Stock Market, mortgage rates and possible recession

Tax cuts will definitely not be enough. There has been a lot of finger pointing at the Banking Industry because of the subprime loans, but I believe it goes much deeper than that. When the securitization of mortgages was implemented, it opened a bag of worms that is eating away at our very souls. Mortgaged-back securities was the worst idea to every hit Wall Street, Main Street, etc… This can all be summed up in one word, “GREED”.

STOP THE BAILOUTS and FIX THE BANKS
- Solve the loan problem.
- Solve the derivative problem.
- Reassemble whole loan mortgages.

The U.S. economy is shrinking fast, because businesses cannot get loans that they need to operate normally. Banks and lenders already made $ billions in bad loans, and they are afraid to make new loans. The government gave $ billions in bailout money to banks, and the banks hoard the money to save themselves.

Our financial system became untrustworthy, because it mixed $ billions in bad loans in with most of the good loans. Now, banks do not trust any of the loans, and the entire credit market stopped working.

The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow.

So far, our government is spending $ trillions on bailouts and pork projects, out of ignorance and political ideology. The real solution is much less expensive than that.

The USA has fixed this problem before, and it is not hard to do again.

A) Start with the Resolution Trust Corporation (RTC), which our government setup to solve a Savings and Loan problem in the 1980s.

B) RTC buys up components and derivatives to reassemble whole mortgages.
1. Total securitized mortgage market is estimated at $1.3 Trillion by a Professor of Economics at Ohio State University. (Also see the graph from Deutsche Bank at “The Death of Securitized Mortgages” http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html )
2. Government buys components and derivatives at the lowest market price set via a reverse auction. (Google on “reverse auction”.)
3. Squatters, who sit on their derivatives in order to extort big $ from the rest of the system, can be forced to sell. (Law is analogous to eminent domain, or sales forced on cybersquatters that registered the domain names of well-established companies.)
4. Government pays derivative squatters at market price set by previous reverse auctions, perhaps with a penalty to the squatters.
5. Sellers give up all rights. No new law there.
6. Banks, investors, and insurers now have cash instead of questionable loans and derivatives, so the banking system is healthy with cash to lend.
7. Credit will flow, and the economy will grow.

C) Government reassembles whole loans from securitized mortgage components and derivatives.

D) Government sorts the newly reassemble whole loans (mortgages) into groups according to risk/quality.
1. Government uses traditional mortgage experts and guidelines to sort the home loans into quality groups, for example, a high quality group would include homeowners with 20% (or more) equity in their house at today’s market price; and house payments that are 25% (or less) of homeowners monthly income.

E) Government (RTC) sells groups of reassemble mortgages to traditional mortgage banks.
1. This solves the problem of renegotiating home loans with homeowners. Read on.
2. Law must be changed so that reassembled whole loan mortgages cannot be securitized into derivatives, again.
3. An important purpose is to reconnect each homeowner with his lender, and vice versa.
4. It eliminates incentive for mortgage lenders to make predatory and junk loans. If the loan fails, the lender is stuck with a bad loan.
5. Government recovers much of the $1.3 Trillion purchase cost, because government sells off the reassembled mortgages.
6. Groups of lower quality mortgage would fetch a lower price at auction.
7. Mortgage companies that buy the risky groups of mortgages did so at a lower price, and they have room to negotiate with the homeowners.
8. Some homeowner negotiations will not succeed. Those homeowners will move into affordable rentals. (The government does not owe everyone a free house.)
9. Other renters would like to buy those empty homes at reduced market prices.
10. If the government gets stuck with some homes, the government could profit by selling those homes when the housing market recovers.

F) Insurers like AIG may be reorganized through bankruptcy.
1. Securitized mortgage pools never made business sense, unless they were protected by various insurance schemes.
2. Those insurance schemes always were a scam.
3. Insurance only works when most of the insured assets are never hit with a disaster. That is why flood insurance does not work in the private market. A major flood ruins all the buildings in a large area, all at the same time. That is the fallacy of securitized mortgage insurance. In an economic downturn, the “disaster” hits all the houses, all at the same time.
4. Companies that ran the huge insurance scam will go through bankruptcy.
5. Never ending government bailouts for insurers like AIG are just throwing good money after bad.

This plan is inexpensive, tried and true. It leaves the banks healthy, with cash to lend. It restores trust in the credit markets, so loans will be made. It reassembles mortgage derivatives into whole loans, and restarts traditional mortgage lending. People can get loans to buy homes. Credit will flow, and the economy will grow. *

Guy, gmmillennium_at_Yahoo.com
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*(footnote) The economy will grow if President Obama’s massive tax, borrow, and spending plans can be stopped, before he creates another Great Depression. Presidents Hoover and Roosevelt already tried to tax, borrow and spend their way out of a recession in the 1930s. Instead, they created the Great Depression, which lasted 12 years. Straight as he goes, President Obama is doing it, again. Nevertheless, cleaning up the securitized mortgage mess is a necessary first step.