The path to economic recovery is simple and the answer is as old as time itself. While I applaud The President's work ethic and his desire the cover all Americans with affordable healthcare, address global warming and various other proposals, the reality is that if we don't address housing and manufacturing, we will be a nation of renters and squatters occupying abandoned neighborhoods with excellent healthcare to help treat our depression.
The main problem with our economy is twofold:
1) Housing and therefore commercial real estate are in a tailspin.
2) We have eroded our manufacturing base.
The solution to housing is the key to recovery. We have to force the banks to write down the principal of the mortgages they hold to "real world values." I know this is anethema in a so called capitalist society but as we learned in business school. "An asset is only worth what someone is willing to pay for it." Right now I have several people I know personally who are either trying to sell thier homes or are considering walking away because they owe more on their home than it is worth so they are forced to make a tough choice. "Do I continue to pay the mortgage that is valued at 500k while the houses around me are selling for 250k or less? Or do I just walk away?"
In Atlanta and other areas around the country this is going on because bondholders that own mortgage backed bonds are selling those mortgages for pennies on the dollar while banks and mortgage companies are forcing others into foreclosure instead of rewriting the loans. This is forcing even honest hard working people who did everything right and are living within their means to just walk away.
Forcing the banks to write down the mortgage principal accomplishes several things at once. It immediately gives relief to honest hard working homeowners and will put them in either a break even or small equity position. This gives them incentive to keep paying the mortgage instead of walking away and adding yet more homes to the glut that laready exists and yet another default that we the tax payer have to shoulder with another bailout. It resets prices to a place where people who are sitting on the sidelines waiting until housing hits bottom, will start coming into the marketplace and lowering the glut of inventory. The toxic assets banks have on their books will have a real world price and the mortgage market can get back to business freeing up more capital for banks to loan. Banks will stop hoarding cash for fear that we are just at the tip of the iceberg and they will start loaning out the TARP money we gave them to save them from total collapse. The reality is that banks know something that the American public isn't really keen on. This crisis is just the beginning. As businesses falter commercial real estate values are plumetting even faster than residential real estate has. So banks are hoarding cash in anticipation of even more foreclosures at shopping malls, office buildings and other commercial properties in addition to the foreclosures that aren't even in the pipeline in the residential market. If we get the banks to write down the principal of the mortgages we will kick start the economy as people will rush in to refi, do home improvements, buy exising homes that are reasonably priced and the banks will be more willing to lend as they will have little to fear from more defaults. This will by us the time we need to deal with the other real problem.
Manufacturing is the other area that needs to be addressed. Beginning in the 1980's we began to turn the corner and started moving to becoming a service economy. Wal- Mart and Microsoft were on the rise and people were interested in service and value. The problem is that the same people that want low prices want to be paid top dollar for their goods and services. So all the prudent manufacturers and retailers did what any self respecting business person would do. They either filed bankruptcy and went out of business or they moved their manufacturing facilities to nations that have no EPA, favorable tax laws, no child labor laws, no unions and extremely cheap labor. This way they could keep their customers satisfied by providing them with low prices and they as businesses could be happy and profitable because they didn't have to hire those customers as high paid labor.
All Americans have some type of retirement even if its just Social Security. We want our portfolios to increase exponentially so we can enjoy our golden years being financially independent. None of us want to be the Wal- Mart greeter when we are 70! The problem is we don't want to save anything. We don't want to take care of grandma and grand pa, we want to put them in nursing homes or assisted care communites but when they die we want to contest their will to make sure we get some of that money they left behind. So again the savvy CEO will do whatever it takes to make sure that his company is profitable so that he can continue to attract investors thereby increasing the value of the stock of his company. The stock goes up and thereby increases the value of all of our 401(k) or annuities and we have more money and therefore we are happy. This helps him not only keep his job, but enrich homself and his investors.
What has to happen is a total system structure change not just new legislation. We need to use the vast majority of the TARP money to invest in R&D. Not sporadically as some have suggested, but a concentrated effort to invest in colleges, universities and entreprenuers that will create new technologies or improve on current ones. This will create new jobs that are high paying with benefits. The more jobs the more tax revenue. By creating new jobs governments can actually lower taxes while increasing tax revenue. But to acheive this Americans must give up the myth that Capitalism is the answer to everything. This current crisis is showing how capitalism or any other type of socioeconomic system that goes unchecked will destroy a nation. We don't need more capitalism nor do we need more government. We need a hybrid of both.
We the people need to understand that we are the power behind government and business. Neither can exist without having "we the people" as customers. Once we start thinking this way we will start making decisions that make sense. Instead of raising taxes for various entitlements, corporate or private entitlements. Why not use that money to invest in companies r&d departments?
Funding new ideas from entreprenuers and ideas that are now in their infancy at some of our universities would create jobs for the long term. This will create a new tax base that could fund healthcare and other things we should be offering to our citizens who are either too young, too sick, or too old to care for themselves. Once a new technoogy is introduced that was funded using government funds, we the people will participate in the profits because we will co own the patent and intellectual property of the invention and therefore share in the profits. I know some say well thats what private venture capital is for. True, but we can borrow from the Japanese government that were the seeds behind the massive growth of companies such as Toyota and Honda and Korean companies such as Hyundai and Samsung. All of whom over the last 40 years have emerged from virtual obscurity on the world stage to becoming household brands recognized worldwide. Germany does the same thing with Mercedes Benz and BMW subsidizing those companies in one way or another. We seem to be the only nation on earth that doesn't want to fund our manufacturing base until they need a bailout.
I know the critics say "well we have been more successful than those countries for decades so if it ani't broke don't fix it." The problem is that it IS BROKE!!! The only reason we had an advantage in manufacturing is that during WWII none of our factories or cities were bombed so we didn't have to rebuild. The entire world ( Japan, China, Europe, Korea etc) had no choice but to buy, not only American products but also America raw materials. Companies such as US Steel and GM were thriving because they had no real competition outside the borders of the US. The village idiot could run these companies back then and show enormous profits!! With those kinds of profits we saw the greatest and wealthiest nation in history emerge.
The leaders of that time wisely devised the Marshall Plan to help rebuild those nations destroyed during the war ,to avoid the mistake made after WWI that lead to the rise of Hitler and eventually WWII. So now we have competitors that are formidable and we cannot afford to live as though they are second rate products from formerly 3rd world countries. One of the main reasons healthcare has become such an issue is that our competitor nations not only fund manufacturing, but they use the profits from their manufacturing base to fund national healthcare. These profits allow them to lower their tax rates for their businesses thereby helping businesses to have an even larger competitive advantage because they don't have the costs of doing business that their American counter parts do. Since their government funds R& D and healthcare, the can focus on efficiency and quality and build better products thereby increasing their reputation and market share. This is the MAIN reason America has the largest corporate tax rates in the world and the MAIN reason American corporations can't compete unless they move their manufacturing base to other countries such as China or Mexico or even Canada to even out the playing field.
We have gone from being the worlds largest creditor nation to the largest debtor nation in world history in record time!!!! We need to restructure the way we think about education, manufacturing, government, everything. IN short we need to rebuild using new ideas.
If we make these changes I'm suggesting, we will not only see a return of America propserity, but we will finally find out the truth about life. Life is about balance. Too much of anything isn't good for one's overall well being. We don't need too much government or too much capitalism. We need a hybrid of both. Once we have these two areas back under control, then we will have the money to fund healthcare and anything else we deem necessary.
The path to Economic recovery is simple, and the truth is ALWAYS somewhere in the middle.