How the Recession Could Have Been Avoided

The recession could have easily been avoided had the government helped the portion of the economy that contributes 70% to the GDP and not reward the stupidity of those companies that provided sub-prime mortgages.

As I have written to Senators and the White House, the stimulus process should have focused on the homeowners and not the banks.  There are over 8,000 banks in the United States, so there would have been plenty of money available for lending to corporations.  There is the FDIC which would have protected the consumer should a bank go under.  I guess if your not related to Goldman-Sachs, you're simply out of luck.

So how could this whole recession been avoided?  By simply providing government loans to the 90% of homeowners who were affected by the miscarriage that occurred during the housing bubble.

The process would have been this simple.

1)  If a homeowner has a first mortgage on their primary residence, the government would provide the homeowner with the opportunity to take out a loan for upwards to $100,000; however, the loan cannot be in excess of the outstanding principle.  This loan can only go pay down the principle on the primary mortgage.

2)  Depending on the multiple of $10,000 (e.g. a $70,000 loan would be a multiple of 7), the homeowner would lose the mortgage interest deduction on the loan for the number of years equal to the multiple (in the example 7 years).  This loss of mortgage interest deduction would serve as the interest payment for the loan.

3)  The mortgage rate of any loan would be fixed to either the mortgage current rate or 5%, whichever was lower and re-established as a 30-year mortgage. 

4)  Upon the sale of the home, the principle on the primary mortgage would be paid first, while the government loan would be paid second.  If there is any money left after this point, then the homeowner gets it as a capital gains.

What would have been gained (and still be gained) had the above been followed:

A)  Money would have flowed into the banks, which would have solved a large portion of the financial crisis.

B)  The vast majority of homeowners who were unfairly manipulated because of the housing bubble would have had the value of their homes readjusted from the outrageous valuations; thereby stabilizing housing values.

C)  While government service cutbacks would still be needed, the drastic reduction would have been reduced due to increase tax revenues from the lack of mortgage interest deduction.

D)  Most importantly, spending money would have been left in the hands of homeowners who are also consumers.  While these homeowners would still have moved into a saving mode, there still would have been enough "extra" cash to continue stimulating the economy through purchases that drive the U.S. economy.   

While it may not have eliminated the recession, it would have greatly reduced its effect on the economy.  The focus of any stimulus should be on the consumer and because of the housing bubble the homeowner.  Until the homeowner is made right, anything done to try and make the economy better is a waste of money.


Disclosure: No Positions