What will be the consequences of what the government is currently doing?
The government's approach is a patchwork of quick fixes for present problems. They are treating the symptoms, but their medicine will not cure the disease.
The sub-prime mortgage approach was a short-term fix for a long-term problem, too. While politicians are trying to pretend that the sub-prime mortgages were entirely the creation of mortgages companies and banks, the fact is that they weren't. They government enabled this short term fix, both from a regulatory standpoint, and from an investment standpoint.
Now that this short-term fix has blown up in their faces, they are proposing a whole raft of short-term fixes, which will delay the long term problem for 3-6 months, tops.
The government is doing a number of things, and I won't get into all of them here, but two things merit discussion.
One, the government is buying non-voting shares of corporations. By doing this, the government is hoping to give capital to the corporations to ease the credit crunch. However, by buying non-voting shares, the government is leaving the governance of the corporations to the same leadership that got us into this mess, and they are buying shares that have no leverage whatsoever to influence the decision making of those corporations.
There is NO GUARANTEE that banks will start lending again. There is every incentive for banks, under the same leadership, under the same circumstances, to hoard money. Even if banks loosen a little bit and lend more than they have been lately, we will still face a long and painful period of tight credit, and what puts an end to it? The assinine answer we are getting: When home prices begin to go back up again, banks will lend more money. I'll have more to say about that in a moment.
Two, the government is going to buy up the "bad" mortgages. Now this one is a real hoot. From what's been reported, that's roughly two or three million mortgages. I don't doubt that the government can accomplish that, but what happens once they do?
I'll tell you. Tens of millions of people stuck in mortgages that will force them to pay more money than they will ever recover from the sale of the property will go into foreclosure. Who wants to be the dumbass stuck paying through the nose for a home that won't be worth what was paid for it?
These two consequences of the government's current approach will create the same problems the government is trying to solve now, but on a scale that staggers the imagination. Why? Demographic and economic realities.
Let's take a look at the demographic and economic realities.
For the last 25 years, a systematic, generational disenfranchisement has taken place. Lower and lower wages and salaries after a demographic cut-off. Fewer and fewer benefits (public and private) after a demographic cut-off. And of course, higher and higher prices for everything, including housing. What's the cut-off? The end of the baby-boomer demographic. Roughly, the cut-offs started kicking in right after most boomers cleared high school in the early 1980s.
Jobs, college education, public services and benefits, affordable housing, veterans benefits, union apprenticeships, etc etc were tailored to keep as many benefits going for boomers as possible, and disenfranchise the next generation in line.
The corporate leadership cultivated a political lock on the electorate by pitting the majority, "mega-generation" against the minority Generation X. And the boomers helped. They helped by obliging with a cultural zeitgeist in the press, in movies and television shows and commercials, reinforcing an entire frame of corporate-approved policies. They helped by serving as gatekeepers for access to jobs. They helped by enabling anti-union policies. They helped by circling the wagons inside the unions.
I lived through this. I lived through the entire episode. My experiences, through my school years, through my early adult years, through my military service and after I came back, through my attempts to shop my experience, education and talent to the job market, through my attempts to gain credit. Disenfranchisement, and juxtaposed: Party for the Boomers!
And I watched the elections. 1980, 1984, 1988. Boomers voting for the Republicans. Republicans implementing the disenfranchisement. Boomers cheer. Rinse, repeat. Things changed a bit when Clinton was president, but wait! Boomers elect a Republican Congress. And then, after fighting like hell to keep my head above water for eight years, Boomers elected Bush to push my head under the water. 2000, 2004.
You know, I'm GenX. And don't you know? Haven't you heard? I'm a lazy stupid whiner who lacks ambition! I'm more interested in video games and bands from Seattle. Once in a while, I rouse myself to go out and protest "capitalism." I've got all sorts of silly ideas, like electric cars and solar energy and wind power.
But here's how all this is related to what's happening now: GenX was never the "fringe minority" that the corporate leadership and their boomer cheerleaders pretended for decades. There are tens of millions of us. And now, today, you have all those people who can't buy the boomer's overpriced homes.
