PV Gap

Rosa Said:

What it takes to cure this economy is listed here, do you agree?

We Answered:

You are largely missing the mark. However there are some elements of stimulus within your plan. For instance, the tax concessions listed in #3 and #4 will clearly provide some stimulus.

To correct what's ailing the economy you must first understand, and address the reasons for how we got here. The economy is suffering from a real estate collapse. Here are the steps of this collapse:
1. Home builders are doing well, so they build more and build more homes until they have exceeded demand. We have excess inventory of homes.
2. The excess inventory results in a lowering of home prices.
3. The lower of home prices results in the inability of home owners to refinance their mortgages. (People with sub-prime loans are especially hit hard.)
4. Inability to refinance results in delinquency and foreclosures which has a negative effect on the economy, and mortgage cash flow declines.

Most major banks kept their sub-prime loans to a manageable level, however they also invested in CDO's. These were mortgage backed securities with a AAA bond rating, because they assumed that property values would not appreciably decline.

So the first step to correcting the problem is to STOP building new homes. (To a large extent this is done through the free market.) The government could also get involved in regulating new home construction to prevent a future bubble.

The next step in the correction process would be to prohibit CDOs and other consolidated mortgage backed securities. The office makeing the loan should assume the risk for the loan. The CDOs passed the loan liability from the fly-by-night loan organizations into the major banking institutions. (This is what people refer to as the greed factor.)

The next important thing to do is to place fiscal stimulus where it creates efficiencies and future growth and jobs. This means giving tax incentives to first time home buyers. It means making America more energy independent. It means stimulating the movement of technological developments. It means making transportation more efficient like updating the air traffice system.

Protectionism will not help the economy, neither will spending to put people to work.