The recent TEA (Taxed enough already) parties around the nation culminating with one in Washington, DC showed that most Americans are sick of the way the Federal government is continuing to take more and more of our hard earned income to pay for government expenditures (or at least use it for down payments on more financed borrowing). Unfortunately, what most Americans don’t realize is that we are mad about only the part of the iceberg above water, while 90% more lurks underneath the deep.
Fed Chairman Ben Bernanke advises us that we have probably seen the worst of the “recession”, and that things are looking up. From a purely “nominal” point of view, he is probably right. We may see GDP growth in this quarter and the next. Unemployment may be close to peaking, with gradual improvement into the distant future. But at what cost?
Governments can play with money supply, and they can play with interest rates. This is the method just recently used to prevent the US sky from falling in, with repercussions heard around the world. They can even play with the values of previous metals, by selling from their own stock, or even leasing their own stock to others. But they cannot really totally control the value of precious metals as compared to the value of paper money.
Incidentally, you should know that the US, richest nation in the world after World War II, held 20,000 metric tons of gold, and it was the backing for our paper money. Because we agreed in 1944, at an international conference in Bretton Woods, New Hampshire; to redeem dollars for gold to anybody in the world, the world considered the US dollar king of the hill. By the time LBJ decided to win the war in Viet Nam, while he won the battle against domestic poverty at the same time; the world decided they would rather hold gold than US dollars. They required us to give them 12,000 metric tons of our gold, leaving us only 8,000 metric tons. And history records LBJ lost both wars. Finally, Richard Nixon had to tell the world we could no longer redeem dollars with gold, lest we give away all we held, and we went off the gold standard.
Now our dollar is worth only what the rest of the world believes it is worth. Because Nixon made a deal with Saudi Arabia to require all oil sales to be paid for in US dollars, for 30 years, the dollar held up pretty well from the outside view, as compared to other world currencies. But when Nixon refused to redeem dollars, he also began to allow private ownership of gold, which FDR had confiscated during the depression, and private ownership led to real market prices.
Since the depths of the depression in 1932, the dollar has lost 98% of its purchasing power. Put another way, two pennies in the depression would buy the equivalent of what one dollar buys today. You laugh at your grandpa for making $2,000 per year, but if you are not making over $100,000 per year, he was better off than you are! At the same time, gold soared in value by 4,300 per cent. Put another way, $100,000 cash in 1932 is really worth $2,000 today. $100,000 gold in 1932 is now worth well over $4.3 million in paper dollars.
The dollar index compares the dollar to a basket of other world currencies. The US dollar is now at 76 cents, just 5 points away from its all time low, and headed lower. The Fed is now buying US bonds, which is the equivalent of you loaning yourself money. How long can it last? This is why I still call for a march on Washington for July 4, 2010.We absolutely must save our Republic.
Monday, September 21, 2009
Thursday, March 5, 2009
I WISH PRESIDENT OBAMA WELL
I wish President Obama well, I really do. And I think he won the presidency with good intentions to change Washington for the benefit of most average Americans. But it seems he has already begun to come under the influence of special interests, which would protect their own turf at the expense of the general populace.
On May 15, 2008, when gasoline was heading toward $4 plus per gallon, I wrote that we had enough oil shale reserve in the Rocky Mountain States to provide our domestic gasoline needs for 110 years, over 2.5 trillion potential gallons. The problem is designing an efficient way to separate the oil from the rock. Royal Dutch Shell Oil led the way, and has made tremendous strides toward solving this problem. But with the national gas price now averaging under $2 per gallon, new Energy Secretary Ken Salazar has just reversed plans to lease oil shale land in Colorado, Utah and Wyoming. The nation loses, and the environmental groups, who oppose any oil shale development, win. I see this as a major mistake.
On another vein, we face a frozen banking system, which I acknowledge was allowed to develop by the Bush administration. Interest rates, which were kept too low for too long, brought into being complex mortgage backed securities to satisfy the demand of greedy investors for higher returns. When greedy investment bankers figured how to package bad mortgages into securities rated AAA investment grade; greedy mortgage brokers figured ways to approve unconscionable loans, and the die was cast for a disaster. And it does not help our national reputation that these products were sold to investors all over the world. This is one reason the remaining world is in worse financial shape than we are. But, our banking system is still frozen, and the federal government has already invested over $200 billion of taxpayer money into the largest banks in America, with no appreciable results. Furthermore, all the dying investment banks suddenly became commercial bank holding companies, so they could line up at the same trough.
Now, the Obama administration has announced a new “stress test” for the 19 largest bank holding companies, which hold assets of $100 billion or more each. There are two criteria used for the test. One assumes the economy will continue at its lackluster pace through 2010, and the second presumes things will worsen, with housing values falling another 29%, while unemployment rises to over 10%. This second scenario is probably a good idea. After the stress tests, Treasury Secretary Timothy Geithner will advise these banks how much new capital is required, and give them six months to raise it privately. If they can’t raise it, more of our tax money will go into buying 9% interest bearing preferred stock, which can be converted into common stock. The funds would come from the second half of the original $700 billion TARP plan. Every effort is being made to call this something other than nationalization.
