What could President Obama and Fed Chairman Bernanke undertake with respect to national economic and financial policy that would not require any Congressional approval? Congress will likely undertake nothing of any notable legislative substance before the November elections out of complete institutional gridlock, fear, ignorance and paralysis. If the next Congress is controlled by Republicans, even less than nothing will occur for the next two years.
President Obama should use Freddie Mac and Fannie Mae, along with a long meeting with Federal Reserve Chairman Ben Bernanke, to restart the entire U.S. financial, credit and economic system by the only remaining options available to the Administration and the Fed.
Today Freddie Mac and Fannie Mae guarantee (essentially own) 95% of all residential mortgages in the U.S. Many experts now fear that it may take up to $5 trillion to bail out these two entities now wholly owned by the U.S. Government because so many of those mortgages and the securities based upon them that these 2 entities hold are simply junk. These massive numbers are simply mind-boggling for anyone in government, finance or the private sector – yet alone for most citizens.
The U.S. has already entered the land of the completely surreal. We don’t have a functioning financial or economic system in the U.S. without massive governmental bailouts by issuing tons of new Federal debt, and soly because the Fed is buying up all types of non-performing bank assets and keeping interest rates near zero. Fortunately investors across the U.S. and world have no viable and safe investment options in a generally screwed-up world in which to put their cash other than to purchase U.S. government securities.
Freddie Mac and Fannie Mae should simply assume complete ownership of all residential real estate mortgages in the U.S. Households would be fully relieved of all mortgage payments and the underlying debt obligations. Banks would be relieved of all the worthless mortgages and worthless securities based upon those mortgages still sitting on their financial books. This would be a universal program applicable to every mortgage in the U.S. so no one could complain of favoritism. At most, Freddie Mac and Fannie Mae would be given secured interests in most real estate equal to no more than 50% of the actual sale price that would be paid when the real estate is ever sold again. All those vacant and foreclosed homes held by banks could then be released for sale at any price to the general public that would be wholly unencumbered by any real estate debts. That’s a lot better long-term financial outlook than what is now available for all lenders and borrowers under the current “mark to fantasy” accounting rules.
Essentially we need a national forgiveness day for all outstanding mortgages and all other unsecured debts for everyone. We could also dump all those failed mortgage relief programs that never worked anyway. For those unlucky ones who already lost real estate to foreclosures or to short sales, their financial obligations to banks and for income taxes would be completely repurchased and assumed by Freddie Mac and Fannie Mae.
Some mortgages (non-recourse) protect debtors from being chased for balances exceeding the final sale prices, but that requires a foreclosure, short sale and the occupants moving out. Congress did pass a law a few years ago to not include the forgiveness of debts on principle residences as being taxable income for a certain number of tax years. But this action, Freddie Mac and Fannie Mae would make such policies universal for all current and former holders of residential real estate mortgages. We would stop and reverse the growing cancer of foreclosures, evictions and empty homes across the U.S.
The Federal Reserve already announced its intention to start “quantitative easing” which is buying more U.S. government bonds, mortgage-backed securities, non-performing assets from banks and commercial paper of corporations in order to stimulate the economy. The Fed essential creates money “ex nihilo” (out of thin air) and goes on a buying spree. How nice and how convenient! And so many people though only God could create something out of nothing.
Why should the Fed stop there? The Fed should simply purchase every damn debt instrument in the U.S. That would include all commercial real estate mortgages, personal and business credit card balances, all car loans and student loans, those usurious payday loans, and every conceivable debt that is choking the U.S. economy. This would also include all state and municipal bonds and other public debt obligations, such as the I.O.U’s issued by the bankrupt State of California.
No one seems to have the interest or legal power to actually audit the books of the Federal Reserve, so why should we care what it holds in its massive black box of financial instruments, obligations, and ability to create money out of thin air? It’s probably best that we don’t look in that black box for our own sanity and well-being. There are so many more interesting and fun things to do than audit the Fed.
Does anyone really think that the Fed will go bankrupt? If you do, then you can say goodbye to the entire global financial system and every government and corporation around the world will not let that happen unless Sarah Palin or Glen Beck is elected President.
