Contributing Editor Shah Gilani outlined his plan for fixing the U.S. housing market recently in Money Morning, and was inundated by responses from individuals critical of his plan’s ability to address the “root problems” that initially caused the housing market crisis. Those problems were many and included too much government manipulation of the market, poor regulation, banking greed and a saturated market. His approach addresses all of these problems in a comprehensive manner rather than picking one or two issues at a time, which he claims only results in more failure. For more on this continue reading the following article from Money Morning.
Everyone knows that the U.S. housing market caused the current economic funk.
But here's the irony: The American housing market - a principal actor and victim of a bubble that burst, causing the worst recession since the Great Depression - may now be in a position to save the U.S. economy.
In other words, if we fix the housing market, we stand an excellent chance of fixing the economy.
And my housing plan may be the dual fix we've been looking for .
Plan Generates Huge Response
In Money Morning exactly one week ago, I presented a plan to fix the broken U.S. housing market. And while I wanted feedback on the plan, I was stunned to receive hundreds of e-mails, phone calls and comments - underscoring just what an intensely emotional topic housing continues to be in this country.
Many people lauded my plan. But I was somewhat surprised at the number of people who trashed it. For those critics, the main issue was that they didn't feel the plan addressed the real root causes of the current housing crisis.
I got an earful about what the root problems are. Eventually, it struck me. It wasn't my plan that people didn't like, it was that I didn't explain how my housing plan would fix those root problems.
Those root problems are no small thing. They caused the housing crisis in the first place. They're keeping the housing market from recovering now. And they're a major drag on the U.S. recovery - and could end up as a proximate cause, or key catalyst, of the much-feared "double-dip recession."
Key Problems With the U.S. Housing Market
According to the feedback I received, many of these "root causes" are very clear. The list includes:
- Too much government manipulation and stimulation.
- A free market that's not permitted to operate as such.
- Banker (Wall Street) greed that causes - and then perpetuates - wrenching boom-and-bust cycles.
- Too much easy money, which paved the way for too many easy loans.
- Too many (ineffective) regulations.
- Too few (effective) regulations.
- Too many houses on the market.
- Banks that have no incentive to lend.
- And a generally unhealthy economy.
I agree that all of those issues are root problems. But here's the thing: To fix the housing market - and with it, the U.S. economy - we can't just attack one, two or three of these.
We have to address all of them - and in a comprehensive fashion.
My plan proposes to do just that.
Try it on again. Only this time, when you comment, help me identify unintended consequences that could result from the plan, and let's make it better together.
When Government Involvement is OK
Let me start by saying that my plan isn't another government-manipulation scheme. It does require temporary government action (legislation) that is specifically designed to address these issues in a manner that will turn the market around. But it also puts a strict time limit on these initiatives, meaning the government intervention will eventually expire and allow the free market take over once and for all.
If you're cynical, like me, you're saying: "Yeah, but self-serving legislators pander to special interests to perpetuate government-controlled programs." You're right, but that's another problem for another time - and involves throwing the bums out of office.
In the meantime, my housing plan recognizes that special interests profited egregiously from the de facto government backing of the aptly named government-sponsored enterprises (GSEs) Fannie Mae (OTC: FNMA) and Freddie Mac.
They have to be killed off.
The plan calls for them to be unwound - and buried.
But in our advanced economy, there is a need for a "mechanism" that is able to transfer risk to investors who are willing to accept it.
That mechanism is called "securitization." That's what securitization does. And that's what Fannie and Freddie do.
GSEs such as Fannie and Freddie help increase the flow of mortgage money in the financial system. They amass a pool of money, which they can use to buy mortgages that they carry on their books as inventory, or that they repackage and sell. But there are a few things wrong with this model. And my plan fixes them all.
As I outlined last week, my plan creates a replacement pool of capital. But that money won't come from investors who believe that the government will backstop their Fannie and Freddie bonds; it will be free money "donated" by all the banks that "we the taxpayers" bailed out so that they could live to rip us off another day.
Under my plan, the new mortgage pool:
- Won't be government-backed.
- Will last for only 10 years.
- And will have to lend at prevailing rates based on its "cost of capital" (which will be zero).
