Preventing The Next Financial Crisis And Great Recession

A solution to excessive asset price increases, and excessive credit use, which help create economic bubbles, high inflation, recessions, and financial crisis, follows this partial interview with Professor Steve Keen, Economist. 

Subject: The Failure of Economics : Prof.Steve Keen

Check out this video on YouTube:http://www.youtube.com/watch?v=4sSfPkIUHPk&feature=youtube_gdata_player

The following is a segment of the interview transcript between Mr. Paul Mason of BBC Radio and Prof. Steve Keen an economist.

http://www2.lse.ac.uk/publicEvents/pdf/2012_ST/20120403-Steve-Keen-transcript.pdf

MASON: Good evening and welcome to the Old Theatre of the London School of Economics. I am Paul Mason here with a packed audience. In this week’s addition of Analysis I will be speaking to Steve Keen about his claim that if we keep the parasitic banking sector alive the economy dies. Steve Keen is professor of economics and finance at the University of Western Sydney in Australia and has a cult following among critics of mainstream economics. He was one of a small number of economists who put their reputations on the line before the collapse of Lehman Brothers and predicted that there would be a major financial crisis. In his recently updated book Debunking Economics; The Naked Emperor Dethroned, he argues much of what is taught here at the LSE and other major intuitions is, to put it politely, flawed and not only flawed, but helped cause and accentuate the impact of the crash. Neo-classical economics, he says with its naïve money-less equilibrium theory of capitalism provided the unwitting cover for the greatest Ponzi schemes in human history. 

MASON: Just briefly summarize for us the causes of the crisis.

KEEN: The fundamental cause of the crisis is the banking sector’s profits are limited when they can only finance investment. Or consumption like buying a house over time is a consumption item. They only make huge amounts of money when by fooling us into Ponzi schemes which they themselves don’t really like…

MASON: Ponzi schemes are like pyramid selling.

KEEN: Gambling on rising prices. You borrow money and they play flip that house and you think you can get wealthy by doing it. That’s ok for an individual. But for an entire society to believe you can get rich by playing flip that house and all you are doing is accumulating debt, driving up house prices getting more income for bankers, more income for real estate agents. Then ultimately the debt level reaches so high that society can’t substance it and we crash.

MASON: What draws us down that route though? We know that bankers individually behaviour can lead to that. What is the objective, and in the system, why it causes that?

KEEN: Well first of all this is the one thing I have been trying to explain to Paul Krugman, money is endogenous money is created by the financial system. Money is not controlled by the central bank. Money is something which is generated by the private banking sector and there are really no effective constraints on the rate at which they can increase that. There are constraints how fast they can do it, but they can’t be stopped from creating money. What it requires of course is a willing borrower on the other side. Of course when you get to the point where the willing borrowers disappear then that capacity to create can be constrained and we are seeing now, it’s falling down. But when they could persuade us that it is really smart to be in debt, then as that bubble goes that actually causes the rising asset prices which encourages more people in. It sets off the entire bubble. That is what gets us in.

MASON: This is a financial business cycle. So why should it cause depressions?

KEEN: Because when you can’t pay your debts you can’t eat. Everybody loves the guy that walks down Main Street with a credit card that is buying everything until he can’t afford to get the credit card out any more. And you built your own businesses based on this incredible demand brought by a person with a credit card and suddenly he can’t get another credit card and he is not there anymore and all the economic capacity you’ve built up to service that demand is suddenly excess and you go bankrupt.

The Solution

The Culprits That Helped Create The Financial Crisis Is The 100% Interest Deduction , The Higher Tax Rate on Interest Income, And The Lower Capital Gains Tax Rate Being Continually Applied During Inflation Cycles, And Asset Bubbles, ie housing, real estate, energy and commodities bubbles.

We must automatically  neutralize the lower long term capital gains tax and the interest deduction before they create bubbles or high inflation! 

The following question and answer of the interview is what I would like you to pay close attention to because what follows is how  bubbles are created and how we can help solve the problems of bubbles and high inflation.

MASON: What draws us down that route though? We know that bankers individually behaviour can lead to that. What is the objective, and in the system, why it causes that?

KEEN: Well first of all this is the one thing I have been trying to explain to Paul Krugman, money is endogenous money is created by the financial system. Money is not controlled by the central bank. Money is something which is generated by the private banking sector and there are really no effective constraints on the rate at which they can increase that (money). There are constraints how fast they can do it, but they can’t be stopped from creating money. What it requires of course is a willing borrower on the other side. Of course when you get to the point where the willing borrowers  disappear, then that capacity to create can be constrained and we are seeing now, it’s falling down. But when they could persuade us that it is really smart to be in debt, then as that bubble grows that actually causes the rising asset prices which encourages more people in. It sets off the entire bubble. That is what gets us in.

So the question is;

If money is debt, and excessive debt creates bubbles, and “money (debt) is something which is generated by the private banking sector, and there are really no effective constraints on the rate at which they can increase that (money)”, and this is what creates bubbles; How do we decrease the number of willing borrowers before a bubble is created which will create another financial crisis?

It was private sector debt that created the dot com, oil, and the housing bubble in the last 20 years. Tax policy has more to do with how much debt is created by the private sector than what  has been discussed. The lower long term capital gains tax rate is used to convert earned income, and interest income into lower taxed capital gains income by investors, and homeowners.

There have been many reports lately that Presidential candidate Mitt Romney, many homeowners, and investors use this lower tax rate, on long term capital gains, in the tax code, to lower their tax bill as capital assets increase in price by selling the asset at the higher price derived from inflation. The appreciated asset prices and inflation they helped create with the excessive creation of credit money.

The extra demand that investors, and home owners create utilizing the interest deduction, and the lower long term capital gains tax rate, during the asset appreciation/inflation cycle, or a singular class of asset price increase (bubble), increases prices further by the excessive use of credit to finance the rising asset and home prices. Of course banks are eager to finance all the increases in debt, based on the higher asset, and real estate prices, because they are increasing their profit margin. They are also able to increase the interest rate based on demand for credit and risk assumption.

What is needed to have a sustainable balanced economy is encourage people to increase their investments and consumption during the recession cycle, and then when the inflation cycle begins to occur, people need to be encouraged to increase investments in production, and savings to increase supply by automatically changing the tax code as the economy changes economic cycles.

When Congress changed the tax code that allowed homeowners up to $500,000.00 long term capital gains to be taxed at 0% in 1999 and the banks were deregulated, it set up our economy for the financial crisis that occurred in 2008, because these policy changes created the possibility of extraordinary paper profits. Homeowners had a very profitable reason to sell their homes and buyers had a very profitable reason to buy a home with prices increasing so much each month.

President Bush’s lowering of the long term capital gains tax rate increased the speculation and unproductive investments in our economy. The speculation and investment with credit increases the cost of many commodities, housing, energy, food and many other necessities of life. To eliminate this tax loop hole during the appreciation/inflation cycle and when credit bubbles start to form, we should use the tax code to slow down unproductive credit creation. We should not rely on the credit tightening policies used by central banks, which raises interest rates, and the cost of consumption and production, causing more credit use if wages are not increased as prices increase.  When prices increase further, poverty is increased, increasing the cost of government social programs, and reducing the competitiveness of our exports in the world market place. If we don’t make changes to our guiding polices (taxes) we will continue to repeat history.

We should use the Zero Appreciation/Inflation Taxation Policy to help reduce the severity of the recession and inflation cycles of our economy. The Zero Policy would create a more productive and efficient economy. Asset and commodity prices would be more stable, and long term interest rates would remain more constant. The value of debt (money) would be changed by the percentage of tax on interest earned, and the amount of credit created by the private sector would be reduced by the automatic reduction of the interest deduction, during the inflation cycle, and when asset and commodity price bubbles are being created. The percentage of the tax on interest earned would be reduced by the true annual asset appreciation/inflation rate. The interest deduction would be reduced by the same percentage rate. When the tax on interest earned is at the same rate as the long term capital gains tax rate, the lower long term capital gain tax rate would be neutralized.  As the interest deduction is reduced the excessive use of credit leveraging, during the asset appreciation/inflation cycle, would be reduced. Thus preventing bubbles and financial crisis from being created. It is common knowledge that it was a housing credit bubble that created the financial crisis, that created the Great Recession of 2008. We do not want to keep repeating history as we have done for the last one hundred years.

The long term capital gains tax devalues money (debt) because the interest earned on debt and savings is taxed at a higher tax rate, than the paper profits realized by asset price increases that have increased without the investor increasing the supply, or value of the asset (inflation). The Zero Policy will neutralize the long term capital gains tax rate during the asset appreciation/inflation cycle, by reducing the tax on interest earned, and reducing the interest deduction, but the lower capital gains tax rate will still be available to encourage productive investment. In this way we can reduce the amount of debt (money) banks can create in the private sector, by reducing the number of people willing to borrow money during the asset appreciation/inflation or bubble cycle, without rising interest cost of productive businesses. The raising of interest rates by banks and the Fed is very damaging to the middle class and small businesses. Higher interest rates reduce demand and competition from the bottom of the economic ladder by increasing unemployment, and by causing small businesses to permanently close their doors, or being purchased by larger businesses. Maintaining the viability of small businesses would increase competition in a free market system.

The Zero Policy reduces  demand from the top of the economic ladder. By reducing the number of people with money desiring to protect their money from the devaluing effect of inflation, and benefit from the lower long term capital gains tax rate.

While fighting inflation psychology, the Zero Policy will allow the normal production/consumption economy to continue operating, thereby continuing to provide jobs to the employed, and revenues to local, state and the federal government. The Zero Policy will dampen leveraged speculative investments, and calm people’s “animal spirits” which the policies of economist John Maynard Keynes help create. The Zero Policy reduces inflation psychology investments during the asset appreciation/inflation cycle, slowing down the velocity of money, which will allow production the time it needs to increase supply.

Charts that tell how much private debt was created.

http://caps.fool.com/Blogs/debt-deflation-just-the/284689

To prevent another bubble being created we should enact the “Zero Appreciation/Inflation Taxation Policy” to make the recovery sustainable.

The Flaw In Our Economic Policies That Creates Bubbles And High Inflation

Under our current fractional banking system, economies get into trouble when people have too much confidence, resulting in too much credit creation. Or people don’t have enough confidence, and not enough credit creation is taking place. Since World War II a recession cycle has been preceded by an inflation cycle. The Great Recession was preceded by the popping of a housing price bubble created by the excessive use of credit in the private sector.

Currently the Federal Reserve uses monetary policies to change interest rates up or down trying to re-balance the economy. Using higher interest rates to control inflation psychology and bubble creation, is a flaw in our economic polices, because this is similar to using a sledge hammer to drive in a tack. Too much unnecessary damage is done to the economy when interest rates rise. Cost of production and consumption increases. Small businesses close their doors, people lose their homes, jobs, and go bankrupt. The government’s social programs increase in size. Taxes or deficits increase.
When interest rates are decreased we go back to the same credit leveraging use, we were using that created the excessive asset appreciation/inflation and the excessive money creation, that creates bubbles because the tax code has not changed.

How can we change tax policy, given that fiscal policy is under the control of politicians who have vested interest in creating booms?

Yes it is correct to say that fiscal and monetary policy makers have a vested interest in creating booms. This is why the Zero Appreciation/Inflation Taxation Policy is tied to how the economy is performing, not on the determinations of the Federal Reserve or Congress. We have a dynamic economy, but we have static guiding polices (tax code). In real estate, it is location, location location. In macro economics its timing, timing, timing. The Fed’s policies are out dated for our large and complex economy as we have seen in their inability to control the creation of bubbles and to heal our economy. The Fed cannot correctly guide the economy alone with the tools at it’s disposal.