The beauty of this plan that it would be the fastest, simplest, and the most effective means to immediately restore confidence and buying power in consumers and businesses across the U.S. and around the world. With one sleigh of the hands, all business, consumer and government debt would be eliminated and buried safely in the incomprehensible and untouchable books of Fannie Mae, Freddie Mac and the Federal Reserve. Voila, all problems solved!
Along with this national debt forgiveness, we must regrettably set up some national laws to prevent us from getting into this mess or any future derivation of debt mania – again. All purchases of goods and services involving credit would require a 25% up-front payment in cash or its equivalent. Thus any purchase of real estate, business equipment, cars, electronics, sports and entertainment tickets, restaurants, clothing, and personal services one might charge on a credit card, would require one-fourth of the original cost to be paid immediately and only 75% could be financed over time. If the law applies to all individuals, households, businesses and governmental entities, then it would be perfectly fair and reasonable national policy. We should also end the tax deduction for interest paid on real estate mortgages – because it made no economic, financial or tax sense, and also because no one would have an old mortgage to pay.
Also concurrent with this national debt forgiveness, all the Bush tax cuts should simply expire at the end of this year, for all marginal tax rates. Certainly all taxpayers would be able to afford some tax increases if all their debts were erased. This policy would not affect those without any employment or those stuck working jobs that could not pay all their living and debt obligations. For those 70 to 80% of Americans still gainfully employed full-time, they would suddenly have a huge amount of money available for spending (and for some savings and investments) that would put our entire economy into high gear.
The Chinese would be happy to again sell tons more crap they make in abundance to keep their economy growing. They’ve been lending us money for 2 decades to finance our spending spree – they really don’t have any other alternatives anyway. When so much of their GDP is stuck holding U.S. Treasuries and their trade surplus is denominated in U.S. dollars, they are our financial captives, not the other way around as some economists foolishly argue.
This Administration, along with the prior Bush one that enacted TARP, and both Republicans and Democrats in Congress have been universally criticized by huge numbers of citizens across the entire political spectrum for bailing out the banks, Wall Street, and those who created this financial crisis but not extending even the smallest bailout to everyone else. This proposal would permit President Obama to bail out everyone and thereby become the most popular Chief Executive in our history – ever. He could even throw in a blanket universal Presidential Pardon for all debts held by all U.S. citizens and corporations. Do you think anyone would complain or peruse the Constitution to debate whether he has the power to collectivize all private debts when the precedent was already legally established with the financial sector?
Otherwise, we’re on a trajectory to see the largest Congressional Republican landslide in history this November and President Obama will also be turned out of office two years from now faster than you can say Herbert Hoover and Jimmy Carter. Democrats have got to face reality.
We are collectively drowning in a sea of debt that prevents any spending, hiring, or investing for the foreseeable future. We just need to find a few places to move (hide) all our debt – not unlike dumping toxic waste materials and spent nuclear fuel in quiet secret places that won’t be discovered or disturbed for decades. The Federal Reserve books are a perfect hiding place for all our financial garbage, and associated toxic and worthless debts and assets that we created. At least we won’t harm the environment. It’s not even paper anymore – just silly huge numbers we track in our many computers that could be quickly copied into a few flash drives and then symbolically buried in a handful of sites in the middle of the Arizona and Nevada deserts as chosen by the Federal Reserve Board of Governors.
Our new national motto should be: Out of sight – out of mind. Our entire nation could start over with debt-free balance sheets for every business, household and individual. If that doesn’t stimulate the economy, then nothing will. We might as well let German and Chinese bankers, along with their friends at the IMF take over our Federal Government and we can party on down like the Greeks with others to worry about cleaning up our financial books.
Hey wake up President Obama. I’ve got the complete solution to every economic, political, social and cultural problem facing the U.S. Instead of being seen as a perpetual wimp and a Wall Street tool, it’s time to get some “Cojones” and give everyone a complete debt bailout. You’ll only regret not acting because at this point, what do you have to lose?
Submitted 8/30/10 by Marc Pascal, happily ranting from Phoenix, AZ.