Banks will be forced to lend on similar terms: In other words, in addition to the existence of the pool that banks will have to contribute to, banks will have to compete with one another and the pool by providing loans on the same basis as the pool offers.
And the pool will have risk-retention requirements - the same as banks. That should be 10%. This means the pool, and banks, will have to hold 10% of the value of their total loans as a reserve against possible future losses. After all, banks that overleveraged themselves without a substantial -enough cushion of capital reserves against crashing asset prices led to the credit crisis.
Because this is only a temporary liquidity pool - and because we aren't a communist dictatorship (even so, the banks owe us something for all the trouble they caused, and the trillions of dollars of economic damage they're responsible for) - banks should get a break on the taxes they pay on the profits they generate from the pool.
The public will be benefiting and banks need the profit motive to serve as an incentive. We want those banks to profit so that they can transparently rebuild their balance sheets and pay taxes again. (Another plan we need to talk about is breaking up all the too-big-to-fail banks).
The idea of "sunsetting" the pool is that it clears the way for other private-mortgage-money investors and syndicators to get into the business and compete profitably.
The ultimate objective here is clear: We want to get the U.S. government out of the mortgage-lending business, and let the free market take over after a transition period.
Save the Housing Market, Save the U.S. Economy
While we're getting mortgage financing back on track, we need to stabilize the sinking U.S. housing market itself. With my plan, tax credits will get prospective buyers off the fences they're currently seated on - and will spur them into action.
U.S. housing prices have fallen precipitously. Should we just let them continue to freefall? No one knows what the natural equilibrium level should be in any town, county, region, state, or nationally.
What we can assume is that a housing-price bottom will eventually form. And if that "bottom" is significantly below where we are now, this country is in for a lot more economic pain.
That statement - more than any other - highlights what I said at the outset of this column: If we're going to save the U.S. economy, we have to fix the U.S. housing market. It also attempts to speak to free -market advocates, of which I am one, by saying that sometimes an engineered soft landing is easier to bounce back from than a full-blown crash.
My plan to offer tax credits against depreciation and credits for appreciation doesn't inordinately manipulate prices. It simply incentivizes people to test the waters sooner rather than later by subsidizing (yes, that's what I'm suggesting) the very real risk that new homebuyers would be taking by making a purchase at this point in a soft-and-unsteady market.
Don't be too quick to dismiss this part of the proposal: After all, we subsidize banks that take risks that are backstopped by taxpayers. Why not offer a small subsidy directly to U.S. taxpayers?
If the small tax credits (they could and should be limited to some range of home prices, if for no other reason than to avoid giving additional tax breaks to the uber-wealthy in this country) are enough to incentivize people to "bottom fish" for homes - and enough people decide that prices have come down to a level that justifies this investment or speculation - then we will have created a "floor" for housing-market prices that could hold.
It's a relatively market-based solution to a market-based problem. And it recognizes that markets need risk-takers and sometimes risk-takers need an edge to play.
If you're thinking that this tax-credit scheme is another government handout that's going to come back to cost us, you're right. And that's another reason I like the plan.
Time to Act
By giving tax credits against future tax revenue, the federal government is trading revenue from tomorrow (which it wouldn't be getting if the economy keeps sinking) for a chance to stabilize the housing market today. It will hopefully achieve that point of stability sooner rather than later - and will energize the U.S. economy at the same time.
What's wrong with forcing more fiscal discipline on profligate government spenders? Eventually, we are going to have to address spending in a meaningful way. If my plan is enacted, it will add to the question of what future revenue will be available to spend if we are giving taxpayers much-needed tax credits to stabilize the housing market and the economy now. I know it's fanciful, but part of my plan is designed to impose fiscal discipline on the federal government by repatriating taxpayer money back to taxpayers.
There are plenty of unintended consequences that will manifest themselves if my plan is enacted and implemented. I'm developing a list (it's short right now) and I would welcome your help. If we can work together to shape this plan so that it is better positioned to deliver the hoped-for impact on the U.S. housing market and the U.S. economy, we just might be able to present Congress and the Obama administration with a deal they can't refuse.
It's our country, our future and our obligation to our democracy to be part of the solution to our collective problems and not part of those problems. If you've got constructive comments and ideas for making our plan better, I will do my part to stitch them together so we can do what needs to be done for our country.
This article was republished with permission from Money Morning.