Congress has the correct tools to change tax policy to help prevent the creation of bubbles, high inflation and deep recessions. Our economy is continually changing between economic cycles. We can’t rely on a 535 member politically divided committee to act quickly enough to prevent inflation psychology from growing cancerous. The Zero Policy would correctly guide people during the correct economic cycle, to increase the money supply when the economy is slowing down. It will decrease the creation of credit (money) and encourage money investments during the excessive asset appreciation/inflation cycle, or during a period of bubble creation.. The tax code would still have the lower long term capital gains tax rate. The higher tax rate on savings and money investment would also remain. It is only when the economy starts to become unbalanced and collateral prices begin to rise to fast, that the percentage of tax on savings and, money investments would begin to be reduced, base on the true inflation rate and asset price appreciation. When interest income is taxed at the same rate as the long term capital gains tax rate, the stimuli to capture lower taxed capital gains from inflation would be neutralized.

The interest deduction would also be reduced by the same percentage amount during the excessive price asset appreciation/inflation cycle to discourage credit creation. This change in taxation policy would maintain a closer balance of values between the money that is lent, and the paper profits on capital assets during the asset price appreciation/inflation cycle. The lower capital gains tax rate would still be available for productive investment and production. By slowing down the velocity of money in this manner, it would give production the time it needs to balance supply with normal demand, thus maintaining employment without creating a recession to control inflation psychology.

A majority of the population would also not be doing the same thing at the same time which creates the herd effect. Appreciation of capital assets, without improvement, would not be taken for granted. When asset price appreciation/inflation is subdued the tax on interest would automatically slowly increase to previous rates, and the interest deduction would slowly return to a 100% tax deduction.
I want to point out that there is a transfer of value from the money (debt) holders to the holders of capital assets as capital asset prices rise. By enacting the Zero Policy, at the end of the year the values would be somewhat re-balanced. One person would pay a little more tax, and the other would pay a little less tax if asset prices were increasing. In this way we don’t allow the balance of values to get so far out of balance that the economy has to be put through a recession to increase the value of money (debt), as the economy is presently doing. You can now buy more real estate with less debt (money). The value or purchasing power of money has increased in the last 5 years. During asset price appreciation/inflation cycles, and bubbles, money loses purchasing power, it takes more debt to buy real estate, to focus on one commodity.

Where does the democratic right to decide how you will be taxed fit into this.

In a representative free society the people have the right to confer and advise their representatives in government. The government serves the people. Our forefathers went to war with England to gain the right to make our own determination on how we the people would be taxed.
The people have the right of free speech, petition and assembly. I believe people are ready for a change. They are tired of the cycles of boom and bust in our economy. Our representatives and the people will need to be educated on the benefits of the Zero Appreciation/Inflation Taxation Policy.

Academia needs to be involved. If necessary the people need to use their rights to encourage our representatives to make the needed changes to the tax code. The timing could not be better. Tax reform discussions are scheduled to start in 2013 in the USA. The financial sector and special interest have had their way for the last 30 years. The people need to stand up and speak out so they will be seen and heard. Our revolution history is proof that we can do it again.

What are your thoughts on the Zero Policy? Will it make our economy more productive and efficient? Will less paper profits be created and more real wealth be created. The real wealth that is needed to increase the standard of living in countries. Will it help dampen the cycles of high inflation and deep recessions. Would you support the change to the tax code. I believe the Zero Policy should be adopted in all modern economies around the world. Many countries have an income tax with the same guiding polices of the USA. This is one of the reasons capital asset, and homes have increased so fast in price around the world.

To have a sustainable recovery we must increase people’s confidence in their ability to succeed at taking on the responsibility of a mortgage. We must also improve people’s disposable income to increase aggregate demand. I have posted on my web site the terms of a new mortgage that people can succeed at, unlike the mortgage terms that created the financial crisis in many nations. The mortgage also increases people’s disposable income and the terms of the mortgage offer a way we can de-leverage the primary home market, in a safe and controlled manner, which will be beneficial to all parties concerned. Thereby resolving the underwater mortgage situation.

Please read “Economic Recovery – The Fed Can’t Do It Alone”  and other articles I have posted on my web sites at http://www.foreclosurecrisissolved.wordpress.com/ and http://www.recoverygovforthepeople.wordpress.com/

Leonard C. Tekaat is an economic scholar, author, and retired small businessman with over forty years of experience in home finance and real estate investment. He is a former candidate for the California Congress. He is the Chairman of a special Committee For Economic Reform and A Better Economic Future.

Tax Reform, Neutralize The Lower Capital Gains Tax Rate During The Inflation Cycle

It was private sector debt that created the dot-com, oil, and the housing bubble in the last 20 years. Tax policy has more to do with how much debt is created by the private sector than what has been discussed. The lower capital gains rate is used to convert earned income and interest income into lower taxed capital gains income by investors. There have been many reports lately that Presidential candidate Mitt Romney and many other investors abuse this loop-hole in the tax code to lower their tax bill as capital assets increase in price. The extra demand that investors create, during the inflation cycle, or a singular class of asset price increase, increases prices further.

Thus increasing the cost of many commodities, energy, housing, food and many other necessities of life. To eliminate this loop-hole during the inflation cycle and when credit bubbles start to form, we should use the tax code to slow down non productive credit creation. We should not rely on the credit tightening policies used by central banks, which raises interest rates, and the cost of consumption and production, causing wages and prices to increase further, reducing the competitiveness of our exports in the world market place.

We should use the Zero Inflation Taxation Policy to help reduce the severity of recession and inflation cycles of our economy. The Zero Policy would create a more productive and efficient economy. Asset and commodity prices would be more stable and long term interest rates would remain constant. The value of debt (money) would be changed by the percentage of tax on interest earned, and the amount of credit created by the private sector would be reduced by the automatic reduction of the interest deduction, during the inflation cycle and when asset and commodity price bubbles are being created. The percentage of the tax on interest earned would be reduced by the true annual inflation  rate. The interest deduction would be reduced by the same percentage rate. When the tax on interest earned is at the same rate as capital gains the lower capital gain rate would be neutralized. As the interest deduction is reduced the excessive use of credit leveraging, during the inflation cycle, would be reduced. Thus preventing bubbles and financial crisis from being created. It is common knowledge that it was a housing credit bubble that created the financial crisis, that created the Great Recession of 2008. We do not want to keep repeating history as we have done for the last one hundred years, with each recession, after the Great Depression, getting deeper and lasting longer.

The long term capital gains tax devalues money (debt) because interest earned is taxed at a higher tax rate than the money realized by asset price increases that have increased without the investor increasing the supply, or value of the asset (inflation). The Zero Policy will neutralize the capital gains tax during the inflation cycle, by reducing the tax on interest earned and reducing the interest deduction, but will still be available to encourage productive investment. In this way we can reduce the amount of debt (money) banks can create in the private sector, by reducing the number of people willing to borrow money during the inflation or bubble cycle, without rising interest cost of productive businesses.

Raising interest rates is very damaging to the middle class and small businesses. Higher interest rates reduce demand and competition from the bottom of the economic ladder by increasing unemployment and small businesses permanently closing their doors, or being purchased by larger businesses. The Zero Policy reduces demand from the top of the economic ladder. The Zero Policy will allow the normal consumption economy to continue operating, thereby continuing to provide jobs to the employed and revenues to local, state and the federal government. The Zero Policy will dampen leveraged speculative investments and calm people’s “animal spirits” which the policies of economist John Maynard Keynes help create.

The Zero Policy reduces inflation psychology investments during the inflation cycle, slowing down the velocity of money, which will allow production the time it needs to increase supply.

Please read the articles I have posted on my web sites at

http://www.foreclosurecrisissolved.wordpress.com/ and http://www.recoverygovforthepeople.wordpress.com/

Charts that tell how much private debt was created.

http://caps.fool.com/Blogs/debt-deflation-just-the/284689

To have a sustainable recovery we must increase people’s confidence in their ability to succeed at taking on the responsibility of a mortgage. We must also improve people’s disposable income to increase aggregate demand. I have posted on my web site the terms of a new mortgage that people can succeed at, unlike the mortgage terms that created the financial crisis in many nations. The mortgage also increases people’s disposable income and the terms of the mortgage offer a way we can de-leverage the primary home market, in a safe and controlled manner, which will be beneficial to all parties concerned. Thereby resolving the underwater mortgage situation.

Leonard C. Tekaat is an economic scholar, author, and retired small businessman with over forty years of experience in home finance and real estate investment. He is a former candidate for the California Congress. He is the Chairman of a special Committee For Economic Reform and A Better Economic Future.

When Is The Best Time To Learn The Meaning Of Responsibility And Opportunity

While President Obama was giving his victory speech I was remembering all the campaign speeches I listened too. I would estimate that President Obama and Governor Romney mentioned responsibility and opportunity in their campaigns speeches more than 1000 times. Responsibility and Opportunity are two fundamental principles of our Democratic Republic.
The citizens of our nation exhibited them again on November 6, 2012 by enduring long voting lines and the aftermath of hurricane Sandy to perform and take advantage of their civic duty to vote. Every day people take care of their responsibilities and look for opportunities to better their lives and their country.
This is why I am proposing that we add the two words “responsibility” and “opportunity” to the Pledge of Allegiance.

Our children need to learn, at a young age, that liberty, and justice can only exist in a democracy if people take responsibility for themselves, their families, and the process of democracy. Participation in the process of democracy is essential to obtaining democracy’s highest calling of equality of opportunity, respect for other people’s lives, and property. Only with participation can justice be achieved through the courts, and on the streets through peaceful participation in group awareness demonstrations.

This is a land of opportunity. We should be proud of what earlier generations have created, and sacrificed for. Each generation is obligated to future generations to carry the torch of opportunity and progress forward.

Our children should learn that through persistence, and a good work ethic, they have the opportunity to achieve whatever they can dream. Each morning they should be reminded that with freedom comes responsibilities, and opportunities in this nation under God, with responsibility, liberty, justice, and opportunity for all.

On our east coast, in New York harbor, we celebrate liberty with the Stature of Liberty. We should erect a monument celebrating our citizens commitment to responsibility and opportunity in support of freedom on the west coast.

If I were to pick a location for this monument I believe the island in San Francisco Bay known as the Ellis Island of the West, Angel Island State Park, would be a good choice. It is a beautiful park with many visitors, a Coast Guard Station and ferry boat access.

The monument should have a large American flag flying high with a diverse group of people, looking up, pledging allegiance to the flag of the United States of America. It should shine brightly at night so people can see it from San Francisco as a beacon of opportunity. Or we could hold a national contest to obtain ideas from our citizens and immigrants.

We should put the following words on the monument.

I Pledge Allegiance to the flag
of the United States of America
and to the Republic
for which it stands,
one Nation under God,
indivisible,
with responsibility, liberty, justice and opportunity for all.

Liberty and Justice is immortalized in many of our institutions and monuments, but two cornerstones of our society, responsibility and opportunity, are not represented by any institution or monument. We must correct this lapse of insight in the Pledge Of Allegiance and by erecting a monument to remind people of these important cornerstones of civilization.

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Better Polices Are Needed For the Economy To Recover Without Inflation

Posted on August 23, 2012 by Leonard C. Tekaat

For years the Federal Reserve has been using monetary policies to maintain low interest rates to help revive the economy.  Monetary policies cannot do it alone.  Government deficit spending policies have not revived the economy either.  A major problem with our economy is that banks are not moving (loaning) the money, created by the Federal Reserve, and the federal government, into the Main St. economy quickly enough to improve the foreclosure and unemployment rate.  Better mortgage terms and a good principal reduction plan for underwater mortgages will jolt the economy back to life by increasing aggregate demand and confidence. 

The financial institutions that were created during the Great Depression to help resolve the foreclosure and unemployment crisis of the 1930s have not been fully utilized to help resolve the foreclosure crisis of the Great Recession of 2008, because they are under a conservator’s control. Mortgage originators have not been able to offer the public the best mortgage terms, to help the recovery, because of a lack of a secondary market for a new mortgage with new terms that fit the current economic conditions.

Healing the the economy is only half of the equation. The other half is, HOW DO YOU CORRECTLY CONTROL INFLATION AND PREVENT OR DEFLATE AN ECONOMIC BUBBLE WITHOUT CREATING ANOTHER GREAT RECESSION?

