cause a recession.
9. Bundle the mortgages into securities that have the same criteria and purpose. This will make it possible to determine their value, so they will be able to be marketed.
10. Enact the Oil Conservation Exchange Contribution (OPEC). This policy will help stabilize oil prices and reduce their importation. Help balance the trade deficient. More info. Go to web site.
Gold at one time in our history was the value behind our currency. It was called the Gold Standard. The new Gold Standard is the value of our homes, buildings, land, products, and our economy (people). Correctly guided, our economy will once again make our currency “As good as gold.” We must change how we make money. “ We must make money the old fashion way, we must earn it.”
THERE IS ANOTHER WAY TO STIMULATE THE ECONOMY
THAT IS FASTER AND MORE EFFICIENT
STIMULATING THE ECONOMY WITHOUT HUGE DEFICITS
According to recent articles in newspapers and financial magazines, across our nation we have seen the price of single-family homes drop an average of 31% or more in the past two years. A recent article by Courtenay Edelhart, Californian staff writer, stated, it is predicted we might see another 21% decrease in the median priced home in 2009! More price reductions are expected in 2010 in housing and in the commercial real estate sector of our economy. The deflation of housing prices was needed after the housing bubble, but we are now at a point where a floor must be put under home prices before we have a complete collapse of our economy. It is very sick because of decades of mismanagement. State and local governments, which rely on property tax money to finance their services, are cutting back and borrowing heavily. Our national debt is expected to increase by trillions of dollars.
INTRODUCTION
Let me introduce myself. I am sixty-four years old. I am a retired Economic Analyst, Economic Scholar, Financier, Businessman, Investor, Author and former candidate for the California Congress. I have over forty years of being in the financial and business world.
There is a major flaw in our economic theories. I wrote a book and several articles outlining new policies to cure economic crisis, now and in the future. It is a guide to correct a major flaw in our economic theories.
We do not need a government jobs program or more bailouts to cure the economic crisis. This is not to say that the things that President Obama is proposing do not need to be done. It would be better if we did them at a slower pace so they could be done in an efficient manner. Job programs were tried in the Great Depression of the 1930s and were only partially successful. It was World War II that finally restarted the economy. We do not want to do that again!
Because our economy has been misguided for decades, our economy is in terrible shape. Unemployment is rising. Our economy is experiencing an economic crisis. Governments are close to being broke. The federal debt is expected to grow by trillions of dollars. People are losing their jobs and homes by tens of thousands. Business large and small are going bankrupt. People are giving up hope of a better future for themselves and their families.
We have been treating the symptoms of the economic crisis, not the disease. We must try something different. What the government is doing is not working!
Investors must be encouraged to invest in long-term bonds and securities to restart the economy. There are five questions that investors ask before they will get off the sidelines. Will I make a profit? Will my investment retain its value? Will it pay a good return on investment? Will the borrower be able to return my money? Will the economic future be better than the past? If we can satisfy these concerns, investors will get off the billions of dollars they are sitting on and reinvest them in our economy. Breathing new life into it. The government will not have to bailout the economy, if investors and consumers are confident of the future.
John Maynard Keynes (1893-1946) was the British economist who revolutionized economic theories of the 1930s. Keynesian economics works well. The trouble is he did not leave a handbook on how to correctly slow down the economy when it is so strong, that it is creating an economic crisis. We recently had the housing bubble, which got us into this mess, and the oil bubble in the commodities market. The Federal Reserve was not able to do anything about either one of these bubbles. WHY?
We need a new method to cure economic crisis and control inflation psychology. Our economy has become so big and electronically sophisticated, the old ways no longer work. One of the reasons we are experiencing an economic crisis is we have made investing in capital assets and commodities with rising prices very profitable. Since inflationary investments are taxed at 15%(long term capital gains tax rate) and money investments are taxed at 35%, making the money investments worth 20% less. In fact to offset the capital gains rate on personal residences, which is 0%, and the homes annual appreciation rate is 30%, which we had in 2003-2006, interest rates on bonds, securities and bank savings accounts would have to go up to 45.5 a.p.r, to have the same return on investment. Add in the effect of the interest deduction and you have all the ingredients for a financial crisis. The house became an investment not a home. The seller had very profitable reasons to sell. The buyer had very profitable reasons to buy. This increased dramatically the number sales that occurred, all eagerly financed by the capitalistic entity (financial institutions) of our economy to increase their profits. Is it any wonder that we had a housing bubble and the Fed could not do anything about it, without killing our economy, and disrupting the world economies?
