Thursday, February 12, 2009

This is the ONLY SOLUTION to the present crisis

It appears that the Gnomes in the US government are grappling with a crisis they know not how their actions will solve!! The example below characterizes one primary reason that the stimulus will anger more people than will create demand. If I were a hard working honest person, who suddenly sees the value of my main asset, my home and my retirement savings account lose 50% in value in a matter of months, how can I continue to pay a mortgage off that is much more than the value of my home?

Arguably, they are worse off than those who have lost their jobs, home, and are on unemployment benefit, which has now been extended for over a year. The latter have no debt burden. The former are drowning in debt. Everyone is therefore in crisis and there is no relief at hand for those still in work!!

This scenario of those in work and those out of work both in a deep depression, no amount of tax reductions, tax credits are going to increase their spending, as they now draw down on credit card debt as well. In many ways those out of work who have declared bankruptcy, and have all their debt wiped clean excluding student loans, are the best off. They have no worries, as they sit at home in a rental drawing unemployment benefit not having to pay off any borrowing. Those with the mortgage, credit card debt, home equity lines, and car loans, are those who will not recover for a decade, having to work to pay off this debt, and so will NOT spend however much you give them even with no strings attached.

The answer is simple and one had better do this now and not later after the recession has gone on for a long time with people wondering why it has not ended. Just the first mortgage only must be reduced to the value of the property or collateral. Then there will be less foreclosure, less delinquency, and a greater likelihood of having disposable income to create instant demand, by those very people who are more likely to spend this mortgage reduction on consumer durables and disposables. Needless to say any future capital gain on the sale of the property can be clawed back by the bank/govt. and so no perceived long-term benefit will result. In a future bankruptcy their lower reduced debt will be with them for life not being extinguishable.

So Mr. President heed this advice as being the surest, quickest and only way to stimulate the economy, and not let the housing crisis overhang any possibility of recovery in the foreseeable future.

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