Anatomy of the 2009 Economic Crisis: Layman’s Primer 3

Wall Street is in the toilet, and may be flushed even further down. But much of what happens in the stock market is driven by the psychology of investors. Are investors happy? Not right now. How can we make them happy and restore confidence in the economy and financial markets?  More importantly, are consumers happy? Not right now.

Changing the consumer mood, from pessimism to optimism is the most  important key to revitalizing the economy and financial markets. Investor confidence will then follow on the heels of consumer confidence.    We must have an urge to positive action rather than the inaction we have today in the financial sector.

So, lets take a quick look at the sequence of events that got us where we are.

 It’s all about the bank and mortgage company’s sub prime, action pay mortgage instruments.  And they are getting bailed out for their mistake. Wrong. To get the housing market going again, Obama’s stimulus package must allocate much more money to the foreclosure problem.

The $75 billion homeowner assistance parcel, in the stimulus package is insufficient. At least half of the 2nd portion of the bank bailout fund of $350 billion should be added to the $75 billion, so that at least $250 billion is allocated to handle the homeowner foreclosure problem.  This is a call to positive action, not the banking inaction we see now, and will begin to create the optimism the country desperately needs to move ahead.

Specifically, we must stop the 9,000 daily foreclosures that are happening as we speak, and clogging up the housing market. Here is what needs to happen now, while the policy-makers in government are setting up a plan of action for the proposed $250 billion homeowner foreclosure fund.

1.     An immediate moratorium on all foreclosures, similar to what J.P. Morgan Chase & Co., Citigroup Inc. and Bank of America Corp. have committed to, while the government works on a financial stability plan. However, the moratorium should be extended to mid-year from the present March 6,  2009 deadline.

2.     Strong mortgage modification plans must be implemented, and since the banks and mortgage companies will not do this voluntarily, it will have to be required.  Not just lower interest rates and payoff period extensions, but principal forgiveness as well.

3.     And Principal forgiveness is justified since the carrot of the sub prime pay option plan enticed people to refinance higher mortgage balances to get more cash by reducing their equity in their homes. That was the bank’s bad decision. Now they need to face the music.

4.     Any foreclosure plan should include the rewriting of sub prime, option pay mortgages so they can not reset at higher interest rates. Larger principal balances associated with increases from unpaid interest should be removed from balances. These bank losses and losses from other principal forgiveness efforts, can be at least partially paid for with the $250 billion homeowner foreclosure fund.

5.     So, the banks will get bailout money from the $250 billion homeowner fund, but it will be earmarked for principal forgiveness, rather than just a big chunk of funds that has no specific purpose as they are receiving now in their $700 billion bailout package.

6.     Now, for those who feel that we should not assist homeowners that overspent their budgets, and perhaps were too greedy, lets put their concern to rest. After all, taxpayers are funding the massive bank bailout, and the banks were greedy with their sub prime mortgage instruments. So we can rest our case on that, can’t we?

It is time for action and optimism now, so let’s get started.