Retribution For Consumer

A major reason this country is in such a deep recession is banks and Wall Street concocted and sold a toxic asset called sub-prime loans, and made a substantial profit doing so. This same asset could have caused many of these financial institutions to fail except for the government bailing them out.

While the banks were bailed out very little was done to help the homeowner. The banks have been able to make substantial progress in getting on a healthier footing since the bailout. Now, per an article in the New York Times, , it is expected that the banks will receive a large boost in their profits due to an expected refinance boom brought about by a new round of quantitative easing by the Federal Reserve .

This expected “gift” to banks should be used to pay retribution to the homeowners that were brutalized during the last decade by the very same Wall Street and banking industries. The recovery of net worth of the consumer is paramount to the recovery of the economy.

Given Romney’s close ties to Wall Street this alone is a good reason to retain the current administration in the White House. Here is a plan on how to handle the retribution….

Federal Reserve Quantitative Easing

I support the Fed’s actions to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially. However, there will be consequences in the long term. When buying short-term treasuries, the theory is as the economy improves the Federal Reserve, to fight inflation, will pull money out of the economy by not extending their purchases of new securities.

This will not be as easy with the purchase of mortgage backed securities which have an average life of twelve years. An improving economy will result in interest rates rising and thus the value of mortgage backed securities decreasing. If they pull money out of the economy to hold inflation in check the Federal Reserve will incur significant losses that will need to be covered by the tax payer.

Don’t blame the Federal Reserve for this needless loss. Blame the Republicans in Congress for not shouldering their responsibility to stimulate the economy by making sound investments in infrastructure that would create jobs. Also blame Congress and the White House for not going after banks for retribution for causing our near depression. This retribution would save the tax payers billions of dollars. Goldman’s contributions to our politicians is paying off. More

Banking Scandals And Politicians

The dirty laundry showing in the banking industry is also worn by our politicians. Why is not Obama and Romney talking about what is going on in banking; not only the LIBOR scandal, but the huge trading losses incurred by JP Morgan Chase. In traditional politics our candidates would get free air time in all news outlets and be on television front and center. Further, politicians in America  are much quieter about this scandal than their counter parts in the U.K..

In years gone by Romney would be shouting “it is happening on Obama’s watch.” Obama would be uttering “let’s get those scoundrels.” The legislative branch is just as silent. Congressman Spencer Bachus, Chairman of the House Committee on Financial Services and Tim Johnson, Chairman of the Senate Committee on Banking, Housing and Urban Affairs would be holding hearings and issuing subpoenas calling bankers on the carpet like they did during the collapse of the auto industry. I still remember Senator Shelby publicly demeaning the auto executives. Where is he now?

The silence is obvious. What is not so obvious is why. If one imagines the possible reasons for Washington being so quiet, high on the list would be the fact that the financial services industry is a heavy contributor to political campaigns. After all, we do have a major campaign going on right now. Could this be the reason? Where is Thomas M. Hoenig when you need him? More:

Twisting The Money Away!

The banks are still in trouble because of the sub-prime fiasco from which they never recovered.  In 2008 the Federal Reserve injected liquidity to save the industry and economy; however, the core problem still lingers: underwater mortgages that have not been fully written down on the banks books. Until the mortgage crisis is resolved, the banking crisis will not be resolved.
The Fed’s “Operation Twist” is not going to help much because it will not increase consumer demand enough to encourage the private sector to increase jobs. The consumer is scared. When the consumer is scared he hoards cash. The same is true with business. When they are not sure about the future, they do not invest in new plant and equipment. They stay liquid until they are certain that any money invested will provide a reasonable return in the future. Otherwise, they hang on to cash waiting for a brighter day. It does not matter that interest rates and prices are low; there is fear that they may fall further or worse yet, a major economic calamity may occur. Some call this a liquidity trap.

This is the problem many republicans have with the government stepping up and investing in infrastructure, oil exploration, developing other sources of energy, investing in education, implementing high speed internet and other such projects that would increase our future productivity.
If you believe in our economic future, you know that the government not only needs, but should, invest in those things that will improve our competitiveness going forward and at the same time create jobs today. This in turn will increase the demand for consumer goods resulting in business to invest and hire to meet the demand. Obama’s stimulus is not enough.
One unanswered question concerning Operation Twist is what will the cost of untwisting the long term bonds when the recovery begins and the price of bonds fall? More:

The Economy And What We Must Do In Next 1,800 days

It is going to take at least 5-years to repair the damage done to the economy because of our excesses over the past 8-years. Too many homes were added to our housing supply because of easy credit granted to consumers who could not afford the home they were buying.

Now because foreclosures resulting from poor credit decisions, we have an excess supply of homes on the market that has, and will continue to, put downward pressure on home prices. This trend will last for at least 5-years. Further, it will take sometime before homes will be viewed as a good investment. Houses will be purchased more for the shelter that they provide as opposed to a means of increasing wealth. To compound the problem, the demand for housing is not going to get much help from the demographic trends over the next 20-years.

This has resulted in a significant drop of the net worth of households, causing households to adjust their spending habits downward. Because of the decline in household spending, retail sales will fall off significantly and will not recover for sometime. There will be store closings and consolidations causing retail rental rates and values of commercial real estate to decline.

The glamour of real estate as an investment is over or at least tarnished significantly for some time to come.The net worth of Americans has further eroded because of a 40% decline of the stock market over the past year and no one can be sure of when the fall will end. Retirement savers have lost $2-trillion over the last 16-months due to the stock market crash.

It is time for the government to institute public works projects to shore up our infrastructure, reduce or dependence on foreign oil and fossil fuel, improve our education system and to supply the jobs necessary to overcome our current economic problems. It is unfortunate that we ran huge federal deficits during “the good times” because now we have no choice but to resort to deficit spending to cure our problems and to make the necessary investment for our future. This is not being liberal or conservative; it is doing what is right.