Keep people in their homes…

Posted by David A. Peterson on 13. January 2009 in Economics |

Whoa now that’s a tall order. Today the 111th Congress will start debating whether they should release the next $350 billion of TARP funds. Just to recap the acronym TARP stands for the Trouble Asset Relief Program. As the name implies this fund was set up to help financial institutions remove nonperforming assets from their books.


When the fund was passed the country was in dire straights. Banks and other financial institutions were not lending to each other. At the same time these institutions stopped lending to individuals. Specifically the two largest banking needs for individuals are buying a house and buying a car.


This loss of lending caused our national economy to fall into a recession. As it turns out we need to keep housing production and auto production cranking to keep people employed. Thus when these two industries ground to a halt then the ripple effect through the economy was immediate. We are in a terrible recession.


The largest corporations are laying off employees by the thousands. Small businesses are in survival mode cutting hours and paychecks as fast as they can. There is no confidence in future earnings. Also at this moment there is no confidence in our elected officials to help steer us out of this malaise.


The government’s immediate job is to keep our current economic malaise a recession and not let it drop into a depression. How can the government help stop the slide?


Our initial slide into the recession was the bursting of the housing bubble, which began the credit crisis. The housing recession is deep and wide covering just about the entire country. You can find pockets of construction but they are due to other events like recovering from hurricane Katrina, hurricane Ike, and probably the devastating fires that took place out west. Certainly these catastrophic events are not what wish on ourselves.


Congress is debating on the next $350,000,000,000 this week. President-elect Obama has asked President Bush to get the ball rolling on these funds. The debate is what should be done with these funds? Since they are already appropriated you can bet that they will be spent.


As a conservative this drives me nuts and probably drives a sizable amount of blue-blooded Democrats nuts as well. However as a somewhat rational thinker (I’ll use that term loosely) I do believe that the first $350 billion did its job. It got the banks to start lending and is helping them seize weaker institutions. What it also did was to get the public’s confidence in the banking industry on firm footing.


So as a rational thinker what do I think about the 2nd $350 billion now being debated. I think that whatever I and other conservatives say it’s going to happen. I can gripe, yell, scream, bitch, cuss and the outcome will be the same. This money will be spent. Since I can’t affect the money actually leaving the building I need to do what I can and that is to try to effect how the money will actually be spent.


Many Congressman and Senators would like to see the money spent on allowing people to stay in their homes. This in its purest sense sounds like a great idea. If you keep people in their homes then we will have less houses for sell, prices will stabilize and then rise as the housing inventory shrinks. Most importantly the confidence in the housing market and housing industry will rise and bank money will flow to this sector of the economy.


So why not back this allocation of resources?


The answer is simple. There is no way in the long run to keep people in their homes using federal fiscal policy. The ideas being bounced around are (as discussed before in previous posts) reductions in interest payments, reductions in principle, and the temporary halting of foreclosures. Basically all of these types of actions are just refinancing/restructuring the current basket of bad loans.


Most conservatives would have probably told you 6 months ago that this will not work in the long run. Since we are now getting data to support that statement we need to look for another answer.


The data now suggest (and we should have known) that a sizable amount of these restructured loans have already failed a second time. As time moves forward we will see most of these restructured loans continue to fail.


Here’s why – When you own a house over $150,000 which is probably right around the medium national home price then your mortgage payment is north of $1,000/month. Add in a few cars, insurance, your kid’s sports programs, gas, electricity, entertainment, and just life in general and you need one good job just to stay afloat.


That’s using a $150,000 home. There are a great amount of homes and households over $150,000 that are in trouble. Households with home values over $200k, $300K, $400K, etc need two good incomes to stay afloat.


Our current jobs problem started with the housing bubble but now our housing bust is precisely because of our jobs problem. Restructuring current loans to “help” homeowners stay in their homes will not work because the owners no longer have two good jobs to pay for their mortgage. The have one good job and maybe if they are lucky one part-time job. That amount of income wouldn’t cut it in good economic times so the newly restructured mortgages fail.


To help the current homeowners we need job creation. We need these people who can’t currently afford their homes to be able to get two good jobs. The only way to do that is to have the two good jobs available. The federal government cannot create those jobs in the long run (short term stimulus is possible). The private sector will have to create the jobs.


Since the additional $350,000,000,000 will be spent I would hope that ALL of the $350 billion would be used as permanent employment tax relief for businesses. Businesses need stability to gain the confidence to grow. Making the tax relief permanent will do that. Businesses need cash now to meet payroll. Giving businesses a tax relief is exactly like putting money back into their business checking accounts so they can meet their current payroll needs.


The bottom line is the only way to keep people in their homes is to have strong employment numbers. Private sector businesses have to be stimulated. Temporarily keeping people in their homes will not help, it just delays the length of the current recession.


Once homeowners have two good incomes that they can rely on then they can start working on plan B. Plan B is to downsize in an orderly manner so they can survive on one good income when the next recession comes around – and it will come around eventually.


You and I can’t stop the $350 billion from being allocated, but hopefully we can influence how it will be spent. Restructuring a bad mortgage is not a good idea.

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