A Solution for Housing, Entitlements and Orderly Contraction.

Modern money is not a constant, it’s changed quite a lot over the last century and we should expect more changes in the future. One example of a major change in our monetary system from the recent past would be the United States termination of the gold standard in 1971:

For the first 2,900 years of recorded history money has meant coin. That’s not to say there haven’t been attempts at paper money, it’s just that all of the previous attempts have failed.  Our latest experiment with paper money has lasted almost 100 years now and during this time we’ve had some really fine advances in living standards but I’m not willing to credit the monetary system for our clever ability to feed, clothe, shelter, entertain and care ourselves. Humankind is pretty resourceful when it comes to meeting our fundamental needs and having a good time.

What I am willing to credit our present monetary system with is layer upon layer of wasteful, unproductive, and largely counter productive economic activity. Activities that simply waste precious human and environmental resources. Does debtmoney foster a waste based economy? Let’s take a quick peek at what’s happened since the Federal Reserve was created in 1913:

  • World War I
  • Roaring 1920’s speculative bubble
  • 1930’s Depression, domestic gold standard default
  • World War II
  • Korea
  • Vietnam
  • 1964 termination of silver coin
  • 1971 termination of international gold standard
  • Iraq, Afghanistan
  • Massive expansion of the military industrial complex. (Whatever happened to the peace dividend we were supposed to see with the end of the cold war?)
  • “Greed is good” paper bubbles.
  • Massive expansion of government.
  • Massive and exponentially expanding government debt.

Wow, that's quite a run up since 1971!

Seems pretty wasteful to me. Especially when you consider all the food, shelter, clothing and medical care that could have been produced over the last century with those resources. Humanity could truly be living a life of leisure in a land of plenty but unfortunately for us we’ve misallocated a lot of time and energy into economically wasteful activity and we have a massive legacy of public debt to show for it. However, this doesn’t mean we have to burden our future generations with the debts of our malinvestment.

Bashing the Federal Reserve Bank of the United States of America (the “Fed”) is mighty popular these days and rightfully so. I’m not favorably impressed with the results of our 100 year experiment thus far and I certainly don’t like where it’s heading. I’ve made some comments below and certainly if you Google around a bit you’ll find gobs of interesting opinions ranging from annoyance to “End the Fed!” campaigns.

Awareness is rising and that’s a very good thing, but what nobody is offering, that I am aware of, is a workable plan forward. The Powers That Be would have us believe borrowing more money, backed by even more debt, is a jolly good idea but I’m opposed to that plan. I really don’t believe you can payoff existing debt (plus the interest) with more debtmoney. Piling on more debtmoney only makes the debt pile bigger and bigger! Obviously!

I’m deeply concerned that the powers that be are content to push this into complete collapse before considering alternatives that might be far more beneficial to humankind and civilization.

So what are the alternatives, how do we repay the paper promises of tomorrow, the sovereign debts, the pensions, social security, medicare, medicade, government debt, municipal debt, commercial debt, private debt, housing debt, consumer debt, student debt? How do we pay for this debt overhang without GROWTH?!

I say the real question should be, HOW DO WE CONTRACT in an orderly way? How do we untie the Gordian debtmoney Knot? Like the Gordian Knot, the debtmoney solution is very simple. What’s called for here is money creation without debt, like with United States Notes.

Legal Tender United States Note

If you don’t appreciate the difference between a Federal Reserve Note and a United States Note please go back and review my previous posts on these subjects, it is key to understanding the two-step proposal that follows:

  1. Authorize the United States Treasury to issue conditional* legal tender United States Notes.
  2. Give the debt-free money to me and my cohorts in the mortgage industry.

Seriously, stay with me here, it’s a really great plan. I mean, what could possibly go wrong? Okay, when you’re done laughing, let’s take a look at the mechanics of my proposal.

*The condition is, we use the new legal tender United States Notes for owner occupied residential finance. First to refinance every viable owner occupied primary residence that would like to refinance and then as a financing option for new owner occupied purchases.

These new, digital, non-debt based United States Notes would largely go to paying off existing GNMA, FNMA, FHLMC, (the GSE’s) mortgage-backed securities (MBS) that the government (taxpayer) already guarantees. Since this action would liquidate a large pool of MBS “toxic assets” boiling away deep in the containment vaults of the banks I’m even hopeful bankers will support this plan.

For you financial types out there here’s my back of the envelope calculations. There’s roughly 5 Trillion in outstanding FNMA and FHLMC mortgages plus maybe another 2 trillion in GNMA totalling say 7 trillion. Now let’s say 65% of that qualifies as “viable and owner occupied”. 65% of 7 trillion would be an initial program size of $4.55 trillion.

