A thought or two to fix the economy

Discussion in 'Economics' started by pneuma, Mar 15, 2009.

  1. pneuma


    The premise for this is simple – if the everyday person can pay down debt, save a little and still have spare disposable income, then they will spend that cash and stimulate the economy. If they can do these three things there will be a massive drop in foreclosures and pick up in retail sales.

    The first thing that needs to be accepted is this: up to the end of 07, the economy artificially enhanced through a variety of mechanisms, but essentially people were spending more than they earned. To recover from this people need to pay down debt and feel financially secure.

    The future economy will need to be now driven by productivity NOT credit. By productivity I mean value adding industries – retail and finance do not value add – manufacturing value adds. The American economy must become 1. more productive and 2. more competitive and this will probably mean that the artificial standard of living people have recently enjoyed will probably slip.

    So how can we provide for this to happen, without it costing trillions? How about we provide every homeowner/occupier (not investors) with the opportunity to replace their current mortgage with the following:

    • Replace the fixed interest rate with a variable rate at Federal Reserve rate + 2% = 2.25%
    • Increase the variable rate in line with the Fed rate until the mortgagee reaches their 30 fixed rate (which at the moment is around 6%), and then revert back to their previously agreed fixed rate.
    • Put everyone on this arrangement on a full recourse agreement – if you walk you still have to pay

    What would this do?

    • Reduce the foreclosure rate markedly as people can start to afford their repayments
    • Reduce the number of CDS that need to be paid out (and thus save the banks, more on that below)
    • Reduce the number so called “toxic assets”
    • Force people to be responsible for their decisions (good and bad)
    • Provide extra cash for everyone to boost spending and the economy – not just the rich

    Total cost to the American public – paper work.

    I would also suggest that all CDS should be called what they really are – insurance – and they should be treated as such. I can’t take out car insurance on a car I don’t own – I shouldn’t be able to take out a CDS on a debit I don’t own. Thus if the owner of the CDS doesn’t have skin in the debit to which it is aligned the agreement should be terminated and the premiums refunded.

    Total cost to the American public – NIL.

    Think about it - simple, cheap and economically responsible.