It’s up to the United States Congress to Decide
Whether They Want a Recession, a Depression or Worse …
CEO - Identity Branding Forum
There is one question-- separate from all questions asked daily about the financial chaos engulfing the USA economy-- that matters most and should be addressed immediately by U.S. lawmakers. Do the lawmakers want this to be a recession or a depression? It’s their choice. All other questions and issues, as critical as they might be, don’t come close in level of importance. There is nothing that can be done to avert the recession the USA is experiencing, but Congress’ immediate actions will determine if the economic crisis is a recession, depression or great depression or worse. It truly is up to them. The key element that separates these possibilities is “fear”. Diminishing fear is where Congress must focus. Let me explain.
Recent news broadcasts reported that one in ten U.S. mortgage holders was at least 30 days past due on their mortgage. That is terrifying news. If we believe respected psychologist Abraham Maslow’s Hierarchy of Needs, the basic need of safety (of home, property, employment) must be met before anyone can meet or concern themselves with higher-level needs such as belonging, self-esteem and self-actualization. The fear felt by everyone—not just the families facing immediate foreclosure actions, but their neighbors, co-workers and friends-- is spreading, threatening everyone’s need for safety. This is where Congress must help.
Let me be blunt: bankers and economists are generally not good psychologists. My guess is they’re lousy psychologists—they work with numbers, not people. The USA, and the global economy, needs a plan that focuses on the psychological need to reduce (and hopefully remove) the fear and uncertainty caused by the sub-prime meltdown. In other words, if we don’t concern ourselves with the “people” part of the equation, things will get worse and stay there. If the USA Congress doesn’t address “fear’s cause” directly with the only ones who really matter—the one in ten homeowners facing foreclosure, and the ones soon to join their ranks-- the downward spiral will only increase in speed. USA Congress can stop the meltdown, if they do it now. So what is the first step?
Keep people from losing their homes
The USA Congress needs to ensure people remain in their homes and retain their mortgages, regardless of the impact on loan portfolios. Matter of fact, I think it is the main thing that can stave off a Great Depression.
The USA Congress shouldn’t center on the bankers as the solution, as is the current approach; bankers have demonstrated that their only concern is their bank and themselves - isn’t that what bankers always do? We should, instead, focus on the homeowner, for the panic will stop if all homeowners feel safe. The bankers’ greed coupled with deregulation is what got the people in the USA into this mess. I will address the bankers more in a moment. Keep in mind the main effort must be to bail out America as a people and a nation, not the banks. The remedy is to focus on the fear and what needs to be done to curb it. To spend time, energy, and taxpayer funds worrying about bailing out additional financial institutions rather than working to avoid the real possibility of a great depression is like rearranging the deck chairs on the Titanic.
The banks got greedy
The USA Banking deregulation and greed itself allowed banks to get greedy. In some ways you can place part of the blame on deregulation. But placing blame and re-regulating won’t fix what ails the USA economy. Sub-prime lending, in and of itself, is not the culprit. All of those real families in crisis had to have “good” credit or they never could have purchased their home. Deregulation and other lending practices and polices created situations where they were not required to put a huge down payment. This is not the fault of those who wanted their piece of America’s real-estate dream. And we cannot dump this crisis back on them now. Banks chose lax lending policies, rooted in greed, so they could obtain more loans and profits. We cannot blame those who lost their homes or are about to lose their homes and who had good credit and paid their bills on time—including their mortgage—until their mortgage changed as a result of the policies set forth by these institutions and the support of Wall Street in selling those packaged securities.
There were many causes for the change. The types of loans given often created the problems and they weren’t just given or offered to only sub-prime borrowers. Some loans had an escalation clause where the interest rate and payment was low for the first X years and then increased, essentially making the home completely unaffordable for the buyers. Others had an adjustable rate mortgage and the bank increased the rate. Some were given only a five-year mortgage and told they would need to refinance at the end of five years—and with their solid payment history they were assured of being refinanced. They weren’t told it would be at a higher rate—which the lenders knew at the time of the original deal. Others had a balloon payment at some anniversary date that came due. There were pay-only-the-interest loans and others.
Remember, until the increase in their payment, these homeowners, for the most part, made their payments on time and had good credit. Some call the mortgage industry’s practice bait and switch, or worse: Bait them into buying at a low-rate payment and then switch to a higher-rate once the borrower had been in the home for several years. The key point to remember is that the home-owner was already maxed-out on the amount they could pay when they purchased their home. Also keep in mind that until their mortgage payment increased, nearly all sub-prime owners had on-time payment history.