Now granted, this $4.55 trillion of principal, that’s presently locked up in GSE debt instruments, suddenly becoming liquid is a lot of liquidity for the system to absorb but I argue it can be contained by increasing bank reserve ratios and selling treasuries off of the Fed’s balance sheet. I also propose that the principal runoff on the $1.25 trillion in GSE mortgage-backed securities held by the Federal Reserve be returned to the United States Treasury and allocated as funding for future social security, medicare and medicade obligations.

As for the terms of the new mortgages between the homeowners and the United States Treasury, I propose 0% interest and a maximum term of 15 years for new owner occupied purchases. For example, in order to borrow $200,000 for a home purchase you’d need to qualify for a principal payment of $1,111.11 per month ($200k / 180 payments = $1,111.11 per month). Adhering to a strict maximum housing expense to income ratio of say 33% should prevent over leveraging and keep median property values in line with median incomes, thus keeping housing affordable.

However, refinancing the existing stock of mortgages will require creativity and flexibility if we are to keep as many people as possible in their homes. In the case of an otherwise viable situation a maximum term of 15 years may render a housing debt to income ratio in excess of guidelines. In these cases a longer term of repayment, say 20 years, might be warranted ($200K / 240 = $833.33 per month). In other situations there may be significant negative equity, more owed against a property than the property is worth. In these cases it may make sense to go ahead and make bondholders’ whole (this should keep the bankers happy) by refinancing the existing mortgage in full and writing down the principal, to a realistic loan to value ratio, on the new loan with the Treasury. In return for such principal forgiveness there would be a shared appreciation agreement, where the borrower would agree to split any proceeds (on a declining scale over time) from the sale of the property with the Treasury.

Finally, these new mortgages between the homeowner and the United States Treasury would become allocated assets of the social security, medicare and medicade programs. The principal repayments on $4.55 trillion in mortgages over the next 15 years should go a long ways toward keeping these programs solvent.

What have we achieved?

  • With the United States Treasury funding housing with legal tender United States Notes we can eliminate the GSE’s. Talk about efficiency and elimination of waste!
  • The $4.55 trillion portfolio of zero interest “Treasury Direct” mortgages allocated toward the payment of future entitlements will be a big help in funding the entitlement programs. A $4.55 trillion portfolio / 15 years payback = $303 billion per year funding for social security, medicare and medicade.
  • Returning to the Treasury the principal runoff on the $1.25 trillion of GSE MBS on the Fed’s balance sheet, for allocation toward Entitlement funding would also add about $812.5 billion in cash to the entitlement kitty ($1.25 trillion x 65%).
  • Without the burden of usury homeowners will have an easier time owning their homes outright in 15 years.
  • 15 years from now there will be $4.55 trillion less housing debt and a lot of homes will be paid for. If retirees 15 years from now had debt free houses they could certainly get by on scaled back entitlement benefits and that would certainly help with the future viability of these programs.

I’m counting three birds with one stone here. Housing, entitlements and reduction of the Fed’s balance sheet. I say bring on the United States Notes!

What else could / should the power of United States Notes be used for? If it’s truly of benefit to the people (and not wrapped in layers of shameful greed and political self interests) other debt could be refinanced (like student loans) or new loans could be made to fund infrastructure or public works.

We could also decide to make the people’s bank deposits whole with US Notes and liquidate insolvent formerly “too big to fail” institutions (Hey, if rolling over 65% of the MBS pools didn’t make you well nothing will!). There’s no reason humanity should have to bail you out just because your double quatloo derivatives bet on synthetic collateralized debt swaps went against you and now your bankrupt (AIG anyone).

I think we’d all be better off without the derivatives, those “financial weapons of mass destruction” as Warren Buffet has called them. Except for more debt, I’ve been unable to identify what they contribute to society beyond being a complex form of gambling. To me it’s a clear example of our waste based economy. As far as I’m concerned so long as we’ve got food, shelter, clothing and care covered let the Ponzi scheme collapse and the chips fall where they may.

Charles Ponzi

I’ll be the first to point out that I’ve presented the legal tender United States Notes plan in a simplistic and positive way but I’m also well aware of the risks. The new money must NOT be used to perpetuate the gross distortions of the waste based economy. It’s proper use is as a monetary cushion as we contract to a lower, more sustainable level of economic activity.

Without care and discipline, the greed, corruption, and self-interest (as we are witnessing now under our present kleptocracy) could very easily lead to some very bad monetary consequences, like Weimar Germany or Zimbabwe for example, but at the rate we are going under the current Federal Reserve debtmoney system it seems more than likely we’re going to get there anyway.

“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as a result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency system involved.” – Ludwig von Mises

 

Do we really want to inflate our way out of our monetary mess with more debt?

That’s my plan. Anybody else got any ideas?

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2 Responses to A Solution for Housing, Entitlements and Orderly Contraction.

  1. Pingback: The Great Debate | Richard Gessford Blog

  2. Pingback: The Great Budget Battle of 2011 | Richard Gessford Blog

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