De railed Stimulus for Housing Crisis

Have you read the almost final version of the Stimulus Bill? For all the anxious people who bought a house last year, OMG the burden on your heads - 39 billion may not be coming your way. Why is this bad news? The provision of $ 39 billion for a tax credit for home buyers is largely a windfall for people prepared to buy a home anyway. This does not encourage people to buy a house or who just fall short of making down payment for the house. The main goals of the stimulus should have been

 

1. To help people retain their home by relieving them of paying their monthly installment if they had lost their job until they get a new job. This will encourage people to repay the amount with interest because once they get the job. By asking them to pay the mortgage payment when they have no job, is clearly moving towards foreclosure and more toxic assets.
2. Tax credit should have been given to people who buy Foreclosed / Bank held homes for renovation. The reason why people are not buying foreclosed homes is that they do not have the money for renovation. This will not only promote sale of foreclosed homes but give jobs to many people in the construction industry and retailers.
3. Tax credit should be given to First time home buyers by assisting them in initial payment. This will help people who do not have enough money for down payment and will reduce the number of available houses in the market.
4. Tax credit or loan adjustment should be made for people whose home value has been considerably lost because of foreclosures in the neighborhood.

 

To get consumer confidence and increase spending, people should have job security and believe that the world is full of opportunities. To get this confidence the layoff trend should stop. Even if hiring is in slow pace and there should be no lay offs, people will feel that the situation is improving and start making investments.

Goals

Goals – Short term goals and long term goals. Short term goals are steps than you can achieve sooner and will be the first step in achieving long term goals. In short long term goals should be decomposed into short term goals.

I read an interesting article in NYTimes on Jan 30^th, 2009. The article Cleaner and Faster by David Brooks and wanted to share my thoughts on the same. Please read the article  here.

The reason why I thought that the Obama’s stimulus plan would not work was because a large portion of it was planned to be invested on long term projects like infrastructure which will take a lot of time even to get started. Investing in long term projects should be carefully planned keeping the future in mind. Right now in this current stimulus package those goals are planned hastily which will not yield the intended results.

The immediate goals for now are

1. Prevent Layoff’s – Can be achieved by giving long term loans with less interest rate to meet the operating expenses of businesses. This is a proper investment because there will be return on investment and interest income. Investing in business does not mean throwing money into hedge funds or backing the bad mortgage of financial institutions.

2. The second most important issue is Health care. Average medical insurance for a family even using COBRA is about $ 1000 per month and the cost of getting private insurance is about $ 1200 per month. Without insurance if you visit a doctor, it is going to cost you at least $ 200 for a general visit leave alone specialty. How do you think the unemployed are going to afford this kind of payment with just their unemployment benefits? Just imagine the situation of uninsured if they get sick? Even it is going to cost a lot to provide health care it is a must do and it is the duty of the nation to safe guard its civilians. Insuring the uninsured is a better way to spend the money than backing the bad mortgage.

3. Methods to create immediate jobs in real estate and auto industry because these two industries are the most affected and has a cascading effect on the entire economy. In the Stimulus package there is an inclusion to convert the $7500 as tax rebate rather than a 15 year loan. This provision will definitely boost the home sales. There is a tax rebate for junking old cars and buying new cars which will have 50:50 chances because it is difficult to get car loans and cars are rebate for buying cars is large enough. Here we have to appreciate the innovative idea of Hyundai Motors, where they will buy back the new car incase the job is lost within the first year. This is a classic example of Short term stimulus.

4. The retail industry needs immediate help because of the decline in sales, these stores are filing bankruptcy or closing. Who would have expected Circuit city to close down. This has to be stopped otherwise many stores will follow and increase the unemployment rate. The retail industry should be given long term loans for working capital.

5. Reduce income tax rate for lower income slabs and payroll taxes and implement it with retrospective effect from the year 2008 and automatically send the excess tax along with the tax refund. This will put money directly to the people and there will be an immediate increase on the monthly salary.