To halt the falling housing prices, save our auto industry and put people back to work, mortgage rates must decrease 2 to 3%. When the economy refinances, at a lower interest rate, people’s disposable income will increase. The unemployed will be employed, and have more income. People’s confidence level will rise and they will start spending money again! They will be able to afford a new car, there-by saving the auto industry. If the vehicle’s loan interest is made tax deductible again, more vehicles will be sold and at a faster pace.
Banks no longer hold mortgages. They sell them to investors. So we must induce an economic climate so investors are willing to purchase, during this economic crisis and the inflation cycle, long-term bonds and securities, I wrote a book “Inflation the Economy Killer” containing “The Zero Inflation Taxation Policy”, which correctly cures the economic crisis. It correctly controls inflation without hurting the economy, unlike the Fed’s high interest rate policy. It also solves the problems of under investment in the private long-term bond and securities market, during economic crises.
The Zero Inflation Taxation policy would work like this. As inflation or under investment in the bond and securities market begins to occur, the tax on money investments should automatically be decreased and the interest deduction should be decreased by the same percentage rate, based on the inflation rate. When money investments are taxed at 15%, money investments will be as valuable as inflationary investments.
Most of the time, all capital gains must be taxed at the same rate to correct this imbalance. I do not want to eliminate the long-term capital gains tax rate. We need to encourage people to make productive investments and take investment risks. I want to neutralize it at the correct time in the economic cycle. Even though it will be neutralize for inflationary investments it still will be available for productive investments. If a real estate, stock market or a commodities market bubble is occurring raise the capital gains tax rate on that item or on all long-term investments. If the price of one of the mentioned items are declining too rapidly, lower the capital gains tax rate on that item. Income taxes in general should not be raised.
In the 1980s, even through interest rates went up to 21%, they were only 100% above the then currant annual inflation rate of 11%. The currant inflation rate is approximately 0%, some economist say we may even be lower than that (deflation). The currant interest rate to buy a home is approx. 6% and decreasing slowly for the most credit worthy people. That is at least 600% above 2008’s inflation rate. If a person has credit card debt, the interest rate is even worse. It can be 2500% or more above the annual inflation rate. If a person has credit card debt equal to their annual gross income, of say $25,000.00, they will pay more interest to the financial institution than income taxes to the state and federal governments combined! The economy cannot function efficiently under these conditions. We must stop the destruction of our economy every 7 to 10 years by high interest rate polices.
ENCOURAGE FINANCIAL INSTITUTIONS TO LOWER THEIR LENDING INTEREST RATES.
The capitalistic financial system has become its worse enemy. If interest rates for mortgages were lowered there would not be as many foreclosures. The value of their collateral would stabilize. The money they are lending can be obtained at the Federal Reserve for a very low rate above the inflation rate. Banks kept the interest rates approx. 300 to 500% or more above the inflation rate all through the 1930s, causing the Great Depression to be worse than it would have been with lower interest rates. The Banks may be keeping interest rates high so they will not loose their depositors or more likely for profit reasons. Banks are investment companies. They invest the money they receive into money investments such as mortgages, business loans, treasuries, and consumer loans, ECT. The banks can have the same concerns as private investors have, as mentioned. This is why the credit system is frozen. It is not a lack of capital. The banks can borrow as much money as they need from the Fed. It is because the collateral is going down in price and people and business’s ability to repay the loan is decreasing every day. The banks will only loan to their most stable customers. The banks must also be able to make a profit to pay their cost.
The US Treasury can also borrow money at the Fed. The Treasury is a not for profit agency. It can fund mortgages for a short period of time at cost or a little above cost to pay for expenses. The Federal Reserve should lend the money to the U.S. Treasury or the Fed should purchase the new mortgages through the following financial institutions, until there is a floor under housing prices. Treasury or Fed would receive the cash flow from these new mortgages, minus a service fee. It could then use the capital to fund more mortgages. When housing prices stabilize and investors are willing to invest in mortgage-backed securities, the treasury would sell the mortgages to investors. This economic recovery plan would not cost the taxpayers any money nor would taxes need to be increased to pay off a federal deficit.