I stated in a September column that our TARP money should be invested only in saving our commercial banks, which hold our hard earned money, rather than investment banks and insurance companies. The government has tried to do both.
It is imperative we learn from the mistakes of Japan in the 1990’s. They allowed their banks to carry bad real estate paper on the books as good assets for over ten years, before they finally wrote off about 96 trillion yen, or the equivalent of nearly 20% of their gross annual domestic output. During that delay, their stock index fell about 75%, and real estate prices declined for 15 straight years. We don’t want such results.
When the tests are completed, and the nation’s capital is invested, these bad investments must be written off the books. Only then, can we start building toward recovery.
On May 15, 2008, when gasoline was heading toward $4 plus per gallon, I wrote that we had enough oil shale reserve in the Rocky Mountain States to provide our domestic gasoline needs for 110 years, over 2.5 trillion potential gallons. The problem is designing an efficient way to separate the oil from the rock. Royal Dutch Shell Oil led the way, and has made tremendous strides toward solving this problem. But with the national gas price now averaging under $2 per gallon, new Energy Secretary Ken Salazar has just reversed plans to lease oil shale land in Colorado, Utah and Wyoming. The nation loses, and the environmental groups, who oppose any oil shale development, win. I see this as a major mistake.
On another vein, we face a frozen banking system, which I acknowledge was allowed to develop by the Bush administration. Interest rates, which were kept too low for too long, brought into being complex mortgage backed securities to satisfy the demand of greedy investors for higher returns. When greedy investment bankers figured how to package bad mortgages into securities rated AAA investment grade; greedy mortgage brokers figured ways to approve unconscionable loans, and the die was cast for a disaster. And it does not help our national reputation that these products were sold to investors all over the world. This is one reason the remaining world is in worse financial shape than we are. But, our banking system is still frozen, and the federal government has already invested over $200 billion of taxpayer money into the largest banks in America, with no appreciable results. Furthermore, all the dying investment banks suddenly became commercial bank holding companies, so they could line up at the same trough.
Now, the Obama administration has announced a new “stress test” for the 19 largest bank holding companies, which hold assets of $100 billion or more each. There are two criteria used for the test. One assumes the economy will continue at its lackluster pace through 2010, and the second presumes things will worsen, with housing values falling another 29%, while unemployment rises to over 10%. This second scenario is probably a good idea. After the stress tests, Treasury Secretary Timothy Geithner will advise these banks how much new capital is required, and give them six months to raise it privately. If they can’t raise it, more of our tax money will go into buying 9% interest bearing preferred stock, which can be converted into common stock. The funds would come from the second half of the original $700 billion TARP plan. Every effort is being made to call this something other than nationalization.
I stated in a September column that our TARP money should be invested only in saving our commercial banks, which hold our hard earned money, rather than investment banks and insurance companies. The government has tried to do both.
It is imperative we learn from the mistakes of Japan in the 1990’s. They allowed their banks to carry bad real estate paper on the books as good assets for over ten years, before they finally wrote off about 96 trillion yen, or the equivalent of nearly 20% of their gross annual domestic output. During that delay, their stock index fell about 75%, and real estate prices declined for 15 straight years. We don’t want such results.
When the tests are completed, and the nation’s capital is invested, these bad investments must be written off the books. Only then, can we start building toward recovery.
Monday, February 23, 2009
SOLVE THE HOUSING CRISIS
The Warren Plan
On October 9, 2008, I offered my suggestion to assuage the tremendous housing deflation problem which our nation faces, the real epicenter of the extended economic recession (?) which continues to grow daily. According to the National Association of Realtors, the median home price nationwide in February was down 12 per cent from one year ago. But declines of more than 30 per cent were found in California, Michigan, Arizona and Nevada. The biggest drop, more than 50 per cent, was in Ft. Myers, Florida. We can argue among ourselves as to whether tax dollars should be used to help some who made extremely unwise financial decisions, but meanwhile the house burns down around us.
My solution was for the government to actually use tax dollars to reduce troubled loan principal up to 20 per cent, provided the lender in control would voluntarily cut the interest rate, make it a fixed rate, and extend the term of the loan, to bring the monthly payment down to around 31% of monthly income. In the past, this front end ratio was always used for loan approval; but was combined with a back end ratio of 38 per cent, when all other monthly household credit obligations were included.