History has shown that the Fed cannot continue maintaining interest rates at their current level, by using monetary policies, without debasing our currency, which will lead to another cycle of inflation, higher interest rates, a devaluation of current debt, and a return to a recession cycle to re-balance values in our economy.

Instead of the Federal Reserve expanding the money supply to create long term low interest rates, we can have an economic recovery without debasing our currency by creating a mortgage with a lower starting interest rate and then a fixed interest rate for the remaining term of the mortgage.  We can also  maintain lower long term interest rates with a change in our tax code.

The new mortgage terms and lower mortgage  interest rates will improve people’s disposable income, confidence, and the primary home market, which will reduce the unemployment rate and the deficit as outlined later.

I am sure the Fed would agree that an infusion of confidence and purchasing power into the middle class will go a long way in obtaining their goal of lowering the unemployment rate and price stability. We have all the necessary institutions in place to help the Fed make it happen, if we fully utilize these institutions.

The backbone of any modern consumption economy is its middle income population. If they are financially strong, the economy will be strong and the government will have the revenue to pay its debt and current expenditures. 70% of the economic activity in our economy relies on the consumer. It is consumer demand that drives increases in employment and investment.

Our economy had been slowly improving, but the government recently reported the unemployment rate has increased to 8.3%.  The total unemployment and under employment rate has been reported to be much higher. Foreclosures have been predicted to increase this year, further depressing the primary home market, even as the Federal Reserve is pumping billions of dollars into the financial sector to help strengthen the financial sector and maintain low mortgage interest rates.

Currently there is talk about the Fed creating QE3 to help our economy improve, because it is showing signs of slowing down again.  New mortgage terms and utilization of Fannie Mae and Freddie Mac will be more beneficial to the economy.

Different Mortgage Terms Are Needed To Solve The Foreclosure and Unemployment Crisis; To Increase Home Ownership For Qualified Primary Home Buyers.  We need to modernize how we control inflation and inflation psychology.

What mortgage terms should be offered to the public, to improve the primary home market, reduce foreclosures, and unemployment, with the 10 year US Treasury Note yielding about 2% and with the Fed rate at .25%, after a collapse of the primary housing market?

The financial sector needs to adopt a mortgage, with terms that are more appealing to investors than the 10 year US Treasury Note, to provide people with a mortgage with a lower starting mortgage interest rate and then a long-term fixed interest rate. As the  Home Owners Loan Corporation, a federal agency did in the 1930s a principal reduction plan must also be put in place for underwater mortgages to reduce strategic abandonment and to quicken the balancing of the primary home market and economic recovery.

A mortgage-backed security (MBS) needs to be created that the interest rate increases each year until the interest rate equals the thirty year fixed rate mortgage interest rate, or a little above it.  A guaranteed annual increase in the interest rate is something a 10 year US Treasury Note doesn’t have. If the mortgages are securitized by Fannie Mae or Freddie Mac, the MBS should be guaranteed by the full faith and credit of the federal government, similar to  US Treasury notes and bonds. Mortgages that are collateralized with less than 10% equity should be insured, if possible, with a mortgage payment insurance policy, rather than mortgage insurance, to guarantee payment of the payment each month if the homeowner is unable to make the payment. We should also consider a combination of the two types of insurance to insure the mortgage.

We have been maintaining the minimum income of the unemployed. This is not a complete solution for posterity. By improving the confidence and monthly disposable income of the 91.7% of the population that is employed, this will put most of the 8.3%, that are unemployed back to work, because of the increase in aggregate demand, which will increase the need for more workers for businesses.

To improve Main Street’s economy and reduce unemployment, people’s monthly disposable income and confidence needs to improve, to increase aggregate demand. By restructuring, or refinancing almost all primary home mortgages, with the correct terms, purchasing power would be increased on Main St., which would speed-up economic recovery without increasing the money supply. Increasing the money supply, without increasing the supply of products and services, debases the currency, which leads to higher prices.

The Solution:

How the “Plan” increases people’s monthly disposable income and confidence, to increase aggregate demand, is by making available, to all qualified homeowners, and home buyers, a mortgage with new terms. Terms that they can succeed at, unlike the previous mortgages that created the collapse of our economy and the collapse of most of the world’s economies.

The risk of default of the new mortgage is near zero, because the borrower would qualify at the highest rate of interest the mortgage interest rate would rise to, which would be the 30 years fixed rate mortgage interest rate, or a little above it. The 30 year fixed rate primary home mortgage rate is currently about 4%, or lower, for well qualified mortgage seekers.

The new mortgage terms would be similar to other mortgages that are available to home owners and homebuyers. It starts out at a low-interest rate, but, and this is important, the Ascending Interest Rate Mortgage is not indexed after a few years. as the current 5/1 Adjustable Rate Mortgage is.

If it is profitable for the financial sector to offer the 5/1 ARM that maintains interest rates at 2.75% for 5 year, and the 15 year fixed interest rate mortgage at about 3%, the mortgage originators should be able to offer the following mortgage terms without any lost of their profit margin. The new mortgage terms are even more appealing considering the tax reform I am proposing.

The Ascending Interest Rate Mortgage has a starting interest rate of around 2.75% or lower, based on the ten-year US Treasury Note. Currently the 10 year Treasury Note is about 2% or lower. That would make the interest rate for the first year lower than 2.75%. The interest rate would increase .25% per year, unlike a Treasury Note which has no increase in the interest rate during its term. The interest rate would stop increasing at 5%, which will take 9 years to obtain, or at the 30 year fixed rate mortgage interest rate or a little higher, whichever is lower, or best for the economy when the mortgage is originated.

As the economy improves the Ascending Interest Rate Mortgage will decrease people’s purchasing power with a .25% higher interest rate each year to help prevent too much aggregate demand from being created, which would help create another cycle of inflation, or a primary home price bubble.

The new mortgage terms would only be available to owners, or buyers of owner occupied homes. The home buyer, or the homeowner will embrace the new mortgage terms, because they will know what their housing cost will be for years to come. With predictability comes confidence in taking on the responsibly of a mortgage. They will also prefer the AIR Mortgage over the 30 year fixed rate mortgage, because of the lower starting interest rate. A simple letter of modification stating the old terms and the new terms is all that is needed to modify those mortgages that have remained current and are held in Fannie and Freddie’s portfolio of mortgages.

After I wrote this article, Chase Bank has been sending a modification letter to home owners that are current with their mortgage payment. A modification letter that lowers the homeowner’s underwater principal balance and interest rate. The letter has no requirements. It just ask the home owner to sign the letter to accept the new terms. A small fee is all that is required to cover the cost of writing and sending the letter.

With the AIR Mortgage available, more homes will be sold and refinanced. With the AIR Mortgage available, economic activity in the primary home sector will increase, which will help the primary home market and the economy to improve. The foreclosure rate should decrease. The foreclosure inventory would be quickly sold to owner occupied home buyers. The primary home market will stabilize and then home values will slowly increase 1 to 2% a year if the “Plan” is fully implemented.

For the AIR Mortgage to become available, Fannie Mae and Freddie Mac, which are government sponsored private mortgage securitization corporations, are the largest securitization firms in the US. F&F will need to offer to purchase the mortgage from the banks and other mortgage originators, before the banks and mortgage brokers will offer the new mortgage terms to the public. If the Fed agrees that they will purchase the AIR Mortgage securities from Fannie Mae and Freddie Mac, there is no reason for F&F not to offer to purchase the AIR Mortgage from mortgage originators.

The Director of the FHFA, Mr. DeMarko, needs to be replaced if he fails to create a secondary market for the AIR Mortgage and use the monthly principal reduction procedure to quicken the restructuring of F&F’s mortgage portfolios. President Obama should make a recess appointment for a new director as he did with the appointment of the director to the Consumer Finance Protection Bureau.

We should take Fannie and Freddie out of conservatorship, and use them to improve the economy and the primary housing market. We made a mistake when we allowed the government to privatize Fannie Mae . Freddie Mac and Fannie Mae should be foreclosed upon and then used for the public benefit, as they were originally created for, instead of for profit.

With the housing market improving and F&F earning more money than it is costing to operate F&F we will be able to repay the 160 billion F&F have borrowed from taxpayers to the US Treasury as HOLC did after all the mortgages they held were paid off.

 If the restructuring, mortgage monthly principal reduction, and refinancing of the mortgages is done quickly, and the housing market and the unemployment rate begin to improve, we may be able to let the Bush Tax Cuts expire, without creating a recession, because of the increase in aggregate demand the new mortgage terms will create with an increase in disposable income on Main Street.

Investors will invest in the AIR Mortgage securities, because the security will increase in value as the annual interest rate increases .25% a year, unlike the treasury note and other fixed rate debt instruments which will decrease in value. Also the mortgages that are securitized in the MBS would have a near zero default rate.

Banks and mortgage brokers do not hold all the mortgages they originate. They sell most of them to investors, or they are securitized into MBSs. If investors don’t see the value in the AIR Mortgage security, the Fed should sell the mortgage securities they are holding with higher interest rates, because they will become more valuable when the new mortgage terms are made available and securitized. The Fed would hold the new securities until their interest rate increases to the 30 year fixed interest rate and then sell them to investors.

The “Plan” would be more efficient if it was adopted nationally, because F&F would be able to offer the lowest possible interest rates, but a State or county could adopt the Plan by selling bonds and using the money to purchase the underwater mortgages at fair market value and then restructure the mortgages as outlined in the Plan. The other possibility would be to create a State, regional or county wide bank that would have access to the Fed’s discount window to borrow the funds to start the mortgage restructuring. North Dakota has a state bank. California is considering a state bank and has created a study group to take a closer look at the benefits and pitfalls of having a state bank. North Dakota’s economy is doing very good with a 4.5% unemployment rate and a normal foreclosure rate.

It is very possible, that because the mortgage’s unpaid balance will be reduced monthly, that the total return on investment will be much more than the spread between the cost of funds and the interest rate the homeowners will be paying. The increase in return on investment occurs because of the increase in a home’s value the Plan will have over a few years . The mortgage may have only been reduced by a small percentage using the monthly principal reduction procedure, when the mortgage equals the resale value of the home, compared to a full discount to the market value of the home when the mortgage is restructured.

The mortgage MBS would be very appealing to investors because of this possible increase in return on investment. This makes the mortgage more valuable for resale purposes. Not only would the investor be collecting interest on a larger principal balance, the investor will receive a larger principal pay off when the loan is paid off or the home is sold. You can think of the monthly principal reduction procedure as a future equity sharing plan. Therefore the mortgage could be readily sold to FHA or private investment funds after the mortgage has been restructured. Please read the “Plan” for more details. The mortgage should be able to be assumed by a qualified buyer to increase mobility of homeowners so they will be able to find work in other areas of the country.  Having the AIR Mortgage being able to be assumed would also assure a continuation of mortgage payments.

The private financial sector, Fannie and Freddie and the other government housing financing agencies could prevent millions of unnecessary foreclosures, and save billion of dollars, by adopting the AIR Mortgage to restructure most of the mortgages they hold in their portfolios. The financial sector and F&F would win the support of millions of families if they succeeded in this endeavor. Our economy would be on a defined road to recovery. The deficit would decrease as employment improved.

We need to modernize how we control inflation and inflation psychology. The Fed’s policy of raising and lowering interest rates is inefficient and very damaging to our enterprise system. To maintain stable long term interest rates, reduce interest rate increase risk and control inflation and inflation psychology, we need to enact The Zero Inflation Taxation Policy as discussed in other articles by the creator of the AIR Mortgage.

