Stimulus To Stimulate Growth
2/1/09I abhor the concept of bailouts and stimulus programs. They tend to end up as Govt. fiasco's that cost too much and accomplish little.
But the simply fact is the US is facing the very real possibility of a complete financial system collapse and the destruction of our currency system. In fact, this end may be unavoidable regardless of what action is taken.
So assuming we are going to "do something"... and clearly we are.... below is My Plan. Some of this my own ideas... some from others.... but I do think this plan would actually work. I also know it would never be passed by our Congress.
1. Capital Gains Tax Elimination and Modification.
For 2 years the capital gains tax would be eliminated, but with conditions. This would be accomplished through the modification of the 1031 exchange rules. Capital gains taxes will be reduced to zero provided that the full amount of capital gain is rolled into a new capital investment in one of a set of approved categories including real estate (residential (owner occupied or investor) or commercial), direct business capital investment, education, or other tangible capital investments.
Re-investment of capital gains from the sale of tangible assets into intangibles such as stocks, bonds or commodities would be subject to regular capital gains taxes.
2. Infrastructure Investment.
$150 Billion to be spent on infrastructure nationwide including electrical grid, bridges, roads, community redevelopment, alternative energy and other projects aimed at creating jobs and improving the nations ability to compete globally.
3. Stimulus Tax Rebates.
Individuals to get $500.... married couples to get $1,000.... families with kids to get $1,500. These funds will NOT be mailed out in check form nor direct deposited. Instead, debit cards will be mailed. The debit cards will be valid for purchase transactions only, no balance transfers off the cards are permitted. The debit cards come with a 3 months expiration date.
The purpose of this kind of stimulus is to spur spending, doing this via debit cards that expire will ensure this objective is reached.
4. Conforming Mortgage "Streamline" Refinance program.
Fannie Mae and Freddie Mac will be placed under the ownership if the Federal Reserve which will oversee their operation and fund their bonds until such time that both companies are returned to sound operating functionality when they will be sold.
Utilizing the direct funding of the Fed, the GSE's will offer a new streamlined refinance program. Any homeowner with a mortgage can apply. A minimum credit score of 650 is required, borrowers must fully document their income and qualify with a debt to income ratio no higher than 40%, and employment in a given field must be verified for at least 2 full years. Qualified borrowers can refinance all existing mortgage loans into a single new 30 year fixed rate at 4.5%. No appraisal is required and no loan to value restrictions will exist. No mortgage insurance will be required, all loans will be held by the Fed until maturity.
The GSE's will also bring back other loan programs that have long histories of success in the marketplace but which have vanished today as a result of knee jerk underwriting restrictions. This will include Stated Income loan programs, restricted to individuals who can be fully verified as having been self employed for at least 2 full years and with a credit score over 700.
Any borrower who uses the new streamlined refinance program and subsequently goes into foreclosure without documented proof that the foreclosure was due to hardship beyond their control (lost job, medical catastrophe...) will be required to repay the difference between the loan balance at foreclosure and the ultimate price the Fed liquidates the home for. (this provision to prevent people from choosing voluntarily to walk away later simply because they may still be underwater).
The GSE's will also remove all restrictions on the number of properties an investor is allowed to own and professional real estate investors who can document 2 or more years of successful rental property managment and fully qualify based on income and credit will have access to special 10% down payment conforming loan programs.
5. Home Buyer Incentives.
Special loan programs will be made available through the GSE's to purchase bank owned foreclosed homes with zero down payment. Buyers who can fully qualify based on income, have a credit score over 700 and who are purchasing the home as a primary residence can qualify for 0 down payment financing. This program will be in place for 12 months only from the time of enactment.
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Do these things.... the economy would recover and the financial system would work its way out.
#1 would make Republicans happy.... and it would definitely stimulate lots of economic activity and investment. I see no losers on that one.
#2 would make Democrats happy and the amount is enough that they could fund a bunch of their liberal pet projects keeping the far left placated.
#3 Gets the economic ball rolling. If spending is what is needed.... then this would clearly get the spending ball rolling. Dems and Repubs would both like it, after all politicians all love handing out candy.
#4 Goes straight to the heart of the problem: Housing. Even though rates today are very low, most folks cannot qualify because of high loan balances coupled to declining property values and absurdly tight loan underwriting guidelines. Allowing everyone to refinance to a very low fixed rate mortgage is like an instant tax cut. Lower mortgage payments equal increased consumer spending. This would also get home owners out of dangerous adjustable rate loans and consolidate all the higher rate second liens and adjustable equity lines of credit.
As all of the existing mortgages are paid off through the refinances, the massive books of mortgage backed securities and associated derivatives would no longer be toxic assets clogging banks as they would cease to exist as the loan servicing pools are reduced.
This initiative would do far more to fight foreclosures than any mitigation effort. If the foreclosure problem is to be solved, efforts must be aimed at preventing tomorrows foreclosures, not trying to somehow fix yesterdays!
#5. The housing market started all of this and its not going to get better until the housing market leads a recovery. A bottom must be put into housing values and this cannot happen until all the excess inventory is absorbed. Efforts aimed to getting people into the housing market have to be promoted but at the same time the historical relationships between housing prices and income have to be maintained.