Unlike the Obama plan, the government would be secured in most instances under my plan. The distressed homeowner would have to give the government a second note and security deed for the amount of aid tendered, payable no later than ten years, or upon sale, if earlier, with 3 per cent simple interest to accrue. According to economists, the national inflation rate from 1970 to 2000 was about 5 per cent per year. Thus, in ten years, with the recession stopped, we should expect a 50 per cent increase in home values from today. If, in the unlikely event the home value had not increased enough to pay the entire government debt upon sale, the excess balance would be forgiven. If my math is correct, $700 billion, which made up the original TARP, would have funded up to $83,400 principal reduction each (20% of the $417,000 Fannie Mae nationwide maximum loan limit) to as many as 8,400,000 homeowners. I don’t think that many are in trouble, and further, most don’t need that much relief. According to the Washington Post, less than 3 million mortgages are now past due. If we relieved only 3 million homeowners, the original TARP would have funded up to $233,000 principal reduction each.
Instead, the Obama plan calls for the lender to eat the principal cost of getting the front end mortgage ratio alone down to 38 per cent of monthly income, and the government will eat the principal cost to bring the front end mortgage ratio alone down further to 31 per cent of monthly income. (Think of all the accounting jobs we will create.) All other household debt, the back end ratio, will not be affected. (Expect another plan later to handle that.) The loan servicers will get a flat $1,000 bonus for every loan which they renegotiate, and another $1,000 per year for three years if the borrower remains current. The lender gets a $1500 bonus, and the servicer gets another $500 bonus, if they renegotiate prior to a delinquency. In addition, the borrower gets a $1,000 annual bonus for 5 years if he makes his payments, and does not walk away.
Finally, the Obama government is injecting another $400 billion into Fannie Mae and Freddie Mac, the former government-sponsored mortgage buying enterprises which are now government owned mortgage buying enterprises. This new $400 billion would fund another 1,716,000 homeowners with $233,000 up front principal reduction. But, regretfully, my solution would not substantially grow the bureaucracy, nor would it pay the greedy lenders who initiated the problem, so it is out of the question. Furthermore, it is just much too simple to come out of the federal government.
Soon, I will be circulating a petition to elect me lifetime benevolent dictator of our nation. If you are willing to sign, please let me know.
On October 9, 2008, I offered my suggestion to assuage the tremendous housing deflation problem which our nation faces, the real epicenter of the extended economic recession (?) which continues to grow daily. According to the National Association of Realtors, the median home price nationwide in February was down 12 per cent from one year ago. But declines of more than 30 per cent were found in California, Michigan, Arizona and Nevada. The biggest drop, more than 50 per cent, was in Ft. Myers, Florida. We can argue among ourselves as to whether tax dollars should be used to help some who made extremely unwise financial decisions, but meanwhile the house burns down around us.
My solution was for the government to actually use tax dollars to reduce troubled loan principal up to 20 per cent, provided the lender in control would voluntarily cut the interest rate, make it a fixed rate, and extend the term of the loan, to bring the monthly payment down to around 31% of monthly income. In the past, this front end ratio was always used for loan approval; but was combined with a back end ratio of 38 per cent, when all other monthly household credit obligations were included.
Unlike the Obama plan, the government would be secured in most instances under my plan. The distressed homeowner would have to give the government a second note and security deed for the amount of aid tendered, payable no later than ten years, or upon sale, if earlier, with 3 per cent simple interest to accrue. According to economists, the national inflation rate from 1970 to 2000 was about 5 per cent per year. Thus, in ten years, with the recession stopped, we should expect a 50 per cent increase in home values from today. If, in the unlikely event the home value had not increased enough to pay the entire government debt upon sale, the excess balance would be forgiven. If my math is correct, $700 billion, which made up the original TARP, would have funded up to $83,400 principal reduction each (20% of the $417,000 Fannie Mae nationwide maximum loan limit) to as many as 8,400,000 homeowners. I don’t think that many are in trouble, and further, most don’t need that much relief. According to the Washington Post, less than 3 million mortgages are now past due. If we relieved only 3 million homeowners, the original TARP would have funded up to $233,000 principal reduction each.
Instead, the Obama plan calls for the lender to eat the principal cost of getting the front end mortgage ratio alone down to 38 per cent of monthly income, and the government will eat the principal cost to bring the front end mortgage ratio alone down further to 31 per cent of monthly income. (Think of all the accounting jobs we will create.) All other household debt, the back end ratio, will not be affected. (Expect another plan later to handle that.) The loan servicers will get a flat $1,000 bonus for every loan which they renegotiate, and another $1,000 per year for three years if the borrower remains current. The lender gets a $1500 bonus, and the servicer gets another $500 bonus, if they renegotiate prior to a delinquency. In addition, the borrower gets a $1,000 annual bonus for 5 years if he makes his payments, and does not walk away.
Finally, the Obama government is injecting another $400 billion into Fannie Mae and Freddie Mac, the former government-sponsored mortgage buying enterprises which are now government owned mortgage buying enterprises. This new $400 billion would fund another 1,716,000 homeowners with $233,000 up front principal reduction. But, regretfully, my solution would not substantially grow the bureaucracy, nor would it pay the greedy lenders who initiated the problem, so it is out of the question. Furthermore, it is just much too simple to come out of the federal government.
Soon, I will be circulating a petition to elect me lifetime benevolent dictator of our nation. If you are willing to sign, please let me know.
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