There has been a lot of talk about making our tax code simpler. That would be nice but economies are not simple. Economies are continually moving between the recession cycle and the inflation cycle. Sometimes they stagnate into deep recessions or high inflation. As we have learned in the current Great Recession of 2008, monetary policy is not enough stimuli to bring about a recovery of Main ST.  The tax code can stimulate and guide people to invest and spend to speed up recovery.  It is important for the tax code to counter what economic cycle the economy is moving through. During the recession cycle the income tax should encourage people to spend money, make investments and use credit to expand the money supply. When the economy is in the inflation cycle the tax code should automatically change to reduce unproductive investment, encourage the spending less money and the use of credit, and encourage money investment and savings to help increase production to help balance supply with demand. Our economy is dynamic. Our tax system is static. The Plan  recommends an income tax reform policy that will stabilizes long-term interest rates, thus decreasing interest rate increase risk and the excessive use of credit during the inflation cycle. The tax policy will help slow down the economy in the correct way, without adding cost, when the economy is expanding to rapidly. The change in the tax code will also decrease the wealth gap between the impoverished and the 1%, without unnecessary tax increases. This is why I propose we adopt The Zero Inflation Taxation Policy. With the Zero Policy available we will no longer be relying totally on the Fed to control inflation and inflation psychology. The rising and lowering of interest rates by the Fed is very damaging to the middle class and small businesses. For more information go to http://www.foreclosurecrisissolved.wordpress.com/

The People’s Economic Recovery Plan also presents a better procedure to dispose of the underwater mortgage situation, without costing the taxpayer a dime. Read the Plan to learn the benefits of a monthly principal reduction program.

For more information go to:

www.foreclosurecrisissolved.wordpress.com or www.recoverygovforthepeople.wordpress.com

Leonard C. Tekaat is an economic scholar, author, and retired small businessman with over forty years of experience in home finance and real estate investment. He is a former candidate for the California Congress. He is the Chairman of a special Committee For Economic Reform and A Better Economic Future.

Leonard C. Tekaat

Plan first written 12/2008

6-16-2012 revised

cc. members of Congress

Economic Recovery, The Fed Cannot Do It Alone

Better Policies Are Needed For Job Creation,Tax Reform, Principal Reduction, Mortgage Refinancing, Inflation Control, Fani & Fredi And Eminent Domain For Economic Growth.

The Fed Rate has been near zero for four years and the economy has not recovered fully. Mortgage originators (banks) have been very slow to pass through to home owners and home buyers the best possible mortgage interest rate and terms that a near zero Fed Rate should be able to create. If the banks had passed through the low interest rate when the Fed Rate was lowered four years ago the Great Recession would not have been as deep and it would not have lasted for over four years.

The economy is still depressed. The unemployment rate is still above 8%. The housing market is slowly improving in a few markets, but it has a long way to go. Millions of mortgages are underwater and homeowners all over the country are facing possible foreclosure. Cities and counties are desperate and are considering extreme legal procedures to help their depressed economies recover.

Re-inflating the home prices to previous high bubble prices to eliminate underwater mortgages is not a good idea,  because wages have not increased to support the higher prices. We will be creating another bubble and another financial crisis.

The use of eminent domain to resolve the underwater mortgage situation has been in the news lately. Eminent domain being the government takes procession of the underwater mortgage, pays the holder of the underwater mortgage a fair market value price for the underwater mortgage, and then the unpaid balance of the mortgage is reduced to the current value of  the home or the price paid for the mortgage.  The mortgage interest rate is also changed to the current market rate, which should be at a lower rate.

I have read several articles about San Bernardino County and other public entities considering using eminent domain to solve the underwater mortgage situation. I believe using eminent domain to purchase underwater mortgages is not the best way to resolve the underwater mortgage situation, because it could become a legal nightmare and delay recovery in the primary home market for years. It also could reduce the availability of the lowest possible mortgage interest rates.

The following paper outlines an alternative plan that will be more efficient,  has the possibility of de-leveraging the primary home market in a orderly manner, and also it solves the underwater mortgage situation. I believe that the underwater mortgage problem needs to be resolved before we can have a sustainable economic recovery.

The primary home market is not just a problem, It is one of the primary problems with our economy!  In previous recessions housing has pulled the economy out of recession.  Because of a lack of equity, home owners have not been able to have their mortgages refinanced to take advantage of the current low interest rates. When the US Congress passed a law forbidding primary home mortgages from being restructured in a bankruptcy court, home owners have not been able to have millions of mortgages that are underwater restructured. If the bankruptcy option was available for restructuring primary home mortgages we would not be considering eminent domain to resolve the underwater mortgage situation.  Using bankruptcy to resolve underwater mortgages is not the best way either.  Bankruptcy hurts all parties involved, and is a race to the bottom for property values, which lowers the assessed value of the property tax base. The property tax base that schools and other county services rely on to pay their bills. Bankruptcy should only be used as a last resort and for leverage to bring the lender to the modification table.

For all the above reasons there has been a lack of aggregate demand and confidence in our economy. Aggregate demand and confidence is what needs to improve to reduce unemployment. Lack of demand is why businesses are not hiring more workers and spending the millions of dollars they have in banks in the USA and abroad.

Healing the primary home market is only half of the equation. The other half is, HOW DO YOU CORRECTLY PREVENT OR DEFLATE AN ECONOMIC BUBBLE WITHOUT CREATING ANOTHER GREAT RECESSION?

The Federal Housing Financial Agency (FHFA) was created to oversee the federal home loan banks and other federal housing finance organizations. It also acts as conservator of Fannie Mae and Freddie Mac. The conservator’s duty is to protect F&F business’ value. The Plan I am presenting is a different way of maintaining and improving the financial health of F&F and the primary home market and allow people to remain in their home when possible.

The Federal Housing Financial Agency (FHFA) is wasting an opportunity to fully utilize the historically low interest rates the Federal Reserve and investors are creating in our financial markets. By not providing the primary home market with the best mortgage terms to homeowners, for the current economic conditions, FHFA has depressed economic activity, and prolonged the Great Recession. By the FHFA not responding to the mortgage crisis of 2008 with new and better mortgage terms to help keep families in their homes, and maintain home values, our citizens have experience enormous hardship, unnecessary foreclosures, unemployment, abuse and fraud by mortgage servicers, an increase in government debt liabilities, and a loss of over 40% of their wealth in the last four years.

The Federal National Mortgage Association, better know as Fannie Mae, was sponsored by the government (American citizens) in 1938 to provide a secondary market for mortgages. They did a suburb job for many years until they were privatized and became involved with purchasing subprime mortgages and bad management. These problems have been corrected. Management has been changed and underwriting standards have improved.

The 30 year fixed interest rate mortgage was created during the Great Depression of the 1930s by the Home Owner’s Loan Corporation (HOLC). The HOLC exchanged government bonds for discounted home mortgages held by banks. The HOLC restructured the mortgages, lowered the interest rate and the unpaid principal amount to make it possible for homeowners to remain in their homes. It was a very successful government sponsored program. HOLC returned a profit to the US Treasury. I believe we can improve on this proven way of helping millions of homeowners stay in their homes and improve our economy, without it costing taxpayers a dime.  We do not need to create another government program. We can use the housing finance programs we already have. We just need to create a mortgage with terms that people can succeed at to reduce the default rate to near zero, that is beneficial to the economy and fair and beneficial to all parties involved.

For years the Federal Reserve has been using monetary policies to maintain low interest rates to help revive the economy. The problem is that mortgage originators have not been able to offer the public the best mortgage terms, to help economic recovery, because of a lack of a secondary market for a new mortgage with new terms.

I am sure the Fed would agree that an infusion of confidence and purchasing power into the middle class will go a long way in obtaining their goal of lowering the unemployment rate and price stability. We have all the necessary institutions in place to help them make it happen, if we fully utilize them.

History has shown that the Fed cannot continue maintaining mortgage interest rates at their current level, by using monetary policies, without debasing our currency, which will lead to another cycle of inflation, higher interest rates, a devaluation of current debt, and a return to a recession cycle to re-balance values in our economy.

The strength of any modern consumption economy is its middle income population. If they are financially strong, the economy will be strong and the government will have the revenues to pay its debt and current expenditures. 70% of the economic activity in our economy relies on the consumer. It is consumer demand that drives increases in employment and investment.

Our economy had been slowly improving, but the government recently reported the unemployment rate has increased to 8.3%. The total unemployment and under employment rate has been reported to be much higher. Foreclosures have been predicted to increase this year, further depressing the primary home market, even as the Federal Reserve is pumping billions of dollars into the financial sector to help strengthen the financial sector and maintain low mortgage interest rates. Currently there is talk about the Fed creating QE3 to help our economy improve, because it is showing signs of slowing down again.

The stimulus program helped the economy, but the 760 billion dollars was not directed at the main problem of the financial crisis, the primary home market. QE2 did not improve the Main St. economy very much, because the money did not make it into the Main St. economy through mass new refies and mortgages, and loans to small businesses. The mortgage finance system that had been developed to handle a down turn in the primary home market was not utilized correctly. Millions of home mortgages still need to be refinanced and restructured to improve the primary home market and the economy. The underwater mortgage situation needs to be correctly resolved.

We can have an economic recovery without debasing our currency. New mortgage terms will improve people’s disposable income, confidence, and the primary home market, which will reduce the unemployment rate and the deficit.

The Fed’s previous actions have improved the financial markets, but their efforts have not improved the primary home market to prevent more foreclosures and reduce the unemployment rate significantly.

Different Mortgage Terms Are Needed To Solve The Foreclosure and Unemployment Crisis; To Increase Home Ownership For Qualified Primary Home Buyers

What mortgage terms should be offered to the public, to improve the primary home market, reduce foreclosures, and unemployment, with the 10 year US Treasury Note yielding about 2% and with the Fed rate at .25%, after a collapse of the primary housing market?

The financial sector needs to adopt a mortgage, with terms that are more appealing to investors than the 10 year US Treasury Note, to provide people with a mortgage with a lower starting mortgage interest rate, and then a long-term fixed interest rate. As HOLC did in the 1930s a principal reduction plan must also be put in place for underwater mortgages to reduce strategic abandonment and to quicken the balancing of the primary home market, and economic recovery.

A mortgage-backed security (MBS) needs to be created that the interest rate increases each year until the interest rate equals the thirty year fixed rate mortgage interest rate, or a little above it. A guaranteed annual increase in the interest rate is something a 10 year US Treasury Note doesn’t have. If the mortgages are securitized by Fannie Mae or Freddie Mac, the MBS should be guaranteed by the full faith and credit of the federal government, similar to a US Treasury notes and bonds. Mortgages that are collateralized with less than 10% equity should be insured, if possible, with a mortgage payment insurance policy, rather than mortgage insurance, to guarantee payment of the payment each month if the homeowner is unable to make the payment. We should also consider a combination of the two types of insurance to insure the mortgage.

We have been maintaining the minimum income of the unemployed. This is not a complete solution for posterity. By improving the confidence and monthly disposable income of the 91.7% of the population that is employed, this will put most of the 8.3%, that are unemployed back to work, because of the increase in aggregate demand, which will increase the need for more workers for businesses.

To improve Main Street’s economy and reduce unemployment, people’s monthly disposable income and confidence needs to improve, to increase aggregate demand. By restructuring or refinancing almost all primary home mortgages, with the correct terms, purchasing power would be increased on Main St., which would speed-up economic recovery without increasing the money supply. Increasing the money supply, without increasing the supply of products and services, debases the currency, which leads to higher prices.

The other economies of the world that want to achieve growth, Spain and Greece to name two, should take a look at the “Plan” and adapt it to their economies.

The Solution:

How the “Plan” increases people’s monthly disposable income and confidence, to increase aggregate demand, is by making available, to all qualified homeowners, and home buyers, a mortgage with new terms. Terms that they can succeed at, unlike the previous mortgages that created the collapse of our economy, and the collapse of most of the world’s economies.