I would not use the TARP money to buy the bad mortgage securities. As the old mortgages are refinance they will change from a delinquent assets to viable assets and be taken off the bad debt list. After the economy restarts and gets strong again, interest rates should rise slightly. The Fed should never let interest rates rise more than 100% above the annual inflation rate. This means that mortgage interest rates must also follow the annual inflation rate down. Mortgage interest rates must be maintained fifty to 100% above the inflation rate to control inflation expectations.
We have special circumstances in our economy at the currant time that warrants this action by the US Treasury and Fed. With the government funding lower interest rate mortgages than the banks and financial institutions, the collateral’s price will stop going down. The banks will have the confidence to lower their interest rates to be competitive.
The Treasury and the Fed will determine the rate of interest for the mortgages it will buy. The Home Loan Bank, Federal Housing Authority, Fannie May, Freddie Mac and any other financial intuitions that are government sponsored, have deposits insurance by FDIC, or are partially owned by the government would create mortgages with that rate of interest. The mortgages should not have an interest rate greater than 200% to 300% above the annual deflation rate.
When the mortgages are bundled into securities, only those loans that had the same lending criteria and purpose would be allowed into the security. With this policy in place the securities could be correctly rated as to value. Adjustable Rate Mortgages (ARM) should have a starting interest rate of 50to100 % above the annual inflation rate. The mortgage interest rate could not be raised more than one-quarter percent per year or greater than a total APR of 5%. We can cap the interest rate because we will no longer be totally relying of the Fed to control the money supply. The interest rate can be lowered at a faster rate to maintain demand in the housing market. The new buyer must qualify for the mortgage at the highest interest rate the mortgage will obtain.
I believe that if home loans were made assumable, home prices would not have decreased as much as they have. The selling expenses connected to transferring the home to the buyer is considerable less and occurs much quicker, increasing demand, thus there is less time for the home to devalue. If there is no equity left in the home, the seller is not going to pay the extra expenses to sell it in a conventional manner. The homeowner will just let it go back to mortgage holder. Approval of the new buyer, by the lender, must be done before they could assume the mortgage. The mortgage should be adjusted to the current selling price of the house or the banks can agree to a sliding principal amount, as explained later. A 3% pay down of the unpaid principal amount would be required. If equity is less than 20%, mortgage insurance is required. The assumption expenses to the buyer should only be the actual expenses of the mortgage service company. The title insurance should be assumable by the buyer. The buyer should pay a small fee to cover the actual cost of assumption and a title search.
You might be thinking these changes to our financial system would decrease the investor’s willingness to invest in the new securities. Currently investors are not as concerned about the rate of return. They are more concerned about the borrower’s ability to repay the loan and the value of the collateral. With the borrower qualified at the maximum interest rate the interest rate will raise too, the chance of a foreclosure is very minor. With the mortgage interest rate increasing 1/4 per year, the investor would be more likely to invest in a mortgage backed security, rather than a treasury note that does not have an automatic annual interest rate increase.
People do not abandon their homes because the loan is greater than the current resale price. They have not given up hope that the selling price of the home will increase in the future. They are mainly moving out of their homes because they cannot afford the mortgage payments. They will give the home to the bank, if they have to move, to find less expensive housing or find employment. This is why the loan should be assumable. If the monthly payment is affordable to the buyer, it is better to own the home than to rent. Even if it’s current selling price is less than the mortgage owed. The new buyer will be allowed a tax deduction for the interest and property taxes. This advantage makes their housing cost cheaper than renting. Also it is possible they may make some money on the sale of the home in the future. Even if they do not make money on the sale, they are better off than renting, because they will eventually pay the home mortgage in full.
For those people who own a home that the mortgage is greater than the currant selling price, a clause should be included in the refinanced mortgage that states, the bank will discount the mortgage, an amount equal to 20% of the monthly payment, each month, for a maximum of ten years, or until the selling price of the house plus repairs equals the amount of the mortgage, if the borrower agrees to pay off the entire unpaid balance due. This policy would allow for an orderly decrease in mortgage balances that are above the selling price of the home. The borrower must also buy mortgage insurance. Again the borrower must qualify for the loan at the highest rate of interest the mortgage will obtain. This clause would benefit both the banks and the homeowner. The homeowner would have a lower monthly mortgage payment when he/he refinances the mortgage at a lower interest rate. The interest paid will remain 100% tax deductible if we maintain low inflation rates. The bank will make up some of the forgiveness of the principle amount because they will collect interest based on the total unpaid balance of the mortgage. The banks will not have the disruption of their mortgage payments, the cost of foreclosure and the sale of the property. To decrease the time and cost it takes to refinance the mortgage a modification agreement should be used.
