Friday, November 21, 2008

Fix the Economy in one easy step!

A friend of mine had an interesting thought about how to practically overnight fix all of the problems in our current economy. I thought I would blog it here, for the small chance that someone might respond with their thought on whether or not it would work.

Here it is:
Our problems stemmed from many things, but the catalyst was the adjustable rate mortgages hitting and causing foreclosures and bankruptcy. So, lets get mortgages to a more affordable rate than the world has ever seen. The government should introduce very low, say 2.5% mortgage rates to anyone that could fit some simple criteria. The government already owns the two largest mortgage giants in the world, and is responsible for eating the cost of many foreclosures, so this is an opportunity to save on losses and increase government income.

Why does this make sense? Banks are screaming that they cannot cover the loans they have out. If anyone and everyone was able to refinance into lower rate loans direct from the government, all of these banks would instantly see their capital returned to them. Because the banks have more money, they could then free up other lines of lending, such as credit cards, business and auto loans (which will help the auto-crisis). Sure, the banks would miss out on mortgage revenue, but aren't they crying that they are not getting this revenue now anyhow? Besides, they would then have an opportunity to make money with other types of loans.

With super low mortgage rates, consumers that did not have problems with their existing mortgage payments could now reduce their monthly payments, which frees up tons of capital for consumer spending including: buying new cars, savings, and debt repayment. People that were soon-to-default on their adjusted mortgages would now have an option to refinance into a much lower rate loan, which is lower than the amount they were paying before it adjusted, in effect ending many of the upcoming foreclosures.

Over time (a couple of years), the government could move the mortgage rate higher in half point increments, until a few years out we are back to "normal" rates and the banks could now compete in the marketplace again.

As I write this, the treasury bond is trading at 0%. That is 0%! The feds are lending to banks at 1%! So, the government could offer out these 2.5% loans to credit worthy people, make more than they are making now, free up the banks to develop and sell other types of loans, stop the decline in the housing market, get more people into homes, get more people to upgrade to bigger homes, and free up personal capital for consumer spending.

Why wouldn't this work?

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