I had occasion earlier today to attend a session on the recently enacted American Recovery and Reinvestment Act of 2009 – more commonly referred to as the “economic stimulus bill” – hosted by the Main Line Chamber of Commerce (www.mlcc.org), with Pennsylvania 7th District Congressman Joe Sestak (D) as its only speaker.
Congressman Sestak, a retired Navy Vice Admiral serving in his second term in Washington, spoke at length, and then fielded about 10 questions submitted by the audience. The Congressman serves as vice-chairman of the House Small Business Committee, and holds post-graduate degrees in Public Administration and Political Economy from Harvard University.
The most striking part of the presentation was the admission by Congressman Sestak, that this Act is really a job-saving measure, designed primarily to avoid the loss of 3 million jobs, and to hopefully see the US unemployment rate crest at 9%, rather than 11.5%. Doing the math, that amounts to over $260,000 paid out by the Federal Government for every job saved. A multitude of questions arise – starting with “will this level of investment permanently save jobs, or only do so temporarily?” “Where is the incentive for businesses to stay profitable and cut costs (including labor costs) if that’s what sound business practices call for?” Conversely, “where is the incentive for individuals and businesses to invest in new product lines or in delivery of goods and services which are perceived to be in demand?”
As the TARP bailout proved, you can’t always get people to do things you want them to do by handing out money. Banks were presented with capital – and used it to boost their reserves or acquire other banks. The desired effect of unfreezing credit markets has not yet materialized.
The Congressman quoted statistics, such as 18.5 million mortgages are for properties which are now worth less than the mortgage amount. He then went on to state that these are for “prime” mortgages, as opposed to “subprime ARMs.” Moody’s puts this figure at 13.8 million (and includes both prime and subprime in its calculation), which is still 27% of all U.S. home mortgages. (www.economy.com).
As you may well know, not all ARM’s are subprime and not all fixed rate lending is prime. The bottom line is that mortgages where little down money was paid are the ones in the most trouble, regardless of whether they are fixed rate or not. And with interest rates having plummeted of late, ARMs are not the culprit of foreclosures at this time – rather, the culprit is ability to pay and incentive to pay, which has its roots in lack of fundamental underwriting standards for mortgages and the existence of a market to buy and hold such mortgages from 2002- August 2007.
I can’t help but think that I’m hearing a litany of “solutions” for the wrong problems. Last I checked, the Bankruptcy Code was still in force. Could it use some tweaking, perhaps by allowing a “cramdown” similar to what debtors in bankruptcy get when they only have to pay for what’s their depreciated car is worth in order to keep it, which is a discount from what they owe? And what of the potential windfall, if/when housing prices climb back up – is that a freebie to the assisted homeowner, at taxpayer expense? Or should it be recaptured by the Federal Government?
All of these issues are up for debate (or are they being silenced in favor of another massive Federal giveaway program?), as the fashioning of another “pillar” of the revitalization of the US economy – that of the housing sector – is underway. The stimulus plan grew from an initial plan of about $60 billion less than 6 months ago. Now we are looking at 13 times that, plus $75 billion for housing (which may or may not come out of the $350 billion remaining in the TARP), plus up to $400 billion in guarantees for losses which might be sustained by Fannie Mae and Freddie Mac. FDIC Chairman Sheila Bair said “we’ve not attacked the problem at the core; we are woefully behind the curve.” Treasury Secretary Timothy Geithner said “the cost of inaction has been very severe.” And, as if to underscore the magnitude what amounts to government-funded mortgage payment relief which benefits borrowers who are “underwater” and their creditors simultaneously, at the expense of the other 73% of homeowners who still have equity, plus those who do not own homes, Housing Secretary Shaun Donovan stressed that homeowners don’t need to be delinquent in order to get help.
In the meantime, the stock markets plummeted another 4% yesterday, approaching 5-year and 11-year lows.
Here’s a sobering thought, quoting Madlen Read, business writer for the Associated Press: “The biggest fear in the market is not that the stocks of banks and automakers will get wiped out. If all the Dow companies involved in financial services or automaking — American Express Co., Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., General Electric Co. and General Motors Corp. — saw their shares sink to zero right now, the Dow would only lose about 400 points, or 5 percent. Rather, the concern is that these ailing industries will keep hobbling the broader financial system and the economy.”
It sure sounds like we’ve just about reached bottom – at least in the Dow Jones Industrial Average. How soon we get back on the road to recovering the lost $13 trillion of wealth and getting people back to work remains to be seen.