When a person refinance, or restructures their mortgage from a 6% mortgage interest rate to a 3% mortgage interest rate their disposable income is increased. If their interest payment each month is $1500.00 at the 6% interest rate, after their mortgage interest rate is reduced to 3% their interest payment drops to $750.00. Their monthly disposable income is increased by $750.00. If you multiply the $750.00 by millions of households you increase aggregate demand on Main St. by hundreds of times. But you want to argue that you have reduced the investors’ disposable income by the same amount. The question is; what will people do with the increase in their disposable income they receive? The investor will not consume as much as the middle class, and working class families. Besides what is different from when interest rates where decreasing in the 1980s from 21% to 7%. People and families were refinancing their mortgages then as they need to now. Nobody was concerned that the investor was losing purchasing power. We called it prosperity, and growth.

To solve the underwater mortgage problem, underwater mortgages should be reduced an additional 33% of the monthly principal, and interest payment each month until the value of the home equals the unpaid balance of the mortgage, or up to 10 years whichever occurs first. By lowering the unpaid principal balance monthly, instead of all at once, the home owner will have hope, that sooner than later their mortgage will equal the selling price of the home. They will not add the home to foreclosure inventory. The mortgage will remain a performing mortgage asset, and will maintain its highest book value. Both parties give up a little for economic recovery. The borrower has lower payments on a faster declining mortgage unpaid balance. The bank, and investor are receiving mortgage payments on a larger mortgage than if they foreclosed on the home, and sold it in a depressed market. When demand for homes increases, and prices are increasing 1 to 2 percent a year; the unpaid balance of the mortgage is decreasing 1 or 2 percent a year, the unpaid balance of the mortgage and value of the home will meet somewhere in the middle of the two factors. The financial sector will save billions of dollars in foreclosure, repair cost, sale cost. They will be saving on attorney fees, legal cost, fines, and penalties they will be paying for the Attorney Generals settlement, and investor law suites.

The risk of default of the new mortgage is near zero, because the borrower would qualify at the highest rate of interest the mortgage interest rate would rise to, which would be the 30 years fixed rate mortgage interest rate or a little above it. The 30 year fixed rate primary home mortgage rate is currently about 4%, or lower, for well qualified mortgage seekers.

The new mortgage terms would be similar to other mortgages that are available to home owners and homebuyers. It starts out at a low-interest rate, but, and this is important, the Ascending Interest Rate Mortgage is not indexed after a few years. as the current 5/1 Adjustable Rate Mortgage is.

If it is profitable for the financial sector to offer the 5/1 ARM that maintains interest rates at 2.75% fo 5 year and the 15 year fixed interest rate mortgage at about 3%, it should be able to offer the following mortgage terms without any lost of profit margin. The new mortgage terms are even more appealing considering the tax reform I am proposing.

The Ascending Interest Rate Mortgage has a starting interest rate of around 2.75% or lower, based on the ten-year US Treasury Note. Currently the 10 year Treasury Note is about 2% or lower. That would make the interest rate for the first year lower than 2.75%. The interest rate would increase .25% per year, unlike a Treasury Note which has no increase in the interest rate during its term. The interest rate would stop increasing at 5%, which will take 9 years to obtain, or at the 30 year fixed rate mortgage interest rate or a little higher, whichever is lower, or best for the economy when the mortgage is originated.

Remember, this is important, the person obtaining a new mortgage would qualify at the highest interest rate the mortgage will obtain to reduce the chance of a default.

To maintain stable long term interest rate and reduce interest rate increase risk we need to enact The Zero Inflation Taxation Policy as discussed in other articles by the creator of the AIR Mortgage.

As the economy improves the Ascending Interest Rate Mortgage will decrease people’s purchasing power with a .25% higher interest rate each year to help prevent too much aggregate demand from being created, which would help create another cycle of inflation, or a primary home price bubble.

The new mortgage terms would only be available to owners, or buyers of owner occupied homes. The home buyer, or the homeowner will embrace the new mortgage terms, because they will know what their housing cost will be for years to come. With predictability comes confidence in taking on the responsibly of a mortgage. They will also prefer the AIR Mortgage over the 30 year fixed rate mortgage, because of the lower starting interest rate. A simple letter of modification stating the old terms, and the new terms is all that is needed to modify those mortgages that have remained current, and are held in Fannie and Freddie’s portfolio of mortgages.

After I wrote this article, Chase Bank has been sending a modification letter to home owners that are current with their mortgage payment. A modification letter that lowers the homeowner’s underwater principal balance and interest rate. The letter has no requirements. It just ask the home owner to sign the letter to accept the new terms. A small fee is all that is required to cover the cost of writing and sending the letter.

With the AIR Mortgage available, more homes will be sold and refinanced. With the AIR Mortgage available, economic activity in the primary home sector will increase, which will help the primary home market and the economy to improve. The foreclosure rate should decrease. The foreclosure inventory would be quickly sold to owner occupied home buyers. The primary home market will stabilize and then home values will slowly increase 1 to 2% a year if the “Plan” is fully implemented.

For the AIR Mortgage to become available, Fannie Mae and Freddie Mac, which are government sponsored private mortgage securitization corporations, the largest securitization firms in the US. F&F will need to offer to purchase the mortgage from the banks and other mortgage originators, before the banks and mortgage brokers will offer the new mortgage terms to the public. If the Fed agrees they will purchase the securities there in no reason for F&F not to offer the AIR Mortgage to the homeowners, or home buyers.

The Director of the FHFA, Mr. DeMarko, needs to be replaced if he fails to create a secondary market for the AIR Mortgage, and use the monthly principal reduction procedure to quicken the restructuring of F&F’s mortgage portfolios. President Obama should make a recess appointment as he did with the appointment of the director to the CFPB. We should take Fannie and Freddie out of conservatorship, and use them to improve the economy, and the primary housing market. We made a mistake when we allowed the government to privatize Fannie Mae. Freddie Mac and Fannie Mae should be foreclosed upon and used for the public benefit, as they were originally created for, instead of for profit. With the housing market improving, and F&F earning more money than it is costing to operate, F&F we can return the 160 billion to the US Treasury as HOLC did after all the mortgages they held where paid off.  If the restructuring, mortgage monthly principal reduction, and refinancing of the mortgages is done quickly, and the housing market and the unemployment rate begin to improve, we may be able to let the Bush Tax Cuts expire, without creating a recession, because of the increase in aggregate demand the new mortgage terms will create with an increase in disposable income on Main Street.

Investors will invest in the AIR Mortgage securities, because the security will increase in value as the annual interest rate increases .25% a year, unlike the treasury note and other fixed rate debt instruments which will decrease in value. Also the mortgages that are securitized in the MBS would have a near zero default rate.

Banks and mortgage brokers do not hold all the mortgages they originate. They sell most of them to investors, or they are securitized into MBSs. If investors don’t see the value in the AIR Mortgage security, the Fed should sell the mortgage securities they are holding with higher interest rates, because they will become more valuable when the new mortgage terms are made available and securitized. The Fed would hold the new securities until their interest rate increases to the 30 year fixed interest rate and then sell them to investors.

The “Plan” would be more efficient if it was adopted nationally, because F&F would be able to offer the lowest possible interest rates, but a State or county could adopt the Plan by selling bonds and using the money to purchase the underwater mortgages at fair market value and then restructure the mortgages as outlined in the Plan. The other possibility would be to create a state chartered, regional or county wide bank that would have access to the Fed’s discount window to borrow the funds to start the mortgage restructuring. North Dakota has a state bank. California is considering a state bank and has created a study group to take a closer look at the benefits and pitfalls of having a state bank. North Dakota’s economy is doing very good with a 4.5% unemployment rate and a normal foreclosure rate.

It is very possible, that because the mortgage’s unpaid balance will be reduced monthly, that the total return on investment will be much more than the spread between the cost of funds and the interest rate the homeowners will be paying. The increase in return on investment occurs, because of the increase in a home’s value the Plan will have over a few years . The mortgage may have only been reduced by a small percentage using the monthly principal reduction procedure, by the time the mortgage equals the resale value of the home, compared to a full discount to the market value of the home when the mortgage is restructured.

The mortgage MBS would be very appealing to investors because of this possible increase in return on investment. This makes the mortgage more valuable for resale purposes. Not only would the investor be collecting interest on a larger principal balance, the investor will receive a larger principal pay off when the loan is paid off or the home is sold. You can think of the monthly principal reduction procedure as a future equity sharing plan. Therefore the mortgage could be readily sold to FHA or private investment funds after the mortgage has been restructured. Please read the “Plan” for more details. The mortgage should be able to be assumed by a qualified buyer to increase mobility of homeowners so they can find a job in other areas of the country.  Having the AIR Mortgage assumable would also assure a continuation of mortgage payments.

The private financial sector, Fannie and Freddie and the other government housing financing agencies could prevent millions of unnecessary foreclosures, and save billion of dollars, by adopting the AIR Mortgage to restructure most of the mortgages they hold in their portfolios. The financial sector and F&F would win the support of millions of families if they succeeded in this endeavor. Our economy would be on a defined road to recovery. The deficit would decrease as employment improved.

Remember, to maintain stable long term interest rates and reduce interest rate increase risk we need to enact The Zero Inflation Taxation Policy as discussed previously and in other articles by the creator of the AIR Mortgage.

There has been a lot of talk about making our tax code simpler. That would be nice, but economies are not simple. Economies are continually moving between the recession cycle and the inflation cycle. Sometimes they stagnate into deep recessions or high inflation. As we have learned in the current Great Recession of 2008, monetary policy is not enough stimuli to bring about a recovery of Main St. The tax code can stimulate and guide people to invest and spend money to speed up recovery. It is important for the tax code to counter what economic cycle the economy is moving through. During the recession cycle the income tax should encourage people to spend money, make investments and use credit to expand the money supply. When the economy is in the inflation cycle the tax code should automatically change to reduce unproductive investment, encourage people to spend less money, and encourage money investment and savings to help increase production to help balance supply with demand. Our economy is dynamic. Our tax system is static.

The Plan recommends an income tax reform policy that will stabilizes long-term interest rates, thus decreasing interest rate increase risk and the excessive use of credit during the inflation cycle. The Zero Appreciation (Inflation) Tax Policy will help slow down the economy in the correct way, without adding cost, when the economy is expanding to rapidly.

The change in the tax code will also decrease the wealth gap between the impoverished and the 1%, without unnecessary tax increases. This is why I propose we adopt The Zero Inflation Taxation Policy.  With the Zero Policy enforce we will no longer be relying totally on the Fed to control inflation and inflation psychology.  The rising and lowering of interest rates by the Fed is very damaging to the middle class and small businesses. For more information go to http://www.foreclosurecrisissolved.wordpress.com/

The People’s Economic Recovery Plan also presents a better procedure to dispose of the underwater mortgage situation, without costing the taxpayer a dime. Read the Plan to learn the benefits of a monthly principal reduction program.

For more information go to:

www.foreclosurecrisissolved.wordpress.com or www.recoverygovforthepeople.wordpress.com

Leonard C. Tekaat is an economic scholar, author, and retired small businessman with over forty years of experience in home finance and real estate investment. He is a former candidate for the California Congress. He is the Chairman of a special Committee For Economic Reform and A Better Economic Future.

Leonard C. Tekaat

Plan first written 12/2008

6-16-2012 revised

cc. members of Congress

Different Mortgage Terms Are Needed To Solve The Foreclosure and Unemployment Crisis; To Increase Home Ownership For Qualified Primary Home Buyers

 What mortgage terms should be offered to the public, to improve the primary home market, reduce foreclosures, and unemployment, with the 10 year US Treasury Note yielding about 2% and with the Fed rate at .25%, after a collapse of the primary housing market?

The primary home market is not just a problem, it is one of the primary problems with our economy! Lack of aggregate demand and confidence is what needs to improve to reduce unemployment.

 

For years the Federal Reserve has been using monetary policies to maintain low interest rates to help revive the economy. The problem being, the mortgage originators have not been able to offer the public the best mortgage terms. I am sure the Fed would agree that an infusion of confidence and purchasing power into the middle class will go a long way in obtaining their goal of lowering the unemployment rate and price stability. We have all the institutions in place to help them make it happen, if we fully utilize them.

