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If you are unemployed, your home is being foreclosed upon, or are just sick and tired of getting the “shaft“(tax bill to clean up the mess the “big boys” make), join a growing number of people that want to change the guiding polices of our economy to increase  opportunities so they can provide for themselves and their families, and provide America a better financial, and societal future. The middle class does not want to become government dependent. We have worked hard to be self-sufficient. If the Financial Institutions and government continue on the path we are on, it will mean the demise of small businesses, and the middle class. We need people that are not afraid to stand up to be heard. To take a proactive position about their future, and the future of their nation. Join the R.E.B.E.L.S. it is free. Please get involved for your children, and their posterity’s future. There is a better way to improve our economy than to put them into debt to the Federal Government, which will ruin their chance at the American Dream of a better future for their posterity. Our e-mail is economysflaw@yahoo.com Connect on  www.facebook.com/leonard.c.tekaat/ Our Tweet handle is: “recessionkiller”, join the conversation.

Solution to; Credit Crisis, Housing Bubble, Foreclosures, Recession /Inflation 

To my fellow Americans:

Please send a copy to President Bush, President Elect Obama, your Representatives in Congress and all your friends and anybody else that can help get the word out.

 PREVENTING HOUSING BUBBLES

& GET THE ECONOMY MOVING AGAIN

To get our economy moving again, and prevent another housing bubble, the U.S. Congress needs to change the income tax laws, the Federal Reserve must lower interest rates, which they have done, and the financial institutions must be able to decrease long-term mortgage rates.

 Starting mortgage rates should drop 2 to 3%, and stocks should go up as a result of the income tax law changes we are proposing.

There are three things that must be done to lower interest rates, and save our economy. First Congress must make a change to our income tax. Then the Federal Reserve must lower their interest rates to their member banks. They have already done this. The financial institutions then should be able to lower long-term interest rates to the public, after the income tax change is enacted. Mortgage starting interest rates should drop 2 to 3%, and stocks should go up as a result of the changes we are proposing!

The current credit crisis could have been avoided by a change in our income tax laws. We should enact what I call “THE ZERO INFLATION TAXATION POLICY”. This policy is a new way of correcting the current economic crisis, and controlling inflation and inflation psychology in our economy. To halt the fall in housing prices, save the auto industry and put people back to work, mortgage starting interest rates must come down 2 to 3% when the financial institutions restructure the mortgages, at the lower starting mortgages rates, people’s disposable income will increase. The unemployed will be employed and their incomes will increase. Consumer’s conference will rise, and they will start spending money again. Production will increase as people are put back to work. The economy will start working again without a government bailout!  

How can we make it possible for the financial institutions to be able to lower there interest rates on long term mortgages? Banks don’t hold mortgages. They sell them to government sponsored enterprises, Fannie Mae and Freddie Mac. The GSEs sell them to investors. We must induce an economic climate so investors are willing to purchase long term bonds that back mortgages, during this economic crisis, and the inflation cycle. 

 When inflation starts to occur in our economy, the interest deduction, and the tax on interest income must be decreased. This would cause the economy to become more efficient, create more real wealth and strengthen the American dollar in the world money markets. Paper profits will decrease. (Inflationary investments in housing, commodities etc., purchased with credit, that increases in price without making improvements or increasing supply). This change in our tax code would help the Federal Reserve System (Fed) control inflation and maintain employment. The Fed would not have to raise interest rates as high to increase the value of money. We need this tax policy change, before more and more people become government dependent.

I wrote a book titled INFLATION THE ECONOMY KILLER, (>Amazon.com<) which outlined this POLICY. We need a new method of dealing with economic crisis.  Our economy has become so big, and electronically sophisticated the old ways no longer work. One of the reasons inflation exist in our economy is that we have made it very profitable. Since inflationary investment income is taxed at 15%, (long-term capital gains tax rate), money investment income, which is taxed currently at up to 35%, is worth 20% less. In fact, to offset the capital gains rate on personal residences which is at 0%, and the home’s annual appreciation rate is 30%, interest rates earned on bonds and bank accounts would have to go all the way up to approx. 45% to have the same rate of return on investment. Is it any wonder that we had a housing bubble, and the Fed couldn’t do any thing about it without destroying the economy?

The Federal Reserve, in the early 1980es, tightened the money supply enough to raise interest rates to 21%. Of course this created a recession, because normal production and consumption cannot continue under these conditions. Many people were thrown into the unemployment lines. Small and large businesses went bankrupt and the government’s responsibilities increased as more people became dependent on welfare. Even though interest rates went up to 21% they were only 100% above the then current inflation rate!

The current mortgage rate as of Dec-2008 is 6%, 600% above the current inflation rate of approximately 0%.  The economy cannot work efficiently under these conditions.

A better way to correct the current economic crisis, control inflation psychology, and maintain the value of money is by progressively reducing the interest deduction and the tax on interest income, at the same percentage rate, as inflation increases in our economy.

The balance of our economy would be maintained. Whenever the interest earned on money investments becomes 15% taxable income, money investments would be as valuable as inflationary investments. This POLICY, when used during an inflationary period, would automatically take excess demand out of the market place, slow down the economy and maintain the value of money.

When people try to protect the value of their money from inflation, by investing in inflationary investments, to receive paper profits, they create more debt (money) and more inflation. With the enactment of the “zero inflation taxation policy” normal production and consumption would continue, during the inflation cycle. Demand would be reduced from the top of the economic ladder. Demand in the economy would not be reduced by creating unemployment and bankruptcies of small businesses and the middle class. The economy would have the savings pool (money), at the lowest possible interest rate, it needs to maintain employment and raise the standard of living of all our citizens. Production would have the time it needs to balance supply with normal demand.

 The long-term capital gains tax rate would still be in effect but those people who make capital improvements and increase the real wealth of our economy would benefit from its existence. People with money stay invested in money during the inflation cycle, and  would not be making inflationary investments, because inflation would not be as profitable, or would they be making investments to protect their money from inflation. Their money would stay in the credit system of our country, supporting increases in production and normal consumption, thus maintaining low interest rates and inflation rates.

The ZERO INFLATION TAXATION POLICY would eliminate inflation psychology without raising interest rates, therefore stabilizing credit cost. This policy would not reward inflationary investment. It would encourage productive investment. It would automatically change our economy from a high credit use, and a decreased saving economy, to a system that encourages money and productive investments during the inflation cycle.

This change is exactly what our country needs right now! We need to be able to lower mortgage starting interest rates without creating another round of inflation, or a housing bubble; commodities, energy/oil bubble. We need a 2 to 3% mortgage starting interest rate drop to restructure primary home mortgages in our economy, and return purchasing power to the consumer to avoid a deep recession. 

Continue to read the comments and my replies. There are more details in the replies that you might be interested in. 

Feel free to contact me if you need additional information on the book, or for any other reason. The Book INFLATION THE ECONOMY KILLER is available at Amazon.com

Sincerely

Leonard C. Tekaat

Copyright 1992

Two Questions Need To Be Answered To Solve The Unemployment and Foreclosure Crisis.

What and who really started the primary home price bubble?  How can we stabilize home prices, and help prevent more foreclosures, and improve the unemployment rate without a tax reduction, a tax increase, or by increasing the federal deficit? 

The reason that the economy is not responding very well to the deficit spending stimulus recovery plan is because we continue to use the same Keynesian policies that we have used in past recessions. The Great Recession of 2008 is not the same as previous recessions. It was not caused by lack of demand, or over-supply.

The Great Recession of 2008 is similar to the Great Depression of the 1930s. As in the Great Depression of the 1930s, this recession was caused by a collapse of a credit bubble. If we continue on the same path that we are on, with bigger deficits, it will not turn the economy around. On the path we are on, I believe we are headed for a complete collapse if interest rates are raised. High inflation if interest rates are not raised, or hyperinflation when the Federal Reserve monetizes the federal government’s deficit.

You will find the answer to how the primary home credit bubble was created in the next chapter:  To Increase The Disposable Income And Confidence Of The Middle Class, Without Tax Increases, Tax Decreases, Or By Deficit Spending

We have two major problems. Getting the economy re-started, to create private sector jobs without creating more money, which will create high inflation, and inflation psychology. The other problem is: How do we slow down the economy, after it is up, and running again, without higher interest rates, which will cause the economy to collapse again. 