The situation will improve but we have to speed up the recovery process. The hope that the economy will recover sooner than expected is the hope that is going to keep the business from taking loans to run the business and not laying off people. The layoffs are happening more because of the fear that it will take a lot of time to recover and we cannot sustain without cutting labor costs. In conclusion, it is time for banks to lend and give a helping hand in the recovery rather than showing the bad assets they created as reason for not lending. The government should clearly differentiate between short term and long term goals and start acting and investing more on short term goals which is going to jump start the economy.

Stimulus - Will it Help ?

Being optimistic is good, but being Realistic is required to fix the current situation.  

First of all, are the losses shown by the financial institutions - REAL, or is it their projected value of their assets.This will be blogged later.

Pumping the money in to the system with the current plan is like throwing the money into the pothole.

The first part of the bail out did not improve the situation, the environment got worse and would have been the same even without that stimulus package. I am afraid that the current stimulus package also falls in the same category.

The failure is because the stimulus was feeding the white elephant instead of feeding the common man. It was giving the capital to the financial institutions that never had so much asset to lose it in the first place.

The financial institutions got considerable funds but that has not improved the lending practices to common man or for business. So the money is not reaching the common man, it is getting locked up in banks shoring up their capital.

This situation leads to layoffs, which leads to spending less and then the fateful bankcruptcy for businesses.

The banks have to lend with confidence, the businesses have to borrow and have plans and confidence for expansion rather than trying to play safe. This will create more jobs, put money in the hands of the people which will be converted as profits again for businesses and banks. People should have jobs to spend more, take loans and buy homes and to make the world normal.

This may not be as easy as it sounds, investing in infrastructure will improve the facilities and create jobs but only for certain sectors and income groups which is not enough to jump start the economy.

Securing the loans given to people with good credit, who have atleast 60 % chance of repaying the loan will help, rather than backing up bad mortgages. Greed is a very lineant term for bad practices and the right term is criminal activity. It is not fair to put a person behind bars for financial fraud and give money to financial institutions for commiting bigger financial fraud and call it business practice.

It's about time for America to stop concentrating on their linguistic skills and start improving on real business skills and become more productive. We can achieve anything, we did it before may seem encouraging but doing it right with the right people is important and if done right, the recession would not have been in the life cycle.   

The renovations on roads and bridges that are in bad shape have to be done, connectivity has to be improved in lacking places, but some of the items that have to get importance are

1. Public Transportation 

2. Affordable Medical treatment 

3. communication means have to be improved 

4. Auto industry has to invest in making better quality cars 

5. Green technology for buildings  

6. Banks have to lend responsibly 

7. Medical Research  

8. Improved funding and opening / renovating the educational system 

9. Affordable insurance (Health / Car / Home) 

10. Promote small businesses 

What prompted me to start the blog?

Its 2009, what motivated me to start a blog so late when everyone literally has one? The answer is simple, there is one topic of discussion all over the world that is widely spoken by people who really know what they say and also by people who just speak without understanding. The topic is the current Economic situation, recession, how the world got into this situation and how the world can recover and at what pace.

Well, you might wonder how the current economic situation motivated me to start a blog – yeah! You are right nobody was ready to listen to me and every time I start to talk about it, my colleagues, friends ask the same thing – What do you know that the financial people do not know?  If you yourself can think about it, do you think that the financial people out there might not have thought about it? My response to them is they do not know and even if they know they have ignored the basics of accounting principles.

 So, I have started this blog to express my feelings, share the thoughts to myself and others with the same frequency, knowledge, to save my energy and to quench the thirst to learn and share and most importantly to abstain from abominable ignorant peanut sized brain people who have ignored and discouraged my thought.

That said, I intend to start with my views and what I have read, observed about the current economic times but this blog will not be limited to economics and I hope to keep this blog to express myself about various other topics that I come across and feel that it is worth sharing rather than just talking about it.