 

The strength of any modern consumption economy is its middle income population. If they are financially strong, the economy will be strong and the government will have the revenues to pay its debt. A large number of our citizens are burdened with underwater mortgages with high interest rates, which they cannot refinance. This situation is depressing our economy and many of the world’s  economies.

 

The other world economies that want to achieve growth, Spain and Greece to name two, should take a look at the “Plan” and adapt it to their economies.

 

The private financial sector needs to adopt, for their own benefit and survival,  the enclosed mortgage that has terms that are more appealing to investors than the 10 year US Treasury Note, to provide people with a mortgage with a lower starting mortgage interest rate, and a long-term fixed interest rate, without debasing our money. It needs to create a mortgage-backed security (MBS) that the interest rate increases each year until the mortgage interest rate equals the thirty year fixed rate mortgage interest rate. A guaranteed annual increase in the interest rate is something a 10 year US Treasury Note doesn’t have. If the mortgages are securitized by Fannie Mae or Freddie Mac, the MBS would be guaranteed by the full faith and credit of the federal government, similar to a US Treasury note. Mortgages that are collateralized with less than 10% equity should be insured with a mortgage payment insurance policy, rather than mortgage insurance, to guarantee payment of the payment each month if the homeowner is unable to make the payment.

 

History has shown that the Federal Reserve cannot continue maintaining mortgage interest rates at their current level, by using monetary policies, without debasing our currency, which will lead to another cycle of inflation, higher interest rates, a devaluation of current debt, and a return to a recession cycle to re-balance values.

 

Our economy is slowly improving, but the the government reported unemployment rate is at 8.2%. The total unemployment and under employment rate has been reported to much higher. Foreclosures are expected to increase this year, further depressing the primary home market, even as the Federal Reserve is pumping billions of dollars into the financial sector to help maintain low mortgage rates, debasing our currency. The Fed’s actions have improved the financial markets, but their efforts have not improved the primary home market to prevent more foreclosures and reduce the unemployment rate significantly.

 

To improve Main Street’s economy and reduce unemployment, people’s monthly disposable income and confidence needs to improve, to increase aggregate demand. By restructuring almost all primary home mortgages, with the correct terms, purchasing power would be increased on Main St., which would speed-up economic recovery without increasing the money supply. Increasing the money supply, without increasing the supply of products and services, debases the currency, which leads to higher prices.

 

The Solution:

 

How the “Plan” increases people’s monthly disposable income and confidence, to increase aggregate demand, is by making available, to all qualified homeowners, and home buyers, a mortgage with new terms. Terms that they can succeed at, unlike the previous mortgages that created the collapse of our economy and the collapse of most of the world’s economies. The risk of default of the new mortgage is near zero, because the borrower would qualify at the highest rate of interest the mortgage interest rate would rise to, which would be the 30 years fixed rate mortgage interest rate, or a little higher. The 30 year fixed rate primary home mortgage rate is currently about 4% for well qualified mortgage seekers.

 

By improving the confidence and monthly disposable income of the 91.8% of the population that is employed, this will put the 8.2%, that are unemployed back to work, because of the increase in aggregate demand, which will increase the need for more workers for businesses.

 

The new mortgage terms would be similar to other mortgages that are available to home owners. It starts out at a low-interest rate, but, and this is important, the Ascending Interest Rate Mortgage is not indexed after a few years. as the current 5/1 Adjustable Rate Mortgage is.

 

The Ascending Interest Rate Mortgage has a starting interest rate of around 3% or lower, based on the ten-year US Treasury Note. Currently the 10 year Treasury Note is about 2%. That would make the interest rate for the first year lower than 2.75%. The interest rate would increase .25% per year, unlike a Treasury Note which has no increase in the interest rate during its term.. The interest rate would stop increasing at 5%, which will take 9 years to obtain, or at the 30 year fixed rate mortgage interest rate, or a little higher, whichever is lower when the mortgage is originated. Long term interest rate increase risk is reduced by the The Zero Inflation Taxation Policy as discussed in other articles by the creator of the AIR Mortgage (Succeed Mortgage).

 

The person obtaining a new mortgage would qualify at the highest interest rate the mortgage will obtain to reduce the chance of a default.

 

As the economy improves the Ascending Interest Rate Mortgage will decrease people’s purchasing power with a .25% higher interest rate each year to help prevent too much aggregate demand from being created, which would help create another cycle of inflation, or a primary home price bubble.

The new mortgage terms would only be available to buyers of owner occupied homes. The home buyer, or the homeowner will embrace the new mortgage terms, because they will know what their housing cost will be for years to come. With predictability comes confidence in taking on the responsibly of a mortgage.

 

With the AIR Mortgage available, more homes will be sold and refinanced with the AIR Mortgage available, economic activity in the primary home sector will increase, which will help the primary home market and the economy to improve. The foreclosure rate should decrease. The foreclosure inventory would be quickly sold to owner occupied home buyers. The primary home market will stabilize and then home values will slowly increase 1 to 2 % a year if the “Plan” is fully implemented.

 

Investors will invest in the AIR Mortgage securities, because the security will increase in value as the annual interest rate increases .25% a year, unlike the treasury note and other fixed rate debt instruments which will decrease in value.

 

Banks and mortgage brokers do not hold the mortgages they originate. They sell them to investors, or they are securitized into MBSs. For the AIR Mortgage to become available, Fannie Mae and Freddie Mac, which are government sponsored private mortgage securitization corporations, are the largest securitization firms in the US. F&F will need to offer to purchase the mortgage from the banks and other mortgage originators, before the banks and mortgage brokers will offer the new mortgage terms to the public.

 

Occupy Wall St. did inform the public about the plight of the working class, but it did not stop the unnecessary foreclosures. The private financial sector could prevent millions of unnecessary foreclosures, and save billion of dollars, by convincing F&F to adopt the AIR Mortgage to restructure most of the mortgages they hold in their portfolios. The financial sector would win the support of millions of families if they succeeded in this endeavor. Our economy would be on a defined road to recovery.

 

The Plan also recommends an income tax reform policy that will stabilizes long-term interest rates, thus decreasing interest rate increase risk. The change in the tax code will also decrease the wealth gap between the impoverished and the 1%, without unnecessary tax increases. It also presents a better procedure to dispose of the underwater mortgage situation, without costing the taxpayer a dime. The plan allows investors and mortgage holders to share in future appreciation of the home, thereby  increasing the total return on investment.

 

For more information go to:

www.foreclosurecrisissolved.wordpress.com

 

Leonard C. Tekaat is an economic scholar, author, and retired small businessman with over forty years of experience in home finance and real estate investment. He is a former candidate for the California Congress. He is the Chairman of a special Committee For Economic Reform and A Better Economic Future.

 

Leonard C. Tekaat
Copyright Mar 11, 2012

 

 

Video address

http://www.c-spanvideo.org/program/305565-1   60 Minutes produced this video   ( http://www.cbsnews.com/video/watch/?id=7406104n ) There is a new video report by 60 Minutes on the Leaman Brothers collapse which aired 4-22-2012 at http://us.mg4.mail.yahoo.com/neo/launch?.rand=5oae30iedtql0 you might be interested in viewing.

 

This comment by venusvegasvada April 21, 2012 2:35 AM EDT

on the video outlines it all:

 

This is the third part of the game that Wall Street Bankers engineered.1. Repealed the Glass-Steagall Act of 1932 (in 1999)This removed the laws abolishing large financial institutions that accessed multiple markets. It had been in place since 1932. Why? So we didn’t have financial institutions that were too big to regulate, control and fail.2. Passed the Gramm-Leach-Bliley Act in 1999.This opened the door to reform all the super large financial institutions we have today and allowed other very unwise changes to our financial system.

3. Passed the Commodity Futures Exchange Act of 2000

As this 60 Minutes piece illustrated, this was the final part of the plan. Now the Wall Street Bankers got every single thing they wanted for decades, without oversight or control.

It only took them 8 years to almost destroy the entire world financial system and leave the American Taxpayer holding the bag. It’s absolutely abhorrent that they got away with it.

That fact that the Glass-Steagall Act has not be reinstated and that Gramm-Leach-Bliley Act and the Commodity Futures Exchange Act have not be repealed, only shows that our Govt. absolutely lacks the intelligence, strength and fortitude to do what has to be done.

It also shows just how powerful the Wall Street lobbyist are that all this can come to pass and yet nothing has been done to truly rectify it and return us to the stable system we had before this experiment began.

It also shows who is running this country.

Wall Street is too big to control. The experiment has utterly failed. It’s time to end it and reset the legislation to what did work.

The Govt. is fooling itself if it thinks it can contain, monitor or control these behemoths. End the experiment

 

Wall St. and the Big banks have done many illegal things that they hid from the public and regulators ignored. They have continued to do illegal things after the financial collapse with foreclosures.

 

The financial sector could not have created the financial crisis without people walking through their door to take out mortgages or other loans. Banks will continue to make loans as long as people are willing to borrow money. This is how they make a profit. There is nothing wrong with making a productive profit, but when profit becomes destructive it must be regulated to maintain a balance in our economy. This is why the income tax must be changed. 100 years ago the banks lobbied Congress to have the product they sell (credit) put on the income tax deduction list to encourage people to increase the use of credit. They also reduced the value of our savings (money) and money investments by enacting the lower long term capital gains tax rate. This is all explained in my articles posted on my web site. Read “Alternative Economic Recovery Plan” and the other articles.

REDUCING RISK OF INTEREST RATE INCREASES, RESOLVING THE FORECLOSURE – UNEMPLOYMENT – POVERTY CRISIS

It Is Time To Foreclose On Fannie Mae And Freddie Mac 

We have a flaw in our economic policies. This flaw continually helps to widens the wealth gap between the impoverished, and the riches 1% of our country.

The flaw also eliminates competition between large, and small businesses by eliminating small businesses during down turns in our economy. This condition allows large businesses to control a larger and larger share of the market, giving them the resources to influence our political representatives.

We are in a national economic slump caused by national policies! We must change national policies to resolve national problems.

Main St., the middle class, the working class, small businesses, and people in general have been financially decimated by the current financial crisis. Their disposable income , and confidence have been decreased.

This financial crisis has created one of the longest down turns in US economic history.

The vacant, and abandoned homes that are in our neighborhoods are similar to food that is rotting in the fields. We can do better than this for our citizens, when you consider that so many families need better housing.

The buzz on the housing market is: Sell the foreclosed homes to investors. Rent the foreclosed homes to previous home owners and tenants. Sell the homes with underwater mortgages by short sale, to deal with the foreclosure crisis.

Let me ask you, Do we really want an economy based on investors, and renters? A nation of landlords and peasants.

Short sales are OK, and renting is appropriate for some people, but we need to help the majority of people stay in their homes, if at all possible, to maintain the American Dream of home ownership.

Sure we made mistakes this time, but wise people learn from their mistakes, and make the necessary corrections to stop repeating the same mistake we have been repeating for the last 100 years.

Lately there has been talk about a national refinance plan that would help heal the primary home market.

Federal Reserve Chairman, Ben Bernanke, and Elizabeth Duke have made speeches in favor of the government doing more to stabilize the housing market. President Obama mentioned a national refinance plan in his 2012 State Of The Union speech.

Let the Bush tax plan expire. The working people, the middle income, homeowners, renters, and the poor will be helped more by increasing their disposable income by restructuring their credit obligations, without it costing the taxpayers a dime, or increasing the deficit.

We need to go beyond just a refinance plan. The economy needs a principal reduction plan to quicken recovery. We cannot wait 30 years until all the underwater mortgages are paid off, the homes are foreclosed, or abandoned.

The private financial sector needs to step-up, and help resolve the foreclosure, and unemployment crisis they helped create.

Every qualified homeowner with an underwater mortgage must be included in the national refinance plan, and the principal reduction policy. Which is approximately 25% of current homeowners.

The economy needs a principal reduction plan to unload the burden that the Big banks, Wall ST. and the government helped create to increase their profits, and tax revenues. 

Homeowners are not innocent, but the working, and middle class should not be the only ones suffering to clean up the mess the “BIG BOYS” MADE. 