If President Obama wants the economy to improve, the middle class’s, and small businesses’ financial condition must be improved. His effort to get the economy moving again is faltering because he has been miss guided by the financial capitalist advisors that surround him.   We need to increase tax revenue, not by raising taxes or lowering taxes, but by increasing productive economic activity, by increasing demand without increasing the federal deficit, or the money supply. We do not want to create more paper profits as we have done in the past, to end previous recessions. 

By targeting a temporary ascending interest rate reduction for mortgages to the sectors of our economy that are having the most difficult time recovering, the primary home sector, and the consumer, this will allow the economy’s third leg (enterprise sector) to restart the economy again. The primary home sector of our economy is where the economic crisis was created, and where the credit bubble collapsed. We have not address this part of our economy in the correct way. I will explain.  

You might be thinking that mortgage interest rates are at a historical low rate. The spread between the cost of funds from the Federal Reserve, and the current mortgage rate needs to be much lower. Even then it would be at a historical high. When interest rates went to 21% for a mortgage in the early 1980s, that was less than 100% above the then inflation rate of 12%. Currently we have home prices that are still declining, yet the interest rate for a 30 year fixed rate mortgage is 450% or higher, (4.5% for the most credit worthy people), above the home price deflation/inflation rate. The banks can borrow money from the Fed for under .25%. They can loan it out for mortgages at 5%, that is a 20 times increase between the cost of funds and the sale of funds. Let me give you an example. If an auto manufacturer produced a car for $20,000.00, the sale price would be $400,000.00 marked up 20 times above the manufacturing cost. The financial capitalist businesses can pay enormous bonuses because of these huge profit margins. The profit margin on other consumer, and business credit is even greater. Take for example credit card rates. At an annual interest rate of 25%, the same car would sell for $4,000,000.00. You are not seeing things. It’s six zeros.

The economy should not have to be in a depression for the economy to have interest rates low enough to stimulate the economy. The banks have failed to pass through the low Fed rate to the main street economy, even through 98% of the new home mortgages are either being sold to, or guaranteed by government housing agencies. Since the terms of most mortgages that are purchased by government agencies are determined by the agencies, Fannie Mae and Freddie Mac, and government housing agencies could be used to offer a lower starting mortgage rate. If the agencies offered to purchase a primary home mortgage with the terms outlined here later, banks would offer it to the public. 

Our government was created by the people; for the benefit of the people. It was not created to only benefit the financial capitalist. The government does not have to make a profit from a program, for it to be beneficial for the people. A program has to make sense, and break even without burdening the people with increased taxes, Why cannot our government agencies be used, in the most efficient manner, to lower mortgage starting interest rates? Why can’t the government agencies invest in our new, and modified mortgages, which will increase in value, and earn interest to pay for the operating cost of this program? Why could not the housing agencies modify, or refinance people’s underwater mortgages at a lower starting interest rate. The banks won’t do it unless Fannie and Freddie, and the other government housing agencies offer to buy the mortgages with the new terms, outlined in the chapter, How To Increase The Disposable Income And Confidence Of The Middle Class .

It wouldn’t cost the taxpayer, or the government any money, because the program would be supported by the interest payments, and the increases in the value of the Mortgage Backed Securities that the government housing agency will be investing in, the same way The Home Owner Loan Corporation was supported in the Great Depression.  The Home Owner Loan Corp. closed down in the 1950s returning the excess money they had collected to the US Treasury. It was a very successful program. Posted on my website, in one of my articles, is a review of my recovery plan by CSUB Economics Professor Mark Evans. You can locate it on my website www.economysflaw.wordpress.com There is also an article on the web about the Home Owner Loan Corp.

Banks are not risk takers. They will only loan money when the collateral is maintaining, or increasing in value. If collateral prices are increasing, they are more than willing to loan you money. In fact banks don’t want to stop loaning money out, because this is how they earn their money. They don’t know how or are not willing to slow down the creation of money (debt) correctly, because they will be less profitable. I have no problem with people and banks making a profit. But as we have learned the creation of too much debt can destroy an economy.

Credit underwriting standards should be maintained not lowered as the economy improves, and collateral values increase. If home prices increase more than 2 to 3% a year, raise down payments requirements, and underwriting standards. This will allow production the time it needs to catchup with demand.

The mortgage unpaid balance reduction program for underwater mortgages, as outlined in my other articles, will end in 10 years, or less, without increasing our taxes. As the financial condition of the middle class improves, so will the financial condition of the banking service industry. A bank is only as strong as its customers, the value of its collateral, and capital. 

A lower starting home mortgage rate will increase consumer’s disposable income. As the economy improves, the foreclosure inventory will be eliminated. Since we will be modifying the mortgages, we will not be increasing the money supply, therefore the chance of creating hyperinflation will be decreased. We will be increasing people’s disposable income, but at the same time we will decrease their desire to use credit, and increase their desire to hold money as a store of wealth, during the inflation economic cycle, (as explained later) which will decrease the ability of the banking industry to over leverage the money supply during the inflation cycle. 

Because of the “standard deduction” and the exclusion of so many people from the income tax rolls, the upper middle class, the rich, and investors use the mortgage interest deduction to purchase primary housing, and buy single-family homes as investments. This extra stimulus/demand in primary housing is needed when the economy is experiencing a recession, but not when it is experiencing inflation. By using the income tax to reduce demand from the top of the economic ladder, with an automatic change in our income tax system, when inflation begins to occur, will make our economy more efficient, productive, and raise all of our citizen’s standard of living. 

We have a flaw in our economic policies. We have a dynamic economy that is changing from recession to inflation over the years. Yet we have an income tax that is static. The Flat Tax, and the Fair Tax are also static taxes. The stimulus that is enacted in a recession to improve the economy is left in tact as the economy moves into the inflation cycle. This causes the economy to heat up too much, and the economy collapses into a recession, or a depression. Our economy experiences Gloom, Boom, and Doom economic cycles. 

In the past the Federal Reserve used higher interest rate policies to control inflation in our economy. This policy reduces demand from the bottom of the economic ladder, which causes untold misery, and hardship for the middle class, the poor, and small businesses. Thereby increasing government dependency, and its deficit. Relying only on the Fed’s high interest rate policies to control inflation is an obsolete policy, and it should be changed.  

To Increase The Disposable Income And Confidence Of The Middle Class Without A Tax Cut, Tax Increase, Or Deficit Spending 

President Obama, and the financial capitalist stimulus plans are not working as well as they had hoped. Their plans are not lowering the unemployment and foreclosure rate. President Obama has surround himself with financial capitalist advisors. The financial capitalists have written the current recovery programs to benefit them, not Main Street. The recovery program I am purposing will help the banking sector, and main street. 

An economic recovery plan must increase productive economic activity, and the disposable income, of a majority of the people in the private sector of the economy, which will reduce unemployment, and foreclosures, by increasing aggregate demand.   

What Must Be Done To make Our Economy Better For All Our Citizens? 

 #1. Create a new mortgage that fits the current economic conditions. The mortgage would have a starting interest rate of 3%. The interest rate would increase at 1/4% a year for seven years, and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to most homeowners that could qualify, even those people who their mortgage is underwater. 

The Federal Reserve, US Treasury, or a new Home Loan Corp. (Fannie and Freddie were created for this reason), would purchase the new MBSs until the housing market stabilized, and then sell them to investors when the interest rate on the securities increased to 5%, and the value of the homes were 10% greater than the mortgages. This mortgage would increase middle class people’s disposable income, and confidence, thereby increasing productive economic activity, which would reduce unemployment by increasing demand for products, and services. The mortgage-backed securities the Fed currently holds would increase in value because they include mortgages that have a higher interest rate than the new mortgages will have. The Fed needs to sell the Mortgage Backed Securities that they currently hold. The purchase of these MBSs did not increase the disposable income of a sufficient number of people, to improve the financial condition, and confidence of consumers to restart the economy.  

#2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to 10 yrs, or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate, and terms would be the same as the first lien holder. A modification agreement letter could be used for most mortgages that are held by the banks and federal agencies, and have not been securitized. I believe that the investors that hold securitized mortgages will prefer this program, than a possible foreclosure. The banks, and F&F that hold securitized mortgages should also prefer this program to the short sale. 