The homeowner will also be maintaining the condition of the collateral for their mortgage.
On all mortgage insured homes the insurance company could either take possession of the home or pay the unpaid amount between the currant selling price and the unpaid balance of the mortgage minus any repairs that need to be made to the home to obtain the highest possible selling price. The borrower should be responsible for any repairs, to encourage the borrower to maintain the collateral. The repairs to a home should be made tax-deductible in the year they are made so the neighborhood does not deteriorate. The banks and borrowers should be encouraged to use a Grant Deed In Lieu of Foreclosure so the amount of time the home is empty will decrease. In this way the banks cost will decrease and borrower responsibilities will not last as long. The shortest turn a-round time will decrease the possibility of damage. The borrower should be responsible for the maintenance of the home until the bank obtains legal possession. The bank does not care who is making the mortgage payment. They do not want the house back. They just want someone to continue making the monthly payments.
To prevent another housing bubble and slow down rising housing prices, if occurring in any of the twelve Federal Reserve Districts, (more than 2% annual price increases) in that District, the secondary mortgage market should require a greater percentage down payment to reduce demand and maintain a strong financial industry. The Fed should not raise interest rates because this causes cost to go up in the economy and causes the economy to slow down in general, which causes a recession.
If the interest rate for a mortgage is reduced by 2 to 3 % the price of the collateral will stabilize because of the increased number of qualified buyers that would want to buy a home. The foreclosed housing inventory will quickly be sold increasing the value of all the other homes in the neighborhood. When the mortgage is made assumable, the monthly payments will continue to pay down the loan, there-by maintaining the value of the security. The investors will be making a good return on their investment if the interest rate they are collecting is 200% to 300% above the currant annual deflation rate. With The Zero Inflation Taxation Policy enacted, the security instrument will maintain its resale value because the Fed will not have to raise interest rates as high to control inflation and inflation psychology.
There is a second wave of foreclosures on the way, starting in 2009 or 2010, when another set of (ARM) mortgages adjust. If we act quickly, they will adjust down instead of up. With the above policies enacted interest rates will come down, avoiding the possibility of hundred of thousands of more foreclosures and the prolonging of the recession or even developing a depression.
To recap again, the Zero Inflation Taxation Policy will stabilize the long-term bond and securities market, creating a market for 30 year fixed rate or ARM mortgages, at the lowest possible interest rate.
If you agree that these changes need to be enacted, support me in getting them enacted. In this way you will be doing something that will really improve the lives of the American people and families of America. The stock market should go up, replacing some of the value they have lost in their retirement funds.
We do not need a government jobs program or more bailouts to cure the economic crisis. They may do more harm than good. With the government borrowing such large amounts of money, treasury securities will rise in price. Banks and investors will put their money into treasuries and not into the economy and mortgages. A decrease in interest rates would be better than a tax cut because it would increase purchasing power without decreasing government revenues or increasing the national debt. Housing prices must have a floor put under them before more equity is lost. Banks will not loan homeowners money because of a lack of equity unless the homeowner agrees to the previous stated clause. These policy changes will cause mortgage rates to drop and the stock market should go up. The economy will stand up on its own, without a government bailout.
RECAP—WHAT TO DO TO STIMULATE THE ECONOMY.
1. Enact the Zero Inflation Taxation policy. This policy will increase confidence of investors to make long-term money investments, creating a market for 30yr mortgages. It will automatically change the income tax as economic conditions change in our economy from recession to the inflation economic cycle. This policy will help curb the excessive use of credit during the inflation cycle.