The Committee For Economic Reform and A Better Economic Future has developed a PRIVATE SECTOR SOLUTION TO JOB CREATION AND ECONOMIC RECOVERY. 

WE CALL IT “THE PEOPLE’S ECONOMIC RECOVERY PLAN”. 

The Plan has basically two parts. Get the economy on a healthy path to recovery, and change the policies that helped create the financial crisis.

To help prevent another financial crisis from occurring, we need to stop relying on the Federal Reserve to slow the economy down, when it is getting out of balance, and the amount of money, and credit that is being created is growing too fast. Instead we need to use the income tax to control inflation psychology, and excessive hard capital asset appreciation. 

We believe that the financial sector, investors, and the people will embrace the “PLAN”, because it will help heal the economy, and the primary home market. Improving the primary home market will decrease the unemployment, and the foreclosure rate, without increasing the deficit, like a government jobs program, or another government stimulus program will do. 

We do not want to leave our children, our grand children, and our great grand children a legacy of debt to pay off with higher taxes, or an inflation tax, which will make us all poorer, create more poverty, and more government social liabilities. 

You are correct, if you believe the foreclosure crisis will not correct itself quickly, without direct action. There are three things we can change, to speed up recovery. 

1. Change the bankruptcy law. 2. Increase aggregate demand, without increasing the deficit. 3. Change the guiding policies (income tax policies) of our enterprise economy. 

Let’s get started with changing the unconstitutional bankruptcy law that violates the “equal protection under the law” clause of the Fourteenth Amendment, Section one of our Constitution. 

People should have the same rights as businesses to have their mortgage terms, and unpaid balances modified by a bankruptcy judge. Businesses are not better than People. Businesses, and Corporations are not People! 

This video of a speech Reps. Rep. Earl Blumenauer of Oregon made in front of Congress, explains why we need to change the bankruptcy laws. In fact Rep. Earl Blumenauer of Oregon would like the Occupy groups, and Tea Party members to support the needed changes to the bankruptcy code. http://www.youtube.com/watch?v=J7YPR_p7DYQ/ 

Change only comes about when you have a “Plan” which benefits all parties that are involved. The individual person can see how it will help their situation, and they are willing to stand up for themselves, and unite with others to be heard. 

We need to convince the financial sector that it is to their benefit to make changes to their mortgage terms, and the bankruptcy laws to prevent more foreclosures, and improve the economy. Banks are only as financially strong as their customers. Their customer can be a government, or a homeowner.

Greece, and the other PIGS countries are a perfect example of this. Their government debt problems can crash the world’s banking system if their government debt, and their citizens debt obligation are not restructured as soon as possible. To have a healthy economy both forms of debt must be restructured at the same time. Governments cannot pay their debt unless the national economy is good. The national economy cannot be good unless the export market, and the consumers’ financial condition are in good condition. 

I agree with Reps Blumenauer, changing the bankruptcy laws would be a good constitutional cause, that the Occupy and Tea Party groups should support. Both groups support our Constitution, and want the economy to improve. They both want to protect our rights, and our freedom. 

Changing the bankruptcy law would empower homeowners to be able to modify their mortgages, in court. With the availability of the bankruptcy court option, it would increase the home owner’s ability to have their mortgages restructured when dealing with the banks, if the financial sector failed to accept responsibility for what they helped do to our economy, and to millions of people’s lives.

Reducing principal balances would be a way to help the economy to re-balance itself, and for the financial sector to pay for the damage it did to our economy. 

The 26 billion settlement, arranged by the State’s Attorney Generals with the biggest banks, is only tiny portion of what is needed to repair the damage that has been done by the banks and financial sector. The “Plan” is different. It includes all current home owners and new home buyers. Those families that have lost their homes illegally should receive a direct payment for damages. 

Who knows, the way the economy is going, you may wish that you had helped correct this unconstitutional bias law, to restructure your debts, to save your home from foreclosure. 

Another thing we need to consider changing is our single family home rental policy. The market for single unit housing should be made by primary home buyers. Investor in the single unit primary home market is a destabilizing factor in the primary home market. Investors have no connection to a home like a homeowners do. During the Great recession investors have abandoned tens of thousands of homes creating blight in our neighborhoods. As investors move in and out of the primary home market they create large swings in the price of homes as in commodity prices. Investors have many opportunities to invest in multi-unit housing . The deduct-ability of expenses for single unit rental housing should be eliminated. This change in our housing policy would increase our multi family housing stock, and maintain affordability in the primary single family home market. It would increase home ownership in our country.The repair deduction that investors currently have should be allowed by homeowners to encourage people to maintain their homes. This change would increase economic activity, employment and prevent neighborhoods from deteriorating. 

WE ALSO NEED TO INCREASE TOTAL DEMAND IN OUR ECONOMY, WITHOUT INCREASING THE DEFICIT. 

In a recent poll released by CNN, of the businesses contacted, over 60% of them said that it wasn’t taxes, or regulations that was holding them back from expanding their businesses, it was a lack of demand for their service, or products. 

The way you increase aggregate demand in an economy is by increasing people’s disposable income, with employment, tax decreases or an interest rate reduction.

Raising, or lowering taxes is not a good idea, to my way of thinking. The “Plan” does not increase the deficit, or affect the Social Security fund. 

How the “Plan” increases people’s disposable income is by making available, to all qualified homeowners, and home buyers, a mortgage with new terms. Terms that they can succeed at, unlike the previous mortgages that created the collapse of our economy. 

The new mortgage terms would be similar to other mortgages that are available to home owners. It starts out at a low interest rate, but, and this is important, the Ascending Interest Rate Mortgage is not indexed after a few years. like the current 5/1 Adjustable Rate Mortgage is. 

The Ascending Interest Rate Mortgage has a starting interest rate of around 3% or lower, based on the ten-year US Treasury Note. Currently the 10 year Treasury Note is lower than 2%. That would make the interest rate for the first year lower than 2.75%. The interest rate would increase .25% per year. The interest rate would stop increasing at 5%, or at the 30 year fixed rate interest rate, whichever is lower at the time the mortgage is originated. 

The down payment on new mortgages would be 10%. A lower down payment would require mortgage insurance, or mortgage payment insurance. Mortgage payment insurance would be the better choice, because the mortgage payments would continue to be paid if something happened to the homeowner that made it impossible for them to make their monthly mortgage payment. The home does not need to be foreclosed, for the bank, or investor to receive their money back, as with mortgage insurance, that you pay to protect the bank, or investor from a loss, if you default on your mortgage. 

A person wanting to make a new purchase of a home, or refinance an existing mortgage, that is not current with its payments, would have to qualify at a 5% interest rate, or the current 30 year fixed interest rate mortgage rate, with a 3%, or lower starting interest rate, so we reduce the chance of new defaults.

A homeowner who has kept their mortgage payments current, even if their mortgage is underwater, would be sent a letter, which would change the terms of their mortgage without having to qualify at the 5% interest rate or 30 thirty year fixed interest rate mortgage rate. Nor would they need to have their home appraised. 

When homeowners refinance, or restructure their mortgage from a 6% mortgage interest rate to a 3% mortgage interest rate, their disposable income is increased. If their interest payment each month is $1500.00 at the 6% interest rate, after their mortgage interest rate is reduced to 3% their interest payment drops to $750.00. Their monthly disposable income is increased by $750.00. If you multiply the $750.00 by millions of households, you increase aggregate demand on Main St. by hundreds of times. 

What will homeowners do with the increase in their disposable income they receive? The homeowners will spend it on their families. 

What could you do with an extra $750.00 dollar of extra money each month? If you don’t have a mortgage, don’t worry. When the homeowners spend the money, it will go out into the economy, just like a tax cut would. Be ready to earn your share. There is no way Congress can give the working, and middle class a $750.00 per month tax cut, or anywhere close. 

The “Plan” increases productive growth, and consumption, which will increase employment in our economy. This will reduce our governments social liabilities, and increase tax revenues.

Are you concerned that investors will be losing purchasing power because of the refinancing of the mortgages at a lower interest rate. It is no different from when interest rates where decreasing in the 1980s from 21% to 7%. People, and families were refinancing their mortgages then, as they need to do now. Nobody was concerned that the investor was losing purchasing power. We called it prosperity, and growth. 

Investors invest their cash buying up all the homes that families have lost through foreclosure. Or, maybe they will be in the commodities market bidding up the price of food, energy, and the materials for production with their extra money. 

Fannie Mae and Freddie Mac would need to start offering to purchase the new mortgage from mortgage brokers, and the banks. This is the only way the new mortgage will be made available to the public. 

The Occupy groups should demonstrate in front of Fannie Mae and Freddie Mac The Occupy Wall St. groups need to put pressure on them to change their policy of no principal reduction, and to change their mortgage terms. These changes will help the economy improve, and reduce foreclosures by stabilizing the primary home market, and increasing employment. 

If Fannie and Freddie Mac do not agree to offering to purchase the new mortgage, and lower principal balances, then we should pressure President Obama, and Congress to foreclose on the over 160 billion they owe the taxpayers. We would then be able to offer to purchase the new mortgage to improve the economy. Purchasing the new mortgage, or lowering principal balances should not cost the taxpayers a dime. 

LEARN HOW FREDDIE MAC HAS BEEN BETTING AGAINST STRUGGLING HOMEOWNERS

http://www.npr.org/2012/01/30/145995636/freddie-mac-betting-against-struggling-h…/

Fannie Mae and Freddie Mac have no problem securitizing the 5/1 ARMs, and selling them to investors. With the tax code changes I will be talking about later, to stabilize long term interest rates, the Ascending Interest Rate Mortgage would be no different to the financial markets than if all at once all homeowners wanted to purchase, or refinance their home with an ARM, that started out at a low interest rate. In fact they would like the new mortgage more, because, unlike an ARM, or a US Treasury Note, the interest rate increases .25% a year, until it reaches the 30 year fixed interest rate mortgage rate. 

The home buyer, or the homeowner will like the new mortgage terms, because they will know what their housing cost will be for years to come. With predictability comes confidence in taking on the responsibly of a mortgage. 

To solve the underwater mortgage problem, underwater mortgages should be reduced an additional 33% of the current monthly principal, and interest payment each month until the value of the home equals the unpaid balance of the mortgage, or up to 10 years whichever occurs first. Taxpayers should not be made responsible for any reduction in principle balances. The financial sector should take full responsibility for the cost of principal reduction, because of all the illegal things they did before, and after the financial crisis. Also for the damage they did to people’s lives. 

By lowering the unpaid principal balance monthly, instead of all at once, the home owner has hope that sooner than later their mortgage will equal the selling price of the home. They will not add the home to the foreclosure inventory. 

The financial sector will like the Ascending Interest Rate Mortgage, and monthly principal reduction policy, because the loan will remain a performing mortgage asset, and will maintain it’s highest possible book value. 

Both the lender, and the homeowner will give up a little for economic recovery. The borrower has lower payments on a faster declining mortgage balance. The bank, and investor are receiving mortgage payments on a larger mortgage than if they foreclosed on the home, and sold it in a depressed housing market.

When demand for homes increases, and prices are increasing, 1 to 2 percent a year, and with the unpaid balance of the mortgage decreasing 1 or 2 percent a year, the unpaid balance of the mortgage, and the value of the home will meet somewhere in the middle of the two factors.

The financial sector will save billions of dollars in foreclosure cost, and legal fees, they would otherwise be paying for investor law suites, mortgage buy backs from the GSEs, and government housing agencies, and homeowner law suites. Not to forget all the money that it cost to foreclose on a home, and the money lost selling the home in a depressed real estate market. 

We should start offering these terms to primary home buyers who want to buy a foreclosed home, to eliminate the foreclosure inventory. We should make the new mortgage available to all conforming priced homes after the maximum amount of the mortgage the government will guarantee is lowered. These terms would only be available to owner occupied single family homes. 