Now, I wonder, how does the government think they are going to change a systemic disenfranchisement that has created the economic reality that we have today? What happens when you have so many people who want to sell their homes at the price it is supposedly worth, and so many people without the means to buy them?
I have a solution.
My solution doesn't punish the boomers. Quite the contrary. My solution does punish the corporate leadership, whether they are boomers, GenX, or older. My solution ends the disenfranchisement frame for GenX and the Millenials behind us.
What's the solution?
Putting the corporations involved in the mortgage crisis (banks, financial companies, mortgage companies, real estate companies, etc) into trustee receivership and reclassifying the shares to create a wider franchise of corporate power. My proposal is more complex than that, and it has a number of republican reforms of the corporate system, like abolishing multiple titles, but the receivership idea is a mechanism in corporate law that would allow us to implement the solution to the mortgage crisis and the credit crunch. The feds aren't the proper authorities to do this, by the way. The state attorneys general, acting collectively as a deliberative body, are the proper authorities to enact these reforms.
Under receivership, the trustees could go through the mortgages and cancel ALL of them.
That's right. Cancel all the mortgages. Send out the titles to the properties and grant 100% equity to the people currently paying the mortgages.
How would this solve the crisis? Well, all of the money currently being paid for morthgages would instead be deposits in the bank, which the banks could use to lend. If we change the corporate leadership, we won't have entrenched wealthy bank shareholders trying every gambit to stifle lending and hoard money. Instead, we will have competing interests sitting on boards who will want to expand lending.
The equity from all of these homes could be pooled locally to attract investment cash. New community banks would facilitate lending locally for infrastructure, mortgages, business, etc.
People wouldn't just let all that money they save from mortgage relief sit in the bank. They would invest it. They would spend it. That would create an enormous boom in the economy, both locally and nationally.
Some people would lose equity. Home prices need to go down about 50% to make housing affordable again. But, remember, whatever the home is worth belongs to the property holder 100%. Not the bank, not the mortgage company. The property holder.
The devaluation of property would create another dividend: Property taxes would fall. Insurance would be cheaper. While local communities would lose taxes, they would gain a tremendous shot in the arm for local projects through new community banks.
My solution is a capitalist solution. It doesn't guarantee equal outcomes. Some people would be a lot better off, some not so much. Rich people would take a bath, admittedly. But no one would be ruined. Not even the rich.
My solution is a republican solution. It takes the idea of republican government and applies it to corporations we have long tolerated as unconstitutional aristocratic institutions. The gains from incorporation don't really belong to the people running the corporation. The corporate charter belongs to the people, and we can assert that prerogative whenever public benefit demands it. Public benefit is the justification for granting corporate charters.
My solution is libertarian. I'm not proposing socialism. I'm proposing using a mechanism of corporate law to reset the frame of our economic governance. I'm proposing a more capitalist system. I don't think we should have permanant receiverships. Receivership ends when the trustees finish creating a new franchise and corporate governance is restored with republican checks and balances.
We don't need better regulation. We need better corporations and better corporate leadership.
My solution is liberal. I'm proposing a remedy to a systematic disenfranchisement engineered by the corporate leadership through abuses of the corporate charter. It's a progressive solution that empowers individuals and local communities and creates a better corporate system.
If we do this, it will not stop with the financial sector. We need the receivership method to overcome resistance to a new energy infrastructure, health care reform, the stagnation of our industrial sector, etc etc etc.
Think about my arguments above that this will become the only way out. The government simply will not be able to deal with a mortgage payment revolt. Neither will the corporations be able to handle it. It's too big. Too many foreclosures to process.
Am I right? Will tens of millions of people go into foreclosure rather than pay mortgages which will never recover their equity?
Self interest, folks. Whose the "patriot?" Eh? Who is going to say "I know I'm screwing myself and my family, but I'm going to keep paying the mortgage, so that wealthy people won't threaten to crash the economy if they don't get more than they have!"
My proposal is the only solution.