Saturday, December 6, 2008
My Plan To Fix The Economy
I just sent the following to President Elect Obama's team. It's important to note that I do not address the politics of my plan. There will be lots of upset people whose only benefit would be a stable nation and economy (no big deal...) But the plan would work, I am confident of it.
"If there were a way to get the vast majority of mortgages in foreclosure to resume their monthly payments would it have an impact on the troubled economy?
There is a way to do this with prudent, responsible investment from the Federal Government in our banking institutions.
The premise is to use federal funds to create an endowment to assist both the banks and the troubled borrowers. The endowment would be invested in the banks that need capital to loan as normal. The interest generated by these deposits would be routed to the Fed to then assist homeowners in making their mortgage payments.
If we invested $400 billion dollars at 3.5% annually it would generate about $1.2 billion per month in interest. The interest would then be used to assist a troubled borrower in making their mortgage payment. If an average borrower is in need of an additional $500 to make their payments this investment could help over 2.3 million average borrowers. If a rate of return of 4.0% was possible, this investment could assist over 2.6 million average borrowers. The more money invested and the higher the rate of return the more troubled homeowners could be helped. Banks could even compete for these deposits by guaranteeing higher returns over time.
This program does not buy out a mortgage, nor does it make the homeowners entire payment. They are still making a monthly payment of what they can reasonably afford. This would just bridge the gap between what they owe and what they can pay.
This program would get the money flowing back into the bank on the front end, with both what the borrower can repay and what the program can do to cover the gap. Plus the banks receive the initial deposits to help them lend.
Over time, as property values stabilize and hopefully increase, participants would be offered refinance options to reduce their need for assistance and eventually be out of the program entirely. As assistance is reduced, the original investment could be withdrawn slowly and repaid to the Fed.
The risk to the taxpayer is small. The benefit to our economy is massive. People keep their homes, their jobs and their dignity, banks have money to lend and have vastly fewer mortgages in default."