We cannot wait 30 years until all the underwater mortgages are paid off, foreclosed, or the homes are abandoned. We need an economic recovery NOW,…NOT LATER!! Each day that passes, kicks thousands of families with their children, to the curb. 

To increase aggregate demand in an economy you can also increase employment opportunities. Many of our jobs have been outsourced to other countries that have lower wages, less worker protection regulations, and environmental protection laws. President Obama wants to create a level playing field, more job opportunities, and make sure everyone is paying for the cost of providing the needed infrastructure for companies, and people to succeed. He also wants to eliminate the tax benefits for companies that move their businesses to other countries.

We must do more than eliminate the tax benefits to create a level field for production cost. To accomplish these goals the importing companies must help create that level playing field. If an company uses a country which pays less wages, does not have the same worker protection laws, or environmental protection regulations, the importing company should pay the differential in the cost of production between the two countries. This fee should not be retained by the importing country. The fee should be sent back to the exporting country, and then distributed to the workers, and environmental protection agencies of the exporting country to create a level field of production cost. Or, if there is a trade deficit it could be applied to reduce the debt between the two countries.

The other thing we must ask ourselves is: Why do we have these recurring cycles of deep recessions, higher prices, and economic bubbles about every eight to ten years?  Reducing interest rate increase risk. 

If you go back, and examine our recent economic history, you will find that since 1952 our economy has experienced a recession about every 8 to 10 years. Some times we experience a recession in a shorter period of time, like when the “dot com” bubble imploded. 

Eight to ten years is how long it takes for our economy to become over leveraged with credit obligations before the Federal Reserve “takes away the punch bowl” as they say. 

When the Fed tightens the control of credit, the resulting higher interest rates causes our economy to return to the recession cycle. It also devalues current debt by the precentage of increase in interest rates. If a person, or company has invested in a mortgage, or any debt with a fixed interest rate term, and say a 3.87% interest rate, which a majority of homeowners prefer, and the the Fed causes interest rates to rise 1%, the mortgage resale value can decrease by as much as 25%. This fact can create a crisis in the mortgage financial sector, similar to the crisis that destroyed the savings and loan companies of our financial sector. The Ascending Interest Rate Mortgage solves the higher interest problem we will be experiencing in the near future, and the income tax change that I will be discussing shortly will help prevent the risk of interest rate increases. 

The financial crisis, and the resulting Great Recession was caused by over-leveraging credit in our economy; be it derivatives, or home mortgages. They are both leveraged purchases, because they both control a large amount of monetary liability with a small amount of money. 

The financial sector does not know when to stop, nor does it want to stop, creating the product (credit) they produce. They will continue to make loans, creating money, as long as people are willing to walk thru their doors, or get on a computer, and are willing, and able to take out a loan, or use a credit card. 

When a factory produces too much product it becomes unprofitable to produce more product. When the financial sector creates to much of their product, it becomes more profitable. Too much credit creation causes prices to rise, and hard capital assets to appreciate. Therefor larger, and larger loans can be made, and larger fees, and more interest can be collected. 

Relying on the Fed to control credit formation, and inflation expectations with higher interest rate policies is a flaw in our economic policies. By relying on the Fed to control inflation expectations, we keep repeating economic history every time there is a recession, or the Fed does nothing with a credit bubble, and the credit bubble bust, like the primary housing bubble, which creates a very deep recession. 

Free markets are not perfect, as many people claim, especially financial markets. Financial markets have all types of people, and loads of money in them. The two things that are necessary to make a market, but both of them can corrupt a market. 

The financial sector created the financial crisis, even when they knew better. They had Congress change laws, and deregulate the financial sector, all in the name of free market theory, before they could put their plan into action, so they could maximize their profits, and not be charged with a crime.

Economic bubbles, and high inflation are caused by the excessive use of credit in our economy. The economy becomes unbalance by to much demand (credit), which is money, being created in the economy, insufficient competition, or not enough goods, and services are being produced by the economy. 

The question is, What is the best way to re-balance the economy, higher interest rates used by the Federal Reserve , or the income tax?  

My vote goes to the income tax. 

The Zero Inflation Taxation Policy will make our economy more productive, and more efficient in preventing poverty. It will help lower the amount of taxes needed to support social programs. It maintains demand more closely to the production capabilities of our economy, and maintains normal consumption demand during the economic cycles of inflation, and recessions. 

Instead of waiting for the Federal Reserve , the US government, or State governments guessing how to balance the economy with higher, or lower interest rates, changes in the tax code, or other policies, which are all monetarily, or politically motivated, the economy itself would automatically self balance, and tell us, the people, when it needs more money (demand) in the economy, or less demand (money) in the economy. 

The Fed has enormous power over our enterprise economic system. It controls the means of exchange of our economy. By tightening the money supply, it can kill an economy, or if it is too lose with its money controls, it can cause havoc in our economy. 

By using the income tax to control inflation, and inflation expectation, the people regain control of their economy again. The Policy prevents the necessity of the Fed to raise, or lower interest rates, which is very old tech, and very destructive to small businesses, the working, and middle class people of our economy. 

If the economy had excessive demand occurring, the excessive demand would be reduced from the top of the economic ladder with the income tax. Currently demand is reduced from the bottom of the economic ladder, with higher interest rates, when inflation is occurring, which increases the cost of the medium of exchange, which the enterprise system needs to function. 

Higher interest rates increase unemployment, and bankruptcy in the small business community, and in people’s lives. When small businesses go bankrupt this allows big businesses to get bigger, and gain more control over our economy, and our political representatives. 

With excessive demand reduced from the top of the economic ladder, by the income tax, normal production and consumption can continue without raising cost, and the price structure of our economy. Higher interest rates in turn reduces the competitiveness of our products in the world markets by increasing cost, which causes prices to increase. 

Higher interest rates increase poverty, government interest cost, and social liabilities. which increases our taxes, as more people become government dependent because of the increase in the unemployment and bankruptcy rate caused by the higher interest rates. 

The Zero Inflation Taxation Policy would work like this. During a recession, or normal economic times, the income tax code would remain as it currently is. Except to lower the rates as our economy became more efficient, and more people are included in the private sector of the economy. If inflation started to occur, based on a true consumer price index, that included a more complete basket of goods and services, the interest deduction would be reduced based on the inflation rate. At the same time the inflation rate. This policy would pertain to all businesses, and people, just like higher interest rates do. As inflation subdued, the percentages would change back to 0%. This would maintain the balance of the economy, without creating a recession as higher interest rate policies do when used by the Federal Reserve. 

People at the end of the year would correct the balance of the economy by paying a little less tax, or a little more tax based on the how the economy was operating and how their money was invested.

The balance of values between money, and hard capital assets would remain in closer balance each year instead of having a recession to re-balance the values every 8 to 10 years, as we are going through now, with the Great Recession of 2008. 

Using the income tax to control inflation, and inflation expectations will help raise the standard of living of all our citizens, decreasing poverty, and closing the wealth gap, by allowing people at the bottom of the economy to maintain the little piece of pie they have worked so hard to obtain.

In real estate you may have heard the saying, “Location, Location, Location!” In macro economics the saying is “Timing, Timing,Timing! 

Our timing for economic policy changes has been out of step with the economy for a long time.

We need to change economic policies based on how the economy is performing not on political whims. Congress cannot act fast enough to change the stimulus policies they have enacted during the recession cycle, to prevent those policies from becoming destructive to our economy, during the inflation cycle. This is why the “Policy” is guided automatically by how the economy is operating.

To create an economy that doesn’t create deep national recessions and national cycles of high inflation we need to end the Federal income tax code, and replace it with a State Gross Product Flat Tax to fund the federal government. The tax would be the same for all States. The State income tax form would have a line on it for the filer to pay a certain percentage of their taxable income to the Federal Government. We could there-by limit the amount of money the Federal Government can take out of the economy, and eliminate tax policies that cause a large majority of the people in all the States to do the same thing at the same time. 

This change in our tax system would empower the States, and the people of the state with the power to provide the needs, and services they wanted from their government. There are some things that the Federal Government should be responsible for to facilitate a better union, but when the States joined the union they became “indivisible”, not “indistinguishable”. 

The diversity of our people make our nation stronger. It is no different for our economy. Strengthen the differences of the states, to strengthen our national economy, and society. One size does not fit all. If each state adopted the Zero Inflation Taxation Policy, we surely would return to a “land of opportunity” again. All the states would not go into the cycles of inflation, and recession at the same time. Our economy would once again be the people’s economy. Creating a balanced national economy that would maintain the opportunities for people to stay employed, start businesses, and prosper by working at increasing, and maintaining their standard of living. 

To have these policy changes enacted the people must join together and focus on them alone. All the members of Occupy Wall St, Tea Party members, the Unions, and members of the working, and middle class must join together and support these three changes to our economic policies. 

We need to increase economic opportunities so the working class, and the middle class can work to improve their financial condition, and improve their standard of living by being able to maintain their accumulation of wealth thru the cycles of high inflation and deep recessions. Thus helping to end the misery of poverty, and decrease the large wealth gap between the impoverished, and the riches 1% in our economy. 

We would still have a long term capital gains tax rate to reward productive investment, and to encourage risk taking. The value of money would increase during the inflation cycle, just like raising  rates do, because of the decrease in the tax rate on savings and money (debt) investments, without increasing cost of production and consumption.

When the tax rate on saving, and money investment is at the same rate as investments in hard capital investments, the of money (debt) as an investment will equal an inflation expectations investment. This automatic change in our tax code will allow production the time it needs to balance supply with demand, reducing inflation expectation investments which causes prices to increases, and higher inflation rates. 

Leonard C. Tekaat, aka First Occupier is an economic scholar, author, and retired small businessman with over forty years experience in home financing, and real estate investment. He has been working on changing a flaw in our economic policies, that continuously widens the wealth gap, since 1981, when he wrote the book , “Inflation The Economy Killer”. He is Chairman of a special Committee For Economic Reform and A Better Economic Future and a former candidate for the California Congress. 

For more information go to: www.foreclosurecrisissolved.wordpress.com or www.recoverygovforthepeople.wordpress.com/

ARE YOU UP TO IT. DO YOU WANT TO CREATE AN ECONOMY WORTH OCCUPYING FOR YOURSELF AND YOUR POSTERITY? WHERE YOU HAVE THE OPPORTUNITY TO SUCCEED. LET’S NOT JUST SAY,…NO,….. LETS SAY… YES!!!

Remember what I said, “Change only comes about when you have a “Plan” which benefits all parties that are involved. The individual person can see how it will help their situation, and they are willing to stand up for themselves, and unite with others to be heard.”

We must demonstrate in front of the local branches of the big banks, and the head quarters of Fannie Mae and Freddie Mac. We need to make the message load, and clear by carrying signs demanding the financial sector adopt the Ascending Interest Rate Mortgage, and the monthly principal reduction policy to restructure all the primary home mortgages in the country.

To get the message out, demonstrations must be publicize by the news media to increase our voice. Call the media to let them know when, where, what you are doing, and why you are doing it. Make it very clear what you want the financial sector to do. Explain to the media that the restructuring, and principal reduction should not be paid for by the taxpayers. The financial sector should absorb any reduction of the principal balances, because of what they did to our lives, and our economy. Also, the financial sector will be saving billions of dollars in foreclosure, and other cost due to selling a home in a depressed housing market. The financial sector will also be benefiting from an improving primary home market, as the foreclosure inventory is sold to home buyers.

Hand out a flyers, so people can read it later, and have information about where they can obtain more information.

GOD BLESS AMERICA……. AND GOD BLESS YOU!!

Leonard C. Tekaat, aka First Occupier is an economic scholar, author, and retired small businessman with over forty years experience in home financing, and real estate investment. He has been working on changing a flaw in our economic policies, that continuously widens the wealth gap, since 1981, when he wrote the book , “Inflation The Economy Killer”. He is Chairman of a special Committee For Economic Reform and A Better Economic Future and a former candidate for the California Congress.

For more information go to: www.foreclosurecrisissolved.wordpress.com or www.recoverygovforthepeople.wordpress.com/

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