Feb 15, 2009

A convenient truth

THOMAS Hobson (1544-1630) was a livery stable owner at Cambridge, England. For the sake of being able to rotate the use of the horses, he offered college students the choice of either taking the horse closest to the door or taking none at all.Mr Hobson at least had the option of being charitable with some students. A tad over 400 years later, across the Atlantic, we’re in a situation where we’re truly presented with Hobson’s choice to not only tend to the ailing US economy in a spirit of nationalism but to be comprehensive in the approach for global good. In this age, there is no room for a trade war, and the more the ‘Buy American’ mantra wilts, the better it is for the planet.As one thought inevitable, the US economy further stalled as its GDP declined by a whopping 3.8 per cent Q4, 2008. This figure, nevertheless, shone as a bright light in some quarters as the expectation was worse. The redeeming feature was an ambitious estimate for goods and services of which we now have an over-supply waiting to be cleared.The brand new Obama administration’s stimulus package worth $787bn has just been approved by Congress. In the backdrop, we have had almost 1.7 million job losses in the last three months, with no respite in sight. The economy has shrunk primarily due to a decline in consumer spending. The matter of trust is paramount in one’s discourse, just as it is in economic dealings. The value of ‘animal spirits,’ the concept of public trust in one another and among participating parties as per Keynes, still thrives and seems to have picked up even more relevance. Banks have become over-discerning while lending.This credit crunch has left the market dry, with little, if any, option for resource mobilisation for businesses and asset acquisition for individuals. As people feel poorer and businesses under-capitalised, the tap slows to a trickle and eventually stops. We are at the fag end of that unfortunate eventuality.With rising unemployment, the picture gets that much more afflicted with a sense of incertitude. Not only are people losing jobs but, as a natural consequence in some cases, also their homes as they find themselves unable to make mortgage payments. One foreclosed home on a street devastates values in the neighbourhood, thereby further constricting credit supply to individuals as the home equity extraction option, a popular medium of financing interim needs, dissipates.Someone once said that an optimist was one who expected the gift to be the size of the wrapper. Similarly, anyone who thinks the stimulus package is a panacea to all ills is sadly mistaken. The onset of the Japanese crisis about a couple of decades ago and that of the US have some common strings. There was a stock market boom, with the Nikki closing around 38,000 at the end of 1989 (it’s currently hovering around 7,300) and also a real estate price level that proved eventually unsustainable.It’s déjà vu for the US if we go back to just over a year ago. The Treasury secretary Tim Geithner happened to be a young observer of the Japanese ruin and the obstinacy in pursuing aggressive initiatives to try to turn the economy around. This is the reason that the administration is rightly determined to work resolutely and not dither, and we would hope that the implementation of the package not only directly and forcefully treats the symptoms but also cures the disease.Given the hand we’ve been dealt, a well-serving stimulus package should focus on infrastructural improvements, home value stabilisation and middle-class tax incentives.First, