Time to Work on Plan B

Weekly initial jobless claims continue their rise, overall unemployment stays flat to last month, Congress just passed the "bailout" which the President has signed, so now what?

I have heard the statement "From Wall Street to Main Street" many times recently on the local and national news when reporters or "experts" are referring to the current economic crises. Just because we have an economic rescue package does not mean that the economy is going to quickly turn around. It is going to take a while for the impact of this economic "bailout" to help aid the economy. The main purpose is that it will remove the "toxic" assets from banks' balance sheets so they can start to lend money to other banks (at lower rates than the recent record high rates), small businesses (many that use short-term loans to make payroll) and ultimately to consumers. These economic crises took a while to develop. I was emailed an article this week by a senior manager in our organization that was from the New York Times in September of 1999 that reads as though the author of the article has channeled Nostradamus' predictive powers. In the article reporter Steven A. Holmes wrote, "Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits." Later in the article he declares, "In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's." Maybe I could call Mr. Holmes to find out when my beloved St. Louis Rams will win their first game!

Congress has taken a positive step in aiding the prospect of financial recovery, although it will be a while before we start to see the effects of the bailout make its way down to "Main Street." Congress should continue to work to find additional ways to help those on "Main Street." I read an advertisement in the Wall Street Journal today that was a letter from the CEO of Interactive Brokers Group, Thomas Peterffy, in which Mr. Peterffy recommended that the "bailout" be "fixed" so it would simply pay the first $250 of every home owner's mortgage in the US for the next five years (at a cost of about $10 billion monthly). I find this idea very intriguing. You would think that it should have at least hit the radar screen of CNN or Fox News? In the advertisement Mr. Peterffy points out that his idea is "progressive" and would cover a larger portion of the mortgages for those with "modest homes" verses high-dollar estates. Maybe Congress will be wise enough to continue to work on this issue and develop contingency plans in case our economy continues to slip, even in the face of passage of the "bailout." Let's hope we do not have to go there, but it would be refreshing, reassuring, if we knew that Congress was hoping for the best but planning for the worst. Plans such as that put forward by Mr. Peterffy need to be examined and considered when it comes to putting together the proverbial Plan B.

How do you feel about the "bailout" package, and do you see it as a positive or negative move by our leaders in Washington?

Come on Congress...

Let's all keep our fingers crossed that our congressional leaders can come together and get a bill passed that will provide the support our economy needs to be able to work its way out of the current pattern of poor performance. In fact, the deal that the President has put on the table presents a great opportunity for our government to potentially make money on the initial $700 billion dollars of taxpayer money it will invest in our economy. Profits could be used to pay down the deficit, help salvage social security for future generations (even my Gen-X generation), or reduce taxes for all Americans. If the investment does what it is supposed to do, the government should at a minimum make back the initial investment. What has to transpire to make a profit on the deal is that the anticipated number of Americans defaulting on their mortgages would need to decrease. This will come to pass with companies working with (or even being forced by the government to work with) homeowners on the brink of losing their homes in restructuring their loans. Americans are hard working and innovative folks. Nobody buys a home with the hope of losing it, although when it comes to purchasing more home than you can afford, I do not place all of the blame on the banker or mortgage industry folks. Shouldn't some of this responsibility fall at the feet of the people who signed the loans in the first place? Maybe it is my conservative Midwest upbringing, but isn't it prudent to always try to live a little bit below your means? I understand that circumstances change, and I am deeply empathetic to anyone losing their home (especially the home that they live in), but I do believe that people who extended their finances and bought second and third homes with hope of flipping these properties for profits should have to deal with the consequences of their investment strategy. Okay, I'll get off of my soap box.

What I find interesting about the $700 billion economic rescue plan is that (according to President Bush) it will lower the threshold at which people can borrow money. This should immediately help families to be able to refinance at lower rates, spread their mortgage out over a longer period of time, lower their payments, reduce the number of foreclosures, allow for small business growth, etc. But, a lot of this is going to be dependent on the lending institutions’ willingness to lower or eliminate the refinancing charges (that can quickly add up to be more than $10,000) or the confidence the institution has in a small operation’s business plan. Let's hope this becomes reality once the final bill gets passed by Congress. Another "but" is that lower thresholds on borrowing is one of the major contributing factors to getting the economy in the mess it is in today. I am not sure that recreating the environment that led to this current economic state of "crises" is the right way to fix our economy long term. Hopefully, lending rates will drop and lending institutions will learn from the past and not make risky loans. What I do know is that Warren Buffet has (according to his recent appearance and interview on Squak Box) the utmost confidence in Treasury Secretary Henry Paulson to make the right decisions to get our economy back on track. He even put his company's money on the line with a huge investment (around $5 billion) in Goldman Sachs due to his confidence not only in Goldman, but Paulson and Congress's ability to get a deal done on the so-called "rescue package."

Let's keep our fingers crossed that this is the shot of adrenaline that our economy needs and we can get back on track for growth across all sectors and industries. It should be increasingly apparent to our elected officials in Washington that they need to get a deal done upon the release of the current week's jobless claims, the highest in seven years. If I could make a recommendation to Congress, it would be that while they are finalizing and passing into law the current bill, they should have a committee working with the best financial minds in the US working on a contingency should we need one.

What is your opinion on the $700 billion economic "rescue plan?"

Two Steps Back

I am sure you have heard the old saying, "One step forward and two steps back." That is, in my opinion, what the United States economy has been doing over the last several months. It seems as though we start to witness improvements that create enthusiasm that our economy is showing signs of beginning to pull out of the downturn, and then... Wham!, more poor economic news such as last week’s release of the “Employment Situation,” which reported the national unemployment rate at a new high of 6.1%, on the heels of the most recent initial jobless claims report, which spiked back up to 444,000 (although all of the labor news wasn't bad given that in healthcare we have added 367,000 jobs year-to-date). Another good indication of how fast economic sentiment is changing is the fact that all last month experts focused on inflation, and now their concern has changed to deflation. So what are today's headlines, and how will today's changes impact on our economy, good or bad?

Today's headlines are all about the Fed bailing out mortgage giants Freddie Mac and Fannie Mae. Is this good or bad? Wall Street liked the news early as stocks rallied. Most of the articles I have read indicate that this will lead to lower interest rates for would-be homeowners. It would be even better news if it means that folks who are in a tough position given that their short-term rates have adjusted higher could refinance and stay in their homes. Unfortunately for these individuals, the lower rates are going to come with a much higher scrutiny over credit ratings, etc. There is also good news in the fact that folks who are currently living with an adjustable rate, interest only, etc., kind of mortgage who have maintained good standing and have not missed any payments will be able to capitalize on this move by the Fed to lock in a low, fixed rate. If you are in this position be ready to strike once the impact makes its way through your financial institution.

Could this move be the first step in solving the housing crisis after last week's report of foreclosures being at an all-time high? Not yet. It is going to take much, much more to recover, but as I mentioned earlier in this article, it was once again time for the "one step forward" after taking "two steps back" last week.

I personally think that lower interest rates will spur the purchasing of both new and existing homes. Yes, I said it, and, yes, I am an optimist at heart. Even with the high unemployment rate, there is still a group of would-be first-time home buyers that have been waiting for the perfect time to step into the wonderful world of home ownership. I also believe that there is another group, one that is focused on investing, who will also take advantage of the lower rates to scoop a deal on a second home or vacation rental to pad their portfolio with good tax advantages in planning for their future. If both of these scenarios come to fruition, it will be a nice "step forward" again for the economy which could even extend into the labor economy.

Keep a close eye on mortgage rates if you are a potential first-timer, or if you are in the market to refinance. All of the articles I have been reading foresee the 30-year fixed dropping below 5.5%. Let's keep our fingers crossed!

What kind of impact do you foresee the Fed's move to take over the mortgage giants having on your local economy and local labor situation?