14. January 2009 by David A. Peterson.

We have been hearing for weeks about the lack of credit available in the marketplace. Most of us don’t notice this type of problem on a week by week basis.  In fact the only time you would notice is if some major purchase was about to occur.

You may be thinking “credit crisis, what credit crisis?” “It hasn’t affected me.” For the most part you are right the credit crisis hasn’t affected you. To make matters a little less concerning if you have a good credit rating and a job then you might not notice this problem at all.

The only way most of us not making a major purchase would have noticed is the lack of credit card offers coming in the mail. This may be the only silver lining of the whole economic mess – less junk mail.

Here is another deceiving look at the credit crisis; how is it that the housing refinance business is hot right now? Lots of people are being given the chance to restructure their current housing note. If you have tried to refinance and you can’t due to your credit rating then you are learning first hand what the credit crisis means to you and to the economy as a whole.

To you it means that your housing payment will remain at a higher rate than normal. In normal times you would have probably been able to shave a point or two off your current note. That 1 or 2 point shaving of your interest rate can add up to hundreds of dollars a month. That new found money, had you been able to get the new note, may have been enough to help you finance a new car.

There is the issue first hand. In our modern economy all of our purchasing decisions are interconnected. If you can’t finance your new home, refinance your old dwelling, or if you can’t buy furniture, put in a pool, or even put on a much needed roof due to the lack of credit then you are actually contributing to the economic recession. It’s that trickle down effect that liberals are always blasting as voodoo economics.

How many times over the past 20 years have we heard that “trickle down” economics will not work? I would guess at least 1,000 times a year we are hearing on our favorite cable networks or reading in our favorite newspapers how conservatives are destroying our way of life by focusing on supply side economics.

Here we are in a real life demonstration of why demand side economics can fail. People need to buy cars. Notice I didn’t say people want to buy cars they actually need to buy cars. There is a demand.

Mike Jackson, the CEO of AutoNation, was on CNBC yesterday putting the credit crisis into perspective. He said that last year GMAC was financing upwards of 1,600 credit applications a month. Last month he said they did 6! Out of approximately 1,000 applications submitted in December only 6 (not six hundred – six, as in one less than 7) applications were accepted and cars rolled off the lot. His best quote was “… The General Motors Acceptance Corporation should actually be called the General Motors Rejection Corporation…”

Here’s a CEO that employees 25,000 people and has untold millions of dollars tied up in inventory and he can’t even move a car unless he reaches into his own pocket and creates the financing himself. I’m not sure how many friends he can finance before even he runs out of money.

Let’s face it most people can’t buy a $30,000 car by writing a check, how about $15,000 pool? A $5,000 air conditioning system for your home? A $2,500 fence? A $1,500 engagement ring?  A $250 business trip? At what point in your own life do you use some form of credit?

What if that credit is not available? Heck some people can’t even get divorced right now due to the credit crisis.

Regardless if you are a TARP advocate, or a promoter of libertarian ideas, you have to understand that supply side economics ultimately ends up affecting the little guy in a positive manner. The little guy is the economy. The little guy gives us the micro economic view of the economy. The little guy through his purchasing power allows all of the other little guys to stay employed.

We are all little guys. Rich, poor, under-employed, unemployed – we all buy the things that employ our fellow workers.

Bubbles occur when too much buying is going on at one time. We all saw it. The Federal Reserve purposely kept interest rates low while we all saw the explosion in housing values. The Federal Reserves task may be to control the national inflation rate but shouldn’t the Fed have recognized what the housing industry’s affect on the economy would be? Were we not seeing incredible housing inflation?

The government as a whole was so incensed at keeping job growth moving north that if failed to notice the bubble. That’s too polite – our elected officials ignored the housing bubble. Instead of sub-prime lending maybe a few interest rate increases would have been a better idea. I mean really - the housing inflation was clearly visible, and I am not even an economist.

What really happened was the Republican government was pummeled into creating more jobs at all cost. They were browbeaten, and verbally abused for years. The Democratic leaders and the liberal media would not let up. To the Democrats any job that is lost is the result of the federal government.

So our elected leaders, both Republican and Democrat did what was expected. They held hearings, passed laws, amendments, and allowed loose regulation to ensure that anyone that wanted a car, a pool, an air conditioning system, etc could walk right out and get one. Not to mention anyone that wanted to buy a house didn’t even need an income.

Hindsight is easy. It is easy for me to dissect the problem from behind my laptop. But how do we move forward and get out of this mess? Ultimately the little guy has to start buying again. The little guy makes up 70% of the national economy.

Supply side economics means that if enough resources are available at the top then large corporations, small S Corps, Limited Partnerships, and Sole Proprietors will have the resources to invest in their businesses and eventually hire additional workers. The newly hired workers will then do their part and buy the necessities of life – houses, cars, pools, air conditioners, fences, and engagement rings that will ultimately stimulate our national economy.

That is the micro view – the only way to move forward is to give businesses the resources to invest in their respective entities. This investment is ultimately called - job creation. These individuals with jobs will move the economy forward all by themselves.

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13. January 2009 by David A. Peterson.

Whoa now that’s a tall order. Today the 111^th 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 2^nd $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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