2. Create mortgages that have starting interest rates that are no more than 200 to 300 percent above the annual inflation rate. Maintain mortgage interest rates with Adjustable Rate Mortgages at no more than 50 to 100% above the annual inflation rate. Have the U.S. Treasury or the Fed fund these mortgages until investor’s start investing in mortgage-backed securities. Lowering mortgage interest rates would be the fastest way to stimulate the economy. By decreasing mortgage rates by 50%, mortgage interest payments would decrease by 50% per month. A $1500.00 monthly mortgage interest payment would decrease to $750.00. That is like receiving a $750.00 stimulus check every month. Remember, the first payment on a thirty year 0% interest, $200,000.00 loan is a $199.10 principal payment, the rest is interest, on an interest bearing loan. To increase people’s disposable income and increase demand in the economy, we must lower interest rates 2 to 3%. November 08 C.P.I. was negative 1.9%. A 3% starting mortgage rate would be 490% above the deflation rate. Eliminate the deductibility of expenses on non owner-occupied one unit housing units. This policy will increase home ownership in America.
3. Make it unprofitable to use credit in the commodities market. Credit should be available on the day of delivery. This will reduce speculation and hedging in the commodities market, which makes prices rise and fall very rapidly. This will save our savings pool for necessary productive and consumption reasons.
4. After home prices are stabilized, increase the capital gains tax rate on homes to the same amount as other long-term capital investments. If home prices are going up more that 2% a year increase the capital gains tax rate on homes. Increase the down payment requirement to reduce excessive demand in the market. Do not raise income taxes in general.
5. Make home loans assumable. Include all the terms stated in this stimulus plan. Increase the borrowers responsibility for maintaining the home. Encourage making repairs to the home by making the cost of the repairs tax deductible, in the year they are made. This provision does not include home improvements. This will increase economic activity and maintain the collateral for the loan.
6. Make interest on auto loans tax deductible again to increase sales. To encourage the stabilization of manufacturing cost, the auto industry would also be affected by the Zero Inflation Taxation Policy, by the disallowance of this tax encouragement to buy their product.
7. Currently, do not create a government jobs program so large that interest rates rise. Allow this stimulus plan to create more economic activity, then take up slake in the economy, if needed, at an efficient rate, to achieve the infrastructure we need for the future.
8. Do not use high interest rate policies alone to control inflation and inflation psychology. Use the income tax, which will not raise cost or cause a recession.
9. Bundle the mortgages into securities that have the same criteria and purpose. This will make it possible to determine their value, so they will be marketable.
10. Enact the Oil Conservation Exchange Contribution (OPEC). This policy will help stabilize oil prices and reduce their importation. Help balance the trade deficient.
Gold at one time in our history was the value behind our currency. It was called the Gold Standard. The new Gold Standard is the value of our homes, buildings, land, products, and our economy (people). Correctly guided, our economy will once again make our currency “As good as gold.” We must change how we make money. “ We must make money the old fashion way, we must earn it.”
Conclusion
The refinancing of our economy at a beginning rate of 3% would not create another housing bubble or excessive demand in the economy. The changes I have proposed to the income tax will automatically neutralize or remove the Keynesian stimuli that is applied to the economy to help the economy recover from the recession, at the correct time in the economic cycle. In real estate it is location, location, location. In macroeconomics it is timing, timing, timing. Interest rates will remain at approximately 50 to 100% above the inflation rate as the economy improves, with the Zero Inflation Taxation Policy enacted. Investor and consumer’s confidants will be improved and the stimuli to use excessive amounts of credit during the inflation cycle will automatically be neutralized. An interest rate reduction is better than a tax cut or deficit spending because it increases purchasing power without decreasing government revenues or increasing the national debt. Money investment will increase during the inflation cycle, maintaining our savings pool for productive investments. The Zero Policy also maintains the means of exchange we use in our economy, (credit) at an interest rate that allows our economy to work efficiently. Interest cost will stabilize at approximately 3 to 4% with an inflation rate of 2%. Oil and commodities prices will stabilize because of the OPEC and reduced speculation and hedging in the market.
Please send this information to as many people and groups as you can. The last four letters in American are I__CAN. We can do this together and as a nation of free people. We are responsible for how our economy is managed and what laws are enacted.
Copyright 12-1-08 by Leonard Tekaat. All rights reserved in the U.S. or any other country. The use of the information in the above article copied or written by the author is strictly forbidden without written permission.
Additional info, Inflation the Economy Killer, available at Amazon.Com. Leonard Tekaat is an Economic analyst, Economic Scholar, Author Businessman, Financier, Investor and former candidate for California Congress. E-mail leonardc@earthlink.net economysflaw@yahoo.com www.economysflaw.wordpress.com/
