The Current Economic Mess
How did we get into it,
and how do we get out of it?
By Wendell L. Waite, CPA, MBA
Who’s to Blame?
If you really want to blame someone, then blame several of my little clients, not unlike the rest of the world, who speculated in the 2005-2006 real estate market by taking out 2nd TD loan on their residences to finance additional investment properties in order to “flip them.” That is, their goal was to purchase and then quickly sell real estate for a quick profit. And their hope was to make lots of money. Greed is another word for this process. At the time, there were many real estate seminars in town teaching the principles of how to make money by “flipping property.” Even Donald Trump had a seminar, and look how many bankruptcies he has been through.
Some of my clients were successful, but the majority of them were not. In addition, the real estate market became over supplied because truly greedy builders, seizing on the opportunity of the expanding market, built to their hearts content thousands of new homes that the demand could not absorb. Eventually, prices topped, nobody wanted to buy another home and rental properties became “leased up.” The outcome was disastrously simple. My clients had homes they could not sell nor rent at prices that covered their mortgages. So, they began to “feed them” out of their regular monthly income. Paying two to three monthly mortgages become very old, very quickly. Bankruptcy or foreclosures were the only recourse when you couldn’t refinance these properties. This all started to happen in Las Vegas, Nevada in early 2007 and was duplicated thousands of times over America in the months that followed. Unfortunately, what happened in Vegas did not stay in Vegas.
Now the newest gimmick in the lending market is the “short-sale.” Unfortunately, not enough banks are willing to use this method of reducing homeowners’ debts with a minimum of adverse credit impact. And it still doesn’t solve the problem of over priced mortgages, under priced houses, and “cash-poor” homeowners.
How Did the World Get Involved?
How did so much go so bad so quickly? It started with oversupplied real estate, bad mortgage loans, then mix this with speculative complex derivatives that mean nothing to anyone except a few important investors, mortgage insurance polices that can’t pay off, and a world of gullible people. In the middle of this are banks that made the loans, packing and selling them to the world. Add governmental agencies “breathing down the banker’s necks,” and you have a classic “banker’s deep freeze.” I can image every banker in the world not wanting to lend another dime to anyone, until he collected the last one. When a banker or anyone else walks into a dark room, you freeze and do nothing. Bankers are notorious for not lending when they don’t know what’s happening. And who in this world knows what’s happening. Combine this mystery with lots of heat from everyone and you got a great recession. Everyone feels it, but no one knows how to cure it.
One of the best explanations that I have read is the article written in the BYU/Magazine in their Winter 2009 edition (magazine.byu.edu). Mr. Peter B. Gardner brilliantly outlines the whole story and how the ripple effect took over many markets and many financial venues.
I was born at the end of the great depression, and I have lived through several recessions in my life time, but this one is the biggest and meanest recession ever. My humble suggestion is that we need to learn how it happened, why it happened, how to get out of it, and how to never get into it again.
How Do We Get Out?
Everybody has an opinion on how to get out of this mess. Unfortunately, they all can’t be right. I’m not sure that even President Obama, with all of his high powered helpers, has it right. I have the feeling that with the trillions that will be spent, that at the end of this golden rainbow we will find great inflationary pressures, not unlike President Carter’s fourth and last year in office. The interest rates were at 15% and inflationary rates were at 22%. It was appropriately coined the “misery index.”
Other than writing a thesis on Keynesian Economics for my Master’s Degree in Business Administration, what does this little old CPA from Las Vegas, Nevada, know anything about getting out of this gigantic economic mess? Perhaps, I could guess like the rest of the economists are doing?
Conclusion: Balancing Supply and Demand
My simple solution is to balance supply and demand. How do you do this when you don’t have time? You could spend a couple trillion dollars is one way, but you probably will pay an ugly price at the end. Let me make some simple, but rather poignant suggestions.
1. To bring balance to the demand of real estate, you need time. Time to clear out the bad mortgages and replace them with new mortgages. Give economic incentives to residential purchase such as the present $8,000 tax credit for first time buyers. Extend this deadline to purchase to December 31, 2010 so that people have the available time to purchase. You bring a lot of new buyers to the market place. I am not sure how solvent they would be, but it’s a start.
2. Extend bad mortgages to 50 years and reduce the interest rate in order to lessen the monthly payments. Most houses in America, where these mortgages are encumbered, will be refinanced or sold in less than 5 years and that cleans the bad mortgages off the books. The bank could easily lend at lower rates because their present cost of money from the Federal Reserve approaches zero. Any rate they charge makes profit.
3. Next, buy these “toxic assets” from the banks or whoever owns them. Through a quasi-governmental agency, similar to the RTC in the early 1990s, you could buy these “toxic assets” and sell them later when the market is balanced. That was the original idea of the TARP program before it was used to save financial institutions from going broke. It is interesting to note that in less than five years, the original RTC sold their assets for a profit of a quarter trillion dollars. The US government was the recipient of that profit.
4. The next step is the elimination of overspending and duplication of the federal and state programs. This duplication and waste of governmental programs is astounding. Former Governor Mitt Romney claimed in his campaign that he could pay for medical insurance for everyone in the country by eliminating the duplication of programs in the federal government. For the man who saved the 2002 Winter Olympics and turned the State of Massachusetts finances around as governor, it is doable.
From a smaller point of view, I know personally of that duplication and waste when I was in charge of a little volunteer book program for a charity in Clark County that collected used text books from the local schools. I collected the used text books from the schools and delivered them to the charity that sent them throughout the world to be used by students in foreign countries. In a two year period, I and my team collected over $5,000,000 of books that could have been recycled back to the school system. The problem was that these books, which were relatively new, were not exposed to other teachers that could have used them in their classrooms. That’s right, there was no centralized book program to tell the teachers in the system which books were available or could be reused. So, taxes paid for new classroom text books each year and millions were lost.
And the waste goes on and on.
5. Why can’t we use a volunteer program of retired executives that know how to manage systems and businesses to review and make suggestions in reducing every aspect of government—a Hoover Commission approach? Why can’t we give cash bonuses to governmental employees on suggestions they give on how to improve services at lower costs? Why can’t we think out of the box? Why do we live in the arena of only increased taxation? Has anybody thought that reducing costs of governmental activity may in reality render more service than expanding the program?
And the suggestions and ideas go on and on. Is anyone listening?
Waite & Associates • Certified Public Accountants • Las Vegas/Henderson, Nevada • 702-733-2727 • 800-666-6250
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