Under the current economic conditions I would send out modifications letters without the existing homeowners having to qualify at the 5% interest rate. Only new home buyers or people who must refinance their home, should need to be qualified. This policy will eliminate the problems that the government’s HAMP program has experienced. The policy will immediately increase people’s disposable income, and reduce the number of foreclosures, and nonpreforming mortgages. 

If after the modification terms have been agreed to by the homeowner, and the mortgage is still a nonpreforming asset, contact the homeowner with a follow-up letter to have them come in, to discuss the matter, and qualify them. If they are not going to be able to make their new mortgage payment, serve them a Notice of Foreclosure. The homeowner will have time with an improving economy to improve their financial condition or get a job. If they know that the new terms and the principal reduction clause will be available, they will be more motivated to not give up their home.

This policy will greatly reduce the work load of the mortgage servicers, and the court system. The policy will reduce the billions of dollars the financial institutions are losing on foreclosure cost, and short sales. The economy, financial institutions, and the homeowners will benefit also, because the housing market will stabilize, and they will not see more of their equity disappear. The local, state, and federal government will benefit, because their tax base will stabilize, and their liabilities will decrease as people go back to work.

It is not necessary to mark the mortgage down to the current market value of the home as long as the borrower has hope that the mortgage will, at some point, equal the possible selling price of the home. The homeowner will continue to make the reduced mortgage payments as the market stabilizes, and the home starts to go up in value, closing the gap between the appraised value of the home, and the mortgage during the 10 yrs allowed by this program. With a 2 to 3% increase in the price of the home each year, and a 2 to 3% decrease in the unpaid balance of the mortgage, the maximum amount the mortgage that may be discounted would be 30% over a ten-year period. If you add in the 30% increase in the value of the home the total amount would be a 60% change in the owner’s financial position in the home. It could be much less if the economy improves, and the home’s value equals the mortgage amount in a much shorter period of time.

 I don’t believe there would be a moral hazard with this proposal, because the terms are being offered to everyone, and in a few years, homes would slowly increase in value as the foreclosure inventory is sold. There are several sites on the web that could be used to determine an average market value of the home. If either party disagrees with the average market value they would be required to pay for an appraisal.

#3. Enact the Zero Inflation Taxation Policy. This policy would decrease the chance of another bubble/ bust economic cycle.  It will stabilize interest rates so debt will not lose value because of interest rate increases.  People will be more willing to invest in mortgage-backed securities, and other long term debt, thereby maintaining interest rates at the lowest possible rate. Low interest rates will help the private sector maintain cost, and the government’s interest payments on the national debt will remain a smaller part of the budget, thereby not bankrupting our economy, and the government, which would cause hyperinflation to be created.  

To turn the economy around and end the Great Recession we must re-establish the disposable income of the millions of people who have lost their disposable income, and increase the confidence of the general population, so that there will be a better future. A future made up of a different set of rules. A future where jobs are available, and the economy will not be moving so fast that they cannot save, and invest without it all disappearing again, caused by a financial collapse, or inflation or hyperinflation.

What And Who Created The Housing Price Bubble

Our homes, and other real estate had become the new “gold standard.” Almost all consumer, and small business credit was established with the collateral value of our homes, and real estate. The financial capitalist in their desire to increase profits, created ways to increase the amount of money that could be created. In 1999 President Clinton and Congress changed the capital gains tax on the sale of primary homes, making it zero for most sales of primary homes. 

 It took a couple of years to get the snow ball rolling but this change gave the home owner a profitable reason to sell, and a buyer, expecting to reap the same rewards when they sold the home, brought the home without much concern about the price, because primary home prices have been rising since the end of World War Two. 

The financial capitalist with their new ways of expanding credit, were more than willing to finance the increases in home prices, thus creating enormous amounts of  “paper profits”. As more, and more people realized that easy profits could be had, it became a feeding frenzy. Banks lowered their underwriting standards, because they felt safe knowing that, because the home that was securing the mortgage was going up in value, and they could sell the mortgage to Wall St. or a government agency.

 The Federal Reserve did not do anything about the bubble, because they couldn’t do anything (as explained in article on my web site)except  collapse the entire economy.  Besides the consumer price index had been changed not to reflect the cost of owning a home, therefore even tho homes prices were going up 30% a year, we had low inflation based on the CPI, during the bubble years, so the Fed took no action at all, even if they had known what to do. I am sorry to say, the rest of the story is history. 

Home prices have been falling for over 3 years. Foreclosures, and unemployment are increasing. The Federal Deficit is growing larger everyday.  Something has to change.

If you agree that this program will be better for the economy (people), than the financial capitalist, President Obama’s, and Congress’s deficit spending economic recovery plans, send this article to your friends, and neighbors. Tell them to send a message to the President (click the contact button on the white house page), www.WhiteHouse.gov/  and their representatives in Congress www.contactingthecongress.org/ . Don’t break the chain until we are heard in Washington D.C 

Very, Very Important: To help spread the word please click the “Like” button at the top of the website.  The more people we can get evolved, the faster we can change the future. The sooner the economy improves, less taxes we, and our children, and our great, great grand children will have to pay to reduce the deficit. 

To futher help spread the message, please fill out the subscription form to my site. There is no cost to do this, but it will make it easier for people to locate my blog with, google, yahoo, and the other search engines. In this way I will be able to inform you when I post more information about this very important matter.

Sincerely Leonard C. Tekaat

You might be thinking that interest rates are at a historical low.  The spread between the cost of funds from the Federal Reserve and the current mortgage rate needs to be at least another 1.5% lower. Even then they would be historical high. When interest rates went to 21% for a mortgage in the early 1980s that was less than 100% above the inflation rate of 12%. Currently we have close to 0% inflation and home prices are still declining yet the interest rate for a 30yr fixed rate mortgage is 450% above the inflation rate.  

We have a flaw in our economic policies. We have a dinamic economy that is changing from inflation to recession over the years. Yet we have a income tax that is stactic. The Flat Tax and the Fair Tax are the also stactic taxes. The stimuli that is enacted in a recession to improve the economy is left in tact as the economy moves into the inflation cycle.  This causes the economy to heat up too much and the economy colapses into a recession or a depression. 

A previous comment was “it is very hard to create inflation in housing.” I say it is harder to control inflation in home prices under the current government housing policies. I do not want to create inflation in housing but I do want to stabilize home prices and increase home appreciation rates to about 2 to 3% a year with the following recovery program. As we have learned in the past 2 years consumer confidence and disposable income is very important for our economy to fully recover without high inflation.

To Increase The Disposable Income Of The Middle Class Without A Tax Cut

Obama and the capitalist stimulus plan is not working. It is not lowering the unemployment and foreclosure rate. President Obama has surrounded himself with capitalist. The capitalist have written the current recovery program to benefit themselves not main street.The recovery program I am purposing will help the banking sector and main street. 

An economic recovery plan must increase economic activity and disposable incomes, which will reduce unemployment.  

The responsible home buyerer or homeowner did not create the foreclosure crisis, economic crisis, or the unemployment crisis. The taxpayers should not have their taxes increased to bail out the economy or to pay for a huge federal deficit. It was the Capitalistic entity (Banks and Federal Reserve) and the government that caused the Great Recession of 2008.  

What Must Be Done 

 #1. Create a stimulus mortgage that fits the current economic conditions.  The mortgage would have a starting interest rate of 3%. The interest rate would increase a 1/4% a year for seven years and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to any home-owner that could qualify, even those people that their mortgage is underwater. 

The Federal Reserve, US Treasury or a Home Loan Corp., as it did in the Great Recession, would purchase the mortgage backed securities until the housing market stabilized and then sell them to investors when the interest rate on the securities increased to 5% and the value of the homes were 10% greater than the mortgages.  This mortgage would increase middle class people’s disposable income and confidence, thereby increasing economic activity, which would reduce unemployment by increase demand for products and services. 

#2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to10 yrs or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate and terms would be the same as the first lien holder. A modification agreement would be used.  

#3.  Enact the Zero Inflation Taxation Policy. This policy would decrease the chance of another bubble/ bust economic cycle. 