They had good credit
Recently, the US Congress decided to simply throw money at the problem. The rhetoric to the country was that the lender bail-out was to help homeowners, but the real focus in the eyes of bankers was in helping the banks. The banks took the money and almost none of it trickled down to homeowners. Consequently, fear increased across America. Congress got mad at the banks, of course, but very little else happened. As a result, the problem has now spread. It is no longer a “banking” or a sub-prime problem. It is now a “confidence in the whole economy” problem. It is based on heightened fear and uncertainty, and it has spread to the rest of the world.
Even with the bail-out money, banks are continuing their same strategy:
Rather than to admit that the mortgage loan structure is the root of the problem, banks continue to foreclose as though the problem is the individuals who cannot make their payments. After all, they have a contract. They are not concerned with the families they harm or the serious consequences for the US - and the world. The bankers’ only problem, in their minds, is the growing list of foreclosures, their balance sheet and the blood loss of their companies. And the rate of foreclosures is still increasing daily. It is up to US Congress to restore confidence by removing the fear and anxiety before it is too late.
How do you really restore confidence in the economy? It really is simple. Make people feel safe in their home as Maslow’s Hierarchy of Needs states.
The answer is simple if you want to fix THE problem I’ve offered. If you want to fix a series of other problems, such as bailing out banks that knew better, helping them capture profits or remain solvent or, worst of all, placing the blame elsewhere, then it isn’t simple—it is impossible in the near term and a depression is inevitable.
Whether or not financially “thin” mortgage holders should be in their homes or not is not the question any longer, although at some point that can be addressed. Right now the main issue is public confidence in the financial system. How do you restore it? Here is a simple, but workable solution that will help 80% or more of the mortgage problem in the US.
The US President puts in place TODAY a blanket policy that freezes homeowner’s monthly payment at the original amount of their first payment on their mortgage—before any escalation or increase. There is a precedent for the President to freeze and roll-back prices—do it NOW.
All mortgages that are over 60 days past due are rewritten—removing any increases and balloon payments. Fannie Mae and Freddy Mac, in the USA, are the only ones who perform this, and Americans now all own a piece of these companies and should have stockholder authority to demand this action.
The only condition on the homeowners: A family has to have been in their home for two years with a history of on-time payments prior to the current financial crisis. The loan term is then automatically extended to 35 years, versus 30 years, at a fixed-interest rate somewhere between four and five percent. The five additional years added to the contract should cover most of the original value lost in the rewrite. The bank takes the paper loss between the original loan and the new loan amount value. People stay in their homes that they have been in for years, and they feel safe. Their family budgets are intact. Confidence returns and things return to normal. Families can actually spend money on meeting their other needs and stimulate the economy. It is that simple. It is not political. It is about basic human needs.
Banks should have done this without prodding and without government involvement when the entire financial crisis began. Believe it or not, it makes good business sense. Losing only 20-25% of the mortgage paper value and regaining a big chunk of the loss in the last five years of the note is an acceptable strategy for even the most conservative institutions. Right now, foreclosed, bank-owned properties are currently selling from 40 to 60% off previous market value in the Phoenix area, Arizona State, USA. I am told that is the case nationwide in the US.
Had banks done the socially responsible and ethical thing rather than relying on the legalese of their contract and the paper value of the impossible mortgage contracts, I believe most of the sub-prime dilemma could have been avoided.
But what do we do today?
We need to be concerned about the people. We need to do the right thing.
How US Congress deals with the cascading set of problems that remain and have followed the financial collapse is a whole separate issue. The time to be concerned with them is after we’ve eliminated the fear. If you attempt to fix the lesser problems first, it is just a band-aid effort that won’t stop us from having a serious long-term depression. But, institute this plan and then Congress can tackle the other problems one at a time. President Obama’s investing in America will aid greatly in fixing these other issues.
Once people’s budgets are stable, they will feel safe and secure in their homes. Consumer spending will resume, pumping life back into our economy, restoring health and vigor to the marketplace, proving it was only a recession. Then everyone can squabble over how to treat the remaining maladies.
Bottom Line: US Congress must act now. If we don’t curb the fear NOW and let it spread, the mental depression caused by the downward spiral already accelerating and human “herd-effect” reacting to the fear with a global population of over six billion people will make the Great Depression look mild in comparison.
The same applies to the rest of the world. Most governments are more concerned with the solving the institutions problems than addressing the people’s fear.
