April 25, 2024

No Mortgage Payments For A Year Would Stimulate Spending

Experts Predict Depression

Are we in a depression?  Jon Markman of MSN Money eloquently explains the world’s financial dilemma.

Too Late To Avoid A Depression? – MSN Money

Policymakers are quickly running out of time and room for error. And even a brilliant plan — which we haven’t seen yet — could fail without some good luck.

The problem is that the models often fail to accurately forecast human behavior, and politicians regularly screw it all up by ignoring the data and diverting funds to pet projects.

Over the past week, the world’s intellectual, business, government and philanthropic elite emerged from World Economic Forum meetings in Davos, Switzerland, with grim faces and warnings of financial doom.

Credible economic analysts now say there is still a narrow window of time in which policymakers in the United States, Europe and Asia can avoid a meltdown over the next year by immediately coordinating the injection of real financial adrenaline to banks, companies, households and local governments — not just rhetoric and indiscriminate spending. Yet that window is closing fast, and if the right steps are not taken soon it may be shut for years.

The Stimulus Money Could Pay Every One’s Mortgage Payment For A Year

The experts are predicting a possible depression and the economy needs major monetary stimulus.

The government could provide a massive shot of adrenaline to consumer spending by eliminating the consumer’s biggest monthly payment – the mortgage.  The one  trillion dollars that Congress wants to spend can cover the interest due on every residential mortgage in the country for a year.  Here’s ten reasons why the plan would work.

1.  According to the Federal Reserve, total home mortgage debt as of the second quarter of 2008 was $10.6 trillion.   Assuming an average interest rate of 6.5% the interest payments would only be $689 billion for one year.  Equivalent payments could  be made to homeowners without mortgages and renters.  The total cost would roughly equal the one trillion in stimulus spending that has been proposed by Congress.

2.  Eliminating the mortgage payment would allow consumers to strengthen their balance sheets by paying off some debt.

3.  Many consumers would effectively have a substantial pay increase since the average mortgage payment can easily consume up to 40% of gross monthly income.  It is inevitable that a significant part of the extra cash would be spent.  The increased spending would increase demand for goods and services and reduce further job losses.

4. The mortgage payment is the biggest monthly expense for most people.  Not having to pay the mortgage for a year would greatly boost consumer confidence.  Restored confidence could stimulate future spending after the one year mortgage holiday ends.

5.  Homeowners who are in arrears on their mortgages would be given an opportunity to catch up.

6.  The default problem for the banks would be temporarily eliminated since the mortgage payment would be made by the government.   Not having a mortgage payment for a year would strengthen the consumer’s finances thereby lessening the number of defaults after the mortgage holiday is over.

7.  The American consumer knows how to spend – he just does not have the money right now.  Give it to him and let it be spent with no strings attached.

8. Millions of individual consumers will spend or invest the money more wisely than bureaucrats in Washington.

9. Those homeowners who have lost their jobs and are now struggling to pay their mortgages will be given immediate financial relief.

10. This plan would allow renters to save their stimulus payments for a down payment on a home, thereby providing support to the housing market.

If the Congress wants to borrow one trillion dollars that the American taxpayer will eventually have to pay back, then put that money directly into our pockets with a Mortgage Holiday.    We do not need Congress to spend our money for us.

Loan Mods Just A Warmup For The Real Thing-A Mortgage Holiday

It has become increasingly obvious that the central banks of the world will engage in whatever desperate actions are necessary in order to sustain and increase our already unsustainable levels of debt.  The ridiculous idea of providing more credit to a financial system already imploding from oceans of debt seems to be the only solution that makes sense to our policy makers.

The alternative to keeping the credit engine going is to accept the economic pain necessary to restore sound finances.  Since the short term financial pain  would include very high unemployment, lower stock prices, frugal living standards, more credit write downs and  more asset destruction, it is a certainty which path the political and monetary authorities will chose.  Quantitative easing, bailouts and government borrowings are all certain to see immense increases.  The risk of inflation and debasement of the currency brought on by these techniques is apparently viewed as preferable to the pain of deleveraging.

The false prosperity of the past 25 years has come from a parabolic increase in the national debt.  One credit bubble after another in various asset classes have now burst leaving us with destroyed asset values and mountains of debt that can never be repaid.

Real national income has been stagnant for the last decade; attempting to address this problem by borrowing money to maintain living standards does not work long term since the interest costs eventually overwhelm a static income level as shown on the chart below.  With interests rate essentially at zero the Federal Reserve is now forced to employ the unconventional methods that Fed Chairman Bernanke has spoken about in the past.  The deflation we are now facing makes debt payments ever more onerous to the borrower.  Debts too large to be repaid by definition will not be repaid – the only two options are to default or attempt to reduce the debt through inflation of the currency.  The Fed has obviously chosen the later option.

Since the consumer represents roughly 80% of the economy,  there will be massive efforts to put cash into the American consumer’s pocket.   Additional income will not come from wage increases with the present high level of unemployment.   Additional cash  will not come from borrowing  since the banks have thus far largely refused to lend to poor credit risk consumers.   Additional cash will not come from lower rates since the Fed is out of bullets on rate decreases.   Those who are financially responsible do not want to borrow or spend since they are trying to save to make up for the huge wealth destruction they have sustained over the past two years.

What is the solution on how to put more money in the pockets of those consumers most likely to spend whatever cash they receive?  The proposed stimulus rebate program is presently the government’s only and preferred “solution” to over leverage and static incomes.   The next move beyond this point will be to simply provide a way for the consumer to simply stop paying his bills without technically defaulting on the debt.

Since the largest monthly payment most consumers have is the mortgage payment, it is increasing likely that as the economy continues its downward spiral, the government will allow a mortgage holiday, as I have previously predicted. This once unthinkable action was actually proposed today by Gordon Brown in Britain, where consumers have distinguished themselves by becoming the most indebted citizens of the world.

As reported by the Financial Times, “Gordon Brown on Wednesday granted homeowners in financial difficulty the right to demand a two-year mortgage holiday, guaranteed by taxpayers, in a dramatic bid to underpin the housing market.”    You can be certain that this program will eventually be applied to all mortgage holders in many countries.

According to the Federal Reserve, total home mortgage debt as of the second quarter of 2008 was $10.6 trillion, roughly equivalent to 80% of the GDP.    Assuming an average interest rate of 6.5% on this mortgage debt, the cost to the government (who would pick up the tab) would only be $700 billion per year, oddly enough the same size of the presently proposed rebate program.  Since we have already partly institutionalized the repudiation of debt through loan modification programs, this step is only a natural progression but applied to a wider number of people.

This program would no doubt be eagerly embraced and wildly popular with cash poor consumers. It would put cash into the pockets of those most likely to spend it, thereby helping the economy.  The minority of those without mortgages may be upset until they accept the wisdom of “wealth redistribution” now being preached as a method of helping those in need.

My view is that we will all end up equally poor.