For more detailed information go to www.economysflaw.wordpress.com/  These polices will not cost the taxpayers a dime.  

Leonard Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. Over forty years experience in the financial world. He is the Chairman of the Committee for Economic Reform and a Better Economic Future. 

Copy right 7-20-2010 by Leonard C. Tekaat  All rights reserved 

Article 2.

The responsible home buyer or homeowner did not create the foreclosure crisis, economic crisis, or the unemployment crisis. The taxpayers should not have their taxes increased to bail out the economy or to pay for a huge federal deficit. It was the Capitalistic entity (Banks and Wall St.) and the government that caused the Great Recession of 2008.  

What Must Be Done 

 #1. Create a stimulus mortgage that fits the current economic conditions.  The mortgage would have a starting interest rate of 3%. The interest rate would increase a 1/4% a year for seven years and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to any homeowner that could qualify, even those people that their mortgage is underwater.

 The Federal Reserve or the US Treasury would purchase the mortgage backed securities until the housing market stabilized and then sell them to investors when the interest rate on the securities increased to 5% and the value of the homes were 10% greater than the mortgages.  This mortgage would increase middle class people’s disposable income and confidence, thereby increasing economic activity, which would reduce unemployment. 

 #2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to10 yrs or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate and terms would be the same as the first lien holder. A modification agreement would be used. 

#3.  Enact the Zero Inflation Taxation Policy. This policy would decrease the chance of another bubble/ bust economic cycle. 

These polices will not cost the taxpayers a dime.  

Leonard Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. Over forty years experience in the financial world. He is the Chairman of the Committee for Economic Reform and a Better Economic Future. 

 Leonard C. Tekaat 
]]> http://economysflaw.wordpress.com/2010/07/30/increase-middle-class-disposable-income-without-tax-cut/feed/ 0 economysflaw http://economysflaw.wordpress.com/2010/04/14/private-foreclosure-reduction-plan-trumps-government-plan/ http://economysflaw.wordpress.com/2010/04/14/private-foreclosure-reduction-plan-trumps-government-plan/#comments Wed, 14 Apr 2010 03:05:23 +0000 Leonard C. Tekaat http://economysflaw.wordpress.com/?p=483 Continue reading →]]> Three Policy Changes; that is all it will take to decrease unemployment and foreclosures. 

 #! Create a mortgage that fits the current economic conditions. I am proposing: A mortgage with a starting interest rate of 3% and go up 1/4% a year for seven years and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to any homeowner that could qualify, even those people that their mortgage is underwater. (Currently banks offer the 5/1 Adjustable Rate Mortgage, which earns about the same amount of interest in the first 5yrs. The new mortgage is not indexed. Therefore people will refinance their homes.)

 #2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to 10 yrs or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate and terms would be the same as the first lien holder. A modification agreement would be used to modify the terms of the mortgage.

#3. Enact the Zero Inflation Taxation Policy.  This policy decreases the chance of another bubble/bust economic cycle and stabilizes interest rates.

These polices www.economysflaw.wordpress.com/ will not cost the taxpayers a dime.

Leonard C. Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor and author. He has over forty years experience in the financial world. He is Chairman of the Committee for Economic Reform and a Better Economic Future. He is a Tea Party member.

Review of policies by Economics Professor Mark Evans CSUB

From: “Economics Professor Mark Evans CSUB” To: “Leonard Tekaat” Hi, Leonard. I agree that current policies haven’t been very effective thus far in addressing the foreclosure mess and that the macro economy remains vulnerable to a two-dipper because of it. I think we probably need something along the lines you suggest that cuts both interest rates and the principle upon which the monthly payments are based. Several months ago, I found a couple of columns online, by Alan Blinder, (Home Owner Loan Corp.) which described the highly successful program that was implemented during the depression due to upside-down mortgages and defaults. The agency that was created to run this program ran a profit and was “put to rest” sometime in the 1950′s when the last of the contracts expired. I’m not sure without looking at it more closely, but I think your suggestion may work in a similar fashion. We also need some regulatory changes to reduce the risk of bubbles and we needed the stimulus package, as imperfect as it was. Professor Mark Evans. 

The Private Fix is the correct way to solve the foreclosure crisis because it does not award the reckless home buyer or flipping investors. It will increase economic activity and the disposable income of a large number of people, which will reduce unemployment.  It is a fair plan.

The responsible homebuyer or homeowner did not create the foreclosure crisis, economic crisis, or the unemployment crisis. The taxpayers should not have their taxes increased to bail out the economy or to pay for a huge federal deficit. It was the Capitalistic entity (Banks and Federal Reserve) and the government’s taxation and housing policies that caused the housing bubble and the Great Recession of 2008. 

How will this mortgage help the economy?  The banks and the homeowner will both benefit.  The homeowner’s monthly interest payment will be lower for eights years. If the homeowner refinances a 6% loan their interest will decrease by 50% from say $1500.00 to $750.00, the first year and slowly increase the other seven years.

It is going to take time to heal our economy but this private economic recovery plan will help the housing market recover faster and make the financial service sector stronger.

The banks will benefit because the new mortgage cost them less than the amount to foreclose or short sale the house. They are currently losing hundreds of millions of dollars due to foreclosures, short sales, and lost of interest and principal payments. 

The economy will improve because more people’s disposable income will be increased, than with the government’s economic recovery plan. This will increase aggregate demand, increasing economic activity thereby reducing unemployment and foreclosures, shortening the Great Recession of 2008.  For more detailed Info. Go to www.economysflaw.wordpress.com/

Copy right by Leonard C. Tekaat 3-28-2010

All Rights Reserved

Comments

Posted by catpaw on Mar 27, 2010 at 08:18 AM <Delete>

These polices will not cost the taxpayers a dime.

But how much would it cost the banks? Banks are not about to set a dangerous precedent of social conscience or giving a rat’s tail about rectifying the duplicity that sucked home buyers into this mess or in any way show a sense of responsibility for the economic downturn they helped create.

Banks are in the business of making money. And they don’t care where it comes from or how they get it.

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Posted by happyashell on Mar 27, 2010 at 10:12 PM

To catpaw, Banks want to make money that is correct.  They also don’t want to lose money if they can prevent it. If a person bought a 2000 sq ft. house in 2007, for $400,000.00, it might sell now for around $200,000.00.  If the borrower decided they didn’t want to pay for the house.  The bank’s, if the buyer had put down 10%($20,000.00), unpaid balance on the mortgage is $380,000.00.  The bank or the investor, who invested in the mortgage, would loose $180,000.00 on the mortgage, $10,000.00 on foreclosure and selling cost.  They would loose the unpaid interest for all the months the borrower had not paid the mortgage and the time it sat empty waiting for it to be sold.  Say a year at 5% is $10,000.00.  This all adds up to $200,000.00.  If the house is damaged while its empty or it needed repairs when it was foreclosed on, it might sell for a lot less than $200,000.00. So the loss could be more.  If the bank or investor did sell the house, they would earn 5% interest on the $200,000.00 or a smaller amount.  At that selling price, the interest earned for 30yrs can be over $100,000.00 less than if they allowed the borrower stay in the home, if they were not a credit risk. This is why I think it best to qualify the borrower at the 5% interest rate.

If the banks offer the homeowner, the terms of my mortgage they would lose about $35,000.00 in interest in the <b>eight years </b>until the interest rate reaches 5%. and 30% of the principle amount, or about $7300.00 a year until the home went up in price and it met the mortgage as it was being discounted down.  If the home does not go up in ten years the maximum amount that would be discounted is $73,000.00 plus the interest of $35,000.00 for a total of $108,000.00.  They will make some of the lose back because they will be receiving interest on the larger unpaid balance for 22 yrs which will be a higher unpaid balance than if they foreclosed or short sold the home today.  Also more than likely the home will go up in price before the ten years is up and everyone will be smiling again.

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Stroll down for other articles or check archives (at web site).  How To Manage U.S. Fiat Money Banking System, The Means Of  Exchange, Does The U.S. Economy Need A Stimulus Mortgage,  Alternative Economic Stimulus Plan and others articles. 

I have been interested in economic cycles since the early 1980s. I have been in real estate since 1970, close to forty years.  I have been a businessman, investor, financier, and author.  I am a retired economic analyst and economic scholar.

I ran for California Congress in 1992, because I wanted to change how our economy is guided.  Instead of helping the enterprise sector of our economy, the financial capitalist, and the government sectors are slowly destroying it. I don’t know if they are doing it on purpose, or if they just don’t know any better. I do know that they are biting the hand that feeds them. The enterprise sector can function, and support itself without either one of the entities. Neither the government, or the financial entity produce anything to support themselves. They have to have the enterprise sector, or they could not function, or sustain themselves. They need to learn how the enterprise system operates, and what it needs to prosper, or the enterprise sector will shrug them off like an old coat, like you would do if it was not keeping you warm. The financial, and government entities were created to help the enterprise sector function better, not to destroy it. We are all in this boat together, if it flips over were all in the water surrounded by a by a lot of sharks and vultures.

I wrote the book INFLATION THE ECONOMY KILLER, How To Create, Control and Stop High Inflation, in 1982. This was in the middle of the first Great Recession, 1979 to 1983. If you read my book today you would think I was writing about the Great Recession of 2008 to ?  Not much has changed. We continue to make the same mistake over, and over again. That is why my web site is http://economysflaw.wordpress.com I have posted a solution to the unemployment and foreclosure crisis there.

As you are aware our nation is struggling to get out of this Great Recession.  It is at the edge of going either way.  Deeper into recession, or it could begin to crawl.  I want it to stand up and walk.  Not run like it previously did, but walk tall and proud again.  I need your help to make this happen.

President Obama has verbally abused the financial service industry in the past.  Many in the industry deserved it.  The people who were responsible lenders did not like it.  Putting that aside, our financial sector is the best in the world. At creating capital, no one can match it.  Sometimes it does it too well.  I believe the creation of too much money is from the government’s miss-guiding policies, not from greed.

The current system works.  It is not the principal working parts of the system that need to be changed.  I believe we can improve the government’s guidance policies of this sector of our economy,

I do believe my ideas for economic recovery will be beneficial to the financial service industry, and the citizens of America and the world.  A fully recovered economy is more beneficial for our citizens, and the government, than an economy that is running on half its cylinders.  If guided correctly the economy will produce more jobs, tax revenues, and a better standard of living for our citizens.  Unlike what the California Congress has done, taxes will not have to be raised.

It seems to me, that there is macro economic principles that need to be applied to the economy, before the economy will recover completely.

As former Federal Reserve Chairman Alan Greenspan pointed out, we are experiencing a very unbalance economic recovery.  Wall Street is benefiting from the government’s injection of capital into banks, and financial institutions, but the consumer, jobs and small business are lagging behind, which represents 70 to 75% of the economic activity in our market-based economy.  This imbalance leaves our economy vulnerable to a double dip recession.  Export trade must also increase, or imports must decrease, to balance our trade deficit, for America to have lasting prosperity.

Not only do the U.S. and Ca. Congresses need oversight, but they also need direction.  They do not seem to understand what happened to the economy, or what to do to get the economy up off it’s back.

There are plenty of articles that point out problems with the economy.  They are written every day.  It is good to look back, and see where you have been, and what has been done.  From the past you can usually figure out the cause of a problem, and what needs to be fixed.

Why am I talking about inflation when we are in a deep recession?  As the guiding principles are written, we will again create another cycle of high inflation, and another economic crisis.  But you are thinking, we didn’t have high inflation when this economic crisis occurred.  Before the financial service industry almost collapsed, home prices were going up 30% a year.  If that is not high inflation, what is?

I wrote the book, INFLATION, THE ECONOMY KILLER, How To Create, Control and Stop High Inflation, in 1982, in the middle of the first Great Recession.  I thought to myself, “There has to be a better way to guide/manage an economy than to have interest rates increase to 18% to buy a home, to control inflation psychology.  The increases in interest’s rates stopped the inflation, but they destroyed our economy, the world’s economy, and created untold misery.

It appears that Congress has not learned very much in the last twenty-eight years.  Our economy is experiencing another Great Recession, which is much worse than the one in 1982.  This recession is different from in 1982, only because the numbers are different, and you have to “think outside the box” as they say, to find a fix.

I wrote the book as a message to the American people, as a guide into the future, so we would not repeat the mistakes of the past.  I was not a very good messenger, because the information did not get to the people.  I am sorry about that.

I have once again taken up the task, so our children, grandchildren, and great grandchildren are not left with huge government debt, and our posterity has the knowledge to create a better future for themselves and their children.

My book and the recent articles I have written spell out two policy changes that need to be made which will shorten the Great Recession of 2008, and put into place a better way of dampening future cycles of inflation and recession.

 I would like to finish the job I have started.  Is there any way you can help me get these policies enacted into government policy?  We must help the people, and end the misery created by the Great Recession of 2008.  I do not want to re-inflate the economy.  Housing has once again become affordable for many people to purchase a home. Home ownership is a cornerstone of our economy.  I want people to know that there is a different approach available to solving the foreclosure. and unemployment crisis, instead of a huge government deficit.

 Government deficits make governments larger. and more powerful, because people look to government to solve the problem, which the government, and the capitalistic entities helped to create.  Some governments remind be of the starving nations of Africa.  Civil war, government corruption, and ignorance create the problems.  The government then backs the food trucks up to the starving crowd, and passes out food, there-by buying support for the corrupt government.  The best way to put this is:  AN ECONOMIC CRISIS IS A PERFECT OPPORTUNITY AND SHOULD NOT BE WASTED. 

Freedom is not free.  Freedom cannot be maintained without personal responsibility.  Freedom of choice and financial freedom are both earned by acting on the opportunities this great country provides its citizens.  I believe we should add two words to the pledge of allegiance to the flag, opportunity, and responsibility. 

I pledge allegiance to the flag of the United States of America, and to the republic for which it stands,one nation under God, indivisible, with liberty, justice, opportunity and responsibility for all.

Liberty cannot be maintained without people maintaining their responsibilities to their families, their fellow citizens, and their country.  With freedom comes opportunities and responsibilities.  This is a land of opportunity and we should be proud of this.  Our children should speak the word everyday to know it.  We should shout it out so that other nations know that freedom brings opportunities to their suppressed humanity.

I do not want the World, the U.S. to go back on the Gold Standard, or a government managed money system. The economy (people) should be impowered to determine when more money needs to be created, and added to the money supply.

Video on how money is created and fiat money system. Load in your browser.

 The book INFLATION THE ECONOMY KILLER is available at Amazon.com or from the Author

The main objectives of any economic recovery plan should be to strengthen the financial service industry, keep homeowners in their homes and make the home mortgage payments affordable as the homeowner pays off their mortgage. Stabilize collateral prices, increase lending to small businesses, increase aggregate demand and reenergize the private enterprise job-creating sector.

Real interest cost is based on the spread between the annual inflation rate and the annual interest rate. If the mortgage interest rate is 6% and the inflation rate is 3% the real cost of the mortgage is 3%, minus tax advantages or express another way, 100% above the inflation rate.

 The inflation /deflation rate in housing is minus 0% yet the mortgage interest rate is aprox. 5% the real cost of the mortgage is 5% or expressed in another way it is 500% or more above the inflation/deflation rate.  One of the reasons people are not refinancing their mortgages is that the spread between the current mortgage rate and the interest rate of most mortgages is too small.  To cover the cost of refinancing most financial advisors will recommend at least a 2% differential.

Unlike the Home Owners Loan Corporation, (By Alex J. Pollock AEI Online (December 2007) which Congress created in the Great Depression to deal with foreclosure and underwater mortgages, this economic recovery plan does not call for the government to purchase the caustic mortgages from the banks.

Helping the 10% unemployed is a noble effort but does not create sufficient aggregate demand to re-employ the unemployed or the under employed.  The unemployed and under employed must obtain new skills or improve their skills in their chosen profession, to maximize their income

To solve the unemployment and foreclosure crisis and stabilize mortgage interest rates, we must start by doing two things. 

First, we need to create a mortgage with terms that fit the current economic conditions.

The new mortgage I am proposing would improve the economy and the financial condition of Fannie Mae, Freddie Mac (FNM & FRE) and the banks. I call it the 30 yr. 2010 STABILITY MORTGAGE. It would have a starting interest rate of 3% and increase 1/4% a year. (3% is currently more than 300% above the inflation/deflation rate of 0%. Mortgage rates have been historically 100% above the inflation rate. (3% inflation, 6% interest rate) The current mortgage interest rate is over 500% above the inflation rate-0% inflation, 5% interest rate). The interest rate on the new mortgage would cap out at 5%. The borrower would have to qualify at the 5% interest rate.

Banks currently can borrow money from the Federal Reserve or they can pay interest to depositors.  If they obtain it from the Fed the cost is .25% for short-term money. They pay depositors up to 2% for certificates of deposits.  If their cost of funds is .25% and they loan it out as a mortgage, their cost for a year per $100,000.00 is $250.00.  They will receive interest from the borrower $5,000.00 per year. The markup is 20 times the cost of funds.  Credit card debt is even worse. If the cost of funds is .25% and the annual interest rate is 25% the markup is 100 times.  If an auto manufacturer had a car that cost  $20,000.00 to produce and they marked the price up 20 times the asking price would be $400,000.00!   What I am pointing out is, that the financial industry has room in their profit margin to offer this mortgage and the following principal reduction amounts.

I realize they are experiencing losses in the mortgage market and other sectors of the economy.  If the industry adopts the new mortgage terms, they will save money because they will not have as many short sales and foreclosures and unemployment will decrease. 

Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 20 to 30% of their monthly payment amount each month for 10yrs or until the mortgage equals the then current possible sale price of the home. (Reducing the mortgage monthly by a small amount would be less of a loss to the mortgage holder than by reducing the mortgage by foreclosure or a short sale.)

The main objective of the Stability Mortgage is to keep the homeowner in their home and make the home mortgage payments affordable as the homeowner pays off the mortgage and allow the housing market to recover. Then have the homes slowly appreciate to meet the discounting mortgage’s unpaid balance by the bank in about the middle of the underwater amount of the mortgage.

Another objective of the Stability Mortgage is not have the banks mark down the mortgage to market value thereby reducing the capital of the bank. As long as the borrower continues to make the payments the mortgage is a performing asset, therefore the mortgage has more value than a non-performing asset. 

The banks are offering the 5/1 ARM, which has a lower interest rate, but hardly anyone uses it because it is indexed after 5yrs. People do not like indexed mortgages because of our recent history and the unknown future. The interest collected in the first 5 yrs of the fixed rate 5/1 ARM and the Stability Mortgage is less but banks will make it up with less short sales and foreclosures. The important thing is that homeowners will use the Stability Mortgage and it will increase their purchasing power and aggregate demand thereby increasing economic activity and reducing unemployment.

The 3% starting interest rate is not a subsidized rate of interest. Mortgage interest rate should be lower based on the inflation/deflation rate of 0% and the cost of funds to the banks and financial sector. 

If FNM & FRE and the Federal Reserve (Fed) said they would buy a mortgage with a 3% starting rate, the banks would offer it to the public.

Temporarily, only if necessary, the US Treasury would buy FNM & FRE bonds. (US Treasury would receive the money back when the Fed or private investors bought the Mortgage Backed Securities (MBSs) from FNM & FRE. 

The banks would increase their profits by earning the fees for arranging, modifying and servicing the home mortgage.  Second lien holder would also be able to participate in the principal reduction plan and continue to receive payments.

FNM & FRE would have less loses from foreclosures. They would be collecting interest on a larger mortgage than if they foreclosed or short sold the home.

The MBSs the Fed currently holds would go up in value and should be sold to investors to reduce the Fed’s balance sheet. The Fed would buy the new MBSs and sell them to investors, after home prices stabilized and the mortgage interest rate, on the new mortgage, had risen above the 10yr T-Bill rate. 

  If the Fed had been purchasing the Stability Mortgage a year ago our economy would be in much better condition today.

This plan will not cost taxpayers a dime. It will not put our children and great grand children into massive debt.

Empower the people with opportunity and the means of exchange; you will see that it can be done without increasing the size of the deficit or government and government dependency. 

Enacting the ZERO INFLATION TAXATION POLICY (www.economysflaw.wordpress.com) is the second thing we should do.

This policy will help prevent another economic crisis similar to the one that we are currently experiencing.

It would also create a stabile market for thirty year fixed rate mortgages and other long-term debt. It will strengthen the US dollar. 

We must earn money the old fashion way. We must earn it, not just create it. 

Conclusion: Foreclosures should decrease if the mortgage reduction plan is put into effect and the mortgage starting interest rate is reduced to 3%.

The homeowner’s purchasing power will increase by 50% of their monthly interest payment, if their current mortgage interest rate is 6% or more the first year and then slowly decrease the following seven years.

 With increased consumer purchasing power, aggregate demand would increase, there by employment would increase.

The banks would become stronger because their customers would become financially stronger and the collateral for small business loans would be stabilized and then slowly increase in value.

Copyright by Leonard C. Tekaat  All rights reserved

 Leonard C. Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. He has over forty years experience in the financial world.

What Other People Are Saying.

From: “Economics Professor Mark Evans CSUB” To: “Leonard Tekaat” Hi, Leonard. I agree that current policies haven’t been very effective thus far in addressing the foreclosure mess and that the macro economy remains vulnerable to a two-dipper because of it. I think we probably need something along the lines you suggest that cuts both interest rates and the principle upon which the monthly payments are based. Several months ago, I found a couple of columns online, by Alan Blinder, (Home Owner Loan Corp.) which described the highly successful program that was implemented during the depression due to upside-down mortgages and defaults. The agency that was created to run this program ran a profit and was “put to rest” sometime in the 1950′s when the last of the contracts expired. I’m not sure without looking at it more closely, but I think your suggestion may work in a similar fashion. We also need some regulatory changes to reduce the risk of bubbles and we needed the stimulus package, as imperfect as it was. Professor Mark Evans.

 This is my reply to Professor Evans.

 On Thu, 1/28/10, Leonard Tekaat wrote:> From: Leonard Tekaat > Subject: Re: From Leonard Tekaat> To: “Mark Evans” > Date: Thursday, January 28, 2010, 6:16 AM> I> agree regulation on the mortgage origination sector and> banks is needed. On the Stimulus I am not so sure. The banks> are investing in that debt instead of in the economy. > > By enacting the Zero Inflation Taxation Policy this> would decrease the excessive creation of money after> inflation is occurring in an economy. At my web site> you will find an article on this policy and a comment> section. The Alternative Economic Stimulus Plan is> also worth reading. Some of the tax policies of the 1990s> helped create the economic crisis of 2008. It just took time> to snow ball into a bubble. I am referring to the> $500,000.00 homeowner’s capital gains exclusion. Please> read the article and you will understand what I am talking> about. Waiting for your reply.

 Comment From: Leonard C. Tekaat to other readers Fri Jan 29, 2010 12:20:05 PST You are all correct. Many economists agree that World War II did end the Great Depression by increasing the majority of the population’s purchasing power. We do need more manufacturing in the US. We have missed guided our economy for so long that we have priced ourselves out of the world markets. Wages and cost are lower in other countries so companies move over seas. We give preferred trading status to other countries to help them develop their economies and then they slam the door in our face when we want to sell our goods in their country. The world is a better place with free trade but it must be equal free trade.

President Obama did say that he wanted to stop giving tax credits to companies that located in these developing economies. This would be a good thing. It makes no sense to give the other countries a bigger advantage over us than they already have, with their lower wages and cost.

 Our economy is a profit based market economy. Business must make a profit to stay in business. This is why people’s purchasing power and confidence must be maintained so consumers can consume and business can be profitable. The more people that can be employed in the private enterprise entity the better our economy works.

By correcting the flaw in our mortgage delivery system we can put people back to work. The private capital entity or the capital markets cannot do it this time, because the need for profit and the fear investors have that they will not receive all of their investment back. The government and the private sector can do it together and make a profit if they adopt the plan I have outlined.

I suggest that you all go to my web site and read Alternative Economic Stimulus Plan. It explains some of the reasons on how we created this economic crisis. The perfect storm was created, not all at once but piece by piece over a long period of time www.economysflaw.wordpress.com

First, we need to create a mortgage with terms that fit the current economic conditionFs.

The new mortgage I am proposing would improve the economy and the financial condition of Fannie Mae, Freddie Mac (FNM & FRE) and the banks. I call it the 30 yr. 2010 STABILITY MORTGAGE. It would have a starting interest rate of 3% and increase 1/4% a year. (3% is currently more than 300% above the inflation/deflation rate of 0%.) Mortgage rates have been historically 100% above the inflation rate. (3% inflation, 6% interest rate) The current mortgage interest rate is over 500% above the inflation rate- (0% inflation, 5% interest rate). The interest rate on the new mortgage would cap out at 5%. The borrower would have to qualify at the 5% interest rate. 

Banks currently can borrow money from the Federal Reserve or they can pay interest to depositors.  If they obtain it from the Fed the cost is .25% for short-term money. They pay depositors up to 2% for certificates of deposits.  If their cost of funds is .25% and they loan it out as a mortgage, their cost for a year per $100,000.00 is $250.00.  They will receive interest from the borrower $5,000.00 per year. The markup is 20 times the cost of funds.  Credit card debt is even worse. If the cost of funds is .25% and the annual interest rate is 25% the markup is 100 times.  If an auto manufacturer had a car that cost  $20,000.00 to produce and they marked the price up 20 times the asking price would be $400,000.00!   What I am pointing out is, that the financial industry has room in their profit margin to offer this mortgage and the following principal reduction amounts.

I realize they are experiencing losses in the mortgage market and other sectors of the economy.  If the industry adopts the new mortgage terms, they will save money because they will not have, as many short sales and foreclosures. With increased productive economic activity increasing unemployment will decrease, therefore there will not be an additional wave of foreclosures occurring in the future. 

Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 20 to 30% of their monthly payment amount each month for 10yrs or until the mortgage equals the then current possible sale price of the home. (Reducing the mortgage monthly by a small amount would be less of a loss to the mortgage holder than by reducing the mortgage by foreclosure or a short sale.) 

The main objective of the Stability Mortgage is to keep the homeowner in their home and make the home mortgage payments affordable as the homeowner pays off the mortgage and allow the housing market to recover. Then have the homes slowly appreciate to meet the discounting mortgage’s unpaid balance by the bank in about the middle of the underwater amount of the mortgage. 

Another objective of the Stability Mortgage is not have the banks mark down the mortgage to market value thereby reducing the capital of the bank. As long as the borrower continues to make the payments the mortgage is a performing asset, therefore the mortgage has more value than a non-performing asset.  

The banks are offering the 5/1 ARM, which has a lower interest rate, but hardly anyone uses it because it is indexed after 5yrs. People do not like indexed mortgages because of our recent history and the unknown future. The interest collected in the first 5 yrs of the fixed rate 5/1 ARM more than the bank would collect with the Stability Mortgage, but the banks will make it up with less short sales and foreclosures. The important thing is that homeowners will use the Stability Mortgage and it will increase their purchasing power and aggregate demand, thereby increasing economic activity and reducing unemployment. Most mortgages could be restructured without much cost if they have not been securitized. The mortgages that have been securitized, the investors will have to approve the new terms before they can be restructured. If the investor does not want to modify the terms of the mortgage they could face a foreclosure or short sale, which would decrease the mortgage down to the current value of the home.

If I were the investor, I would take the modified term mortgage, because the interest moves up to 5% in 7 years and the mortgage will only be marked down a fraction of the amount it would be if it home were foreclosed on or sold at by short sale. To restructure a mortgage the cheapest and fastest way to do it is with a letter of modification, listing the new terms.

The 3% starting interest rate is not a subsidized rate of interest. The mortgage interest rate should be lower based on the inflation/deflation rate of 0% and the cost of funds to the banks and financial sector.  

If FNM & FRE or the Federal Reserve (Fed) said they would buy a mortgage with a 3% starting interest rate, the banks would offer it to the public because the banks are only interested in the origination fees and servicing fees. They do not want to hold a 30 year fixed rate mortgage under the current economic policies of changing interest rates.

Temporarily, only if necessary, the US Treasury would buy FNM & FRE bonds. (US Treasury would receive the money back when the Fed or private investors bought the Mortgage Backed Securities (MBSs) from FNM & FRE.  

The banks would increase their profits by earning the fees for arranging, modifying and servicing the home mortgage. 

FNM & FRE would have less loses from foreclosures. They would be collecting interest on a larger mortgage than if they foreclosed or short sold the home. 

The MBSs the Fed currently holds would go up in value and should be sold to investors to reduce the Fed’s balance sheet. The Fed would buy the new MBSs and sell them to investors, after home prices stabilized and the mortgage interest rate, on the new mortgage, had risen above the 10yr T-Bill rate.  

If the Fed had been purchasing the Stability Mortgage with the 3% starting interest rate and the principle reduction clause, a year ago our economy would be in much better condition today. 

This plan will not cost taxpayers a dime. It will not put our children and great grand children into massive debt. 

Empower the people with opportunity and the means of exchange; you will see that it can be done without increasing the size of the deficit or government and government dependency.  

Enacting the ZERO INFLATION TAXATION POLICY is the second thing we should do.

This policy will help prevent another economic crisis similar to the one that we are currently experiencing. 

It would also create a stabile market for thirty year fixed rate mortgages and other long-term debt. It will strengthen the US dollar.  

We must make money the old fashion way. We must earn it, not just create it. 

Conclusion: Foreclosures should decrease if the mortgage reduction plan is put into effect and the mortgage starting interest rate is reduced to 3%. 

The homeowner’s purchasing power will increase by 50% of their monthly interest payment, if their current mortgage interest rate is 6% or more the first year and then slowly decrease the following seven years. 

With increased consumer purchasing power, aggregate demand would increase, there by employment would increase. 

The banks would become stronger because their customers would become financially stronger and the collateral for small business loans would be stabilized and then slowly increase in value. 

If this economic recovery plan makes sense to you, call your friends, news, and TV station, Congress or the President and express your support. 

Unless the private enterprise entity speaks up, the capitalistic entity will continue to trade and gamble in the capital markets, buy government debt and profit from the Fed’s discounted interest rate; Thereby denying the enterprise entity the means of exchange it needs to have a broad based sustainable economic recovery. 

Leonard C. Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. He has over forty years experience in the financial world. 

You can reach him at e-mail address economysflaw@yahoo.com/ for more information go to http://economysflaw.wordpress.com/ http://recoveryforthepeople.wordpress.com/  www.facebook.com/leonard.c.tekaat/

Copyright by Leonard C. Tekaat 2-23-10

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What Other People Are Saying

From: “Economics Professor Mark Evans CSUB” To: “Leonard Tekaat” Hi, Leonard. I agree that current policies haven’t been very effective thus far in addressing the foreclosure mess and that the macro economy remains vulnerable to a two-dipper because of it. I think we probably need something along the lines you suggest that cuts both interest rates and the principle upon which the monthly payments are based. Several months ago, I found a couple of columns online, by Alan Blinder, (Home Owner Loan Corp.) which described the highly successful program that was implemented during the depression due to upside-down mortgages and defaults. The agency that was created to run this program ran a profit and was “put to rest” sometime in the 1950′s when the last of the contracts expired. I’m not sure without looking at it more closely, but I think your suggestion may work in a similar fashion. We also need some regulatory changes to reduce the risk of bubbles and we needed the stimulus package, as imperfect as it was. Professor Mark Evans.

This is my reply to Professor Evans.

On Thu, 1/28/10, Leonard Tekaat wrote:> From: Leonard Tekaat > Subject: Re: From Leonard Tekaat> To: “Mark Evans” > Date: Thursday, January 28, 2010, 6:16 AM> I> agree regulation on the mortgage origination sector and> banks is needed. On the Stimulus I am not so sure. The banks> are investing in that debt instead of in the economy. > > By enacting the Zero Inflation Taxation Policy this> would decrease the excessive creation of money after> inflation is occurring in an economy. At my web site> you will find an article on this policy and a comment> section. The Alternative Economic Stimulus Plan is> also worth reading. Some of the tax policies of the 1990s> helped create the economic crisis of 2008. It just took time> to snow ball into a bubble. I am referring to the> $500,000.00 homeowner’s capital gains exclusion. Please> read the article and you will understand what I am talking> about. Waiting for your reply.

Comment From: Leonard C. Tekaat to other readers Fri Jan 29, 2010 12:20:05 PST You are all correct. Many economists agree that World War II did end the Great Depression by increasing the majority of the population’s purchasing power. We do need more manufacturing in the US. We have missed guided our economy for so long that we have priced ourselves out of the world markets. Wages and cost are lower in other countries so companies move over seas. We give preferred trading status to other countries to help them develop their economies and then they slam the door in our face when we want to sell our goods in their country. The world is a better place with free trade but it must be equal free trade.

President Obama did say that he wanted to stop giving tax credits to companies that located in these developing economies. This would be a good thing. It makes no sense to give the other countries a bigger advantage over us than they already have, with their lower wages and cost.

Our economy is a profit based market economy. Business must make a profit to stay in business. This is why people’s purchasing power and confidence must be maintained so consumers can consume and business can be profitable. The more people that can be employed in the private enterprise entity the better our economy works.

By correcting the flaw in our mortgage delivery system we can put people back to work. The private capital entity(the capital markets) cannot do correct the imbalances in our economy to end the Great Recession, because the need for profit and the fear that investors have, that they will not receive all of their money back. The government and the private sector can do it together and make a profit, if they adopt the plan I have outlined.

I suggest that you all go to my web site and read Alternative Economic Stimulus Plan. It explains some of the reasons on how we created this economic crisis. The perfect storm was created, not all at once but piece by piece over a long period of time www.economysflaw.wordpress.com/

Video on how money is created and the fiat money system. Load into your browser to play. 

In the early 1970s President Nixon took the American dollar off the Gold Standard. In place of the gold standard, we have money that floats on the world currency markets, where its exchange value is determined. This is fiat money.

The word fiat means, “let it happen” in the Italian langue. A government can create fiat money simply by decreeing that the money is legal tender for all debts, public and private, as written on our Federal Reserve notes. (Paper money) 

We have a fiat money creation system in our country. A fiat money system can create an unlimited amount of money. A fiat money creation system is backed only by promises, not by gold, or other commodities. The amount of money that is created worldwide is banker controlled not government controlled. Bankers (Federal Reserve and Banks) determine the amount of money that is created in our economy.

 Inflation is created when too much money is created in an economy. A recession is created when there is not enough money or purchasing power in an economy. As we have found out by the current economic crisis, bankers are not very good at controlling the amount of money that is created in our economy. 

Think about it. The banks profit from the amount of money that is created. The more money they create the more profit they make. Profit is a good thing but when it endangers the economy, the security of our country, and people’s standard of living, it must be correctly managed. Just like any other danger.

The income tax benefits bankers by encouraging an increase in the creation of debt, which is 97% of the money created in our economy. The other 3% of the money created is either made of paper or metal. 

The interest deduction and the long-term capital gains tax rate are more for the banks benefit than yours. The interest deduction, and the long-term capital gains tax rate cause hard capital asset investments to become more valuable than money investments. This occurs because of the taxation difference between money investments, and long-term capital gains. Long-term capital gains income is taxes a 15%, and interest income is taxed at 35%; this taxation difference increases demand in the hard capital asset markets, and devalues money investments. The extra demand causes the price of the collateral to go up. Therefore, the owner, or buyer of a hard capital asset, with an increased collateral price can obtain a larger loan, thereby increasing the money supply. This process increases as inflation goes higher, creating higher inflation rates.

The current housing bubble was created in this way.  The government lowered the tax on capital gains on owner occupied homes to 0% in 1999.  This made money investments worth 35% less that a capital investment in a home.  As the homes increased in price, sellers had a very profitable reason to sell, and buyers had a very profitable reason to buy, as long as the buyers thought the house was going to continue to rise in price.  The banks were more than willing to make larger and larger loans based on the increased price of the homes that were being sold, thereby increasing their profits.  With all this money being created, caused increased economic activity that could not be sustained after the bubble burst.

This is so important it needs to be repeated.  Profit is a good thing but when it endangers the economy, the standard of living of people, and our financial and capitalistic market system, it must be correctly suppressed just like any other danger

When hard capital asset prices are raising banks lower their qualification requirements (sub-prime loans) and the loan to value ratio decreases, requiring a lower down payment. 

When hard capital asset prices are decreasing banks will not, or cannot make loans unless they are very secure. Loan qualification requirements increase, and the loan to value increases, requiring larger down payments.

It is when and why people save, and spend money in the economic cycle that determines if we have an increase in our standard of living, or bubbles and deflations.

It is our psychology about our money that determines its value. Do we use it as a rational means of exchange? Do we spend it as fast as we can before it loses more purchasing power? Do we hold it as a store of value? Do we buy hard capital assets as a store of wealth? Do we use it to obtain, and create more money without creating an increase in the supply of products, or providing a beneficial service to the economy? Our income tax, and which economic cycle is occurring in our economy, or which cycle is perceived by people to occur in the near future in our economy, influences all of these decisions. 

The income tax unbalances normal production, consumption, and investment decisions. We have a dynamic economy with a static income tax system. Our economy is continually changing from recession to inflation,m and then recession again. The income tax must change, without government approval, as our economy changes from recession to the inflation cycle. You cannot put the economic pedal to the metal, and not expect to go over a cliff.

The income tax guides us into the herd effect. It causes a vast majority of the people to all go in the same direction, and do the same thing. This is one of the reason we must enact the Zero Inflation Taxation Policy.

The excessive use of credit in business, investment and consumption got us into this economic crisis. Our income tax system encourages credit use, and investing with credit. This is fine as long as the economy needs more credit use, but when the economy is showing signs of excessive credit use, such as economic bubbles and inflation, credit encouragement should be neutralized, and money investments (savings, bonds and securities) should be encouraged to maintain balance in our economy.

If we first use the income tax to guide investors, and consumers before the Federal Reserve must raise interest rates in the inflation cycle, this will maintain the lowest possible interest rates, and maintain the value of existing savings, bonds and securities. This is the second reason we should enact the Zero Inflation Taxation Policy.

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 neutralized for inflationary investments, it still will be available for productive investments. The Zero Inflation Taxation Policy would only go into effect after the Fed, and the banks have created inflation in our economy. This is the third reason we should enact the Zero Inflation Taxation Policy.

The Zero Inflation Taxation policy would work as follows. As inflation, or under investment in savings, and 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 the same rate as long-term capital gains, (currently 15%) money investments will be as valuable as inflationary investments.  This is the fourth reason we need to enact the Zero Inflation Taxation Policy.

The balancing of money investments, and capital investments would occur at the end of the year, based on the annual inflation rate, when we file our income taxes. This procedure would correct the imbalance each year instead of it building up over many years, which cause a major correction, as we are experiencing with our current economic crisis.   This is the fifth reason we must enact Zero Inflation Taxation Policy

Think about it. What the Zero Inflation Taxation Policy does is, it makes the banks responsible for the value of money. If the banks create too much money, which creates inflation, the tax code would change automatically, and encourage savings, and money investments, and less credit creation, there-by increasing the banks liabilities, and reducing its assets. The banks would become sensitive to the purpose of the loans, and total money being created. This would include government debt. Our savings pool would increase for normal production, and consumption to take place. The velocity of money would slow down, without raising cost, after inflation has started to occur in an economy. Inflation will no longer be self-fulfilling prophecy. This is the sixth reason we have to enact the Zero Inflation Taxation Policy.

If we want to leave a smaller deficit, and lower taxes for our future generations we must take the power to limit money creation away from the banks, and give it to the people. Let the economy tell us how much money is needed to maintain normal production, and consumption to maintain the standard of living that we are willing to work for. We must enact the Zero Inflation Taxation Policy to take back our economy from the banks, and have control of our futures.  This is the primary reason we must enact the Zero Inflation Taxation Policy.

For more info go to URL=http://www.economysflaw.wordpress.com/

Leonard C. Tekaat economysflaw@yahoo.com/

Copyright by Leonard C.Tekaat 2-23-10

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Leonard C. Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author of INFLATION THE ECONOMY KILLER, How to Create, Control and Stop High Inflation. He is a former candidate for California Congress. has over forty years experience in the financial world.  He is Chairman of the Committee for Economic Reform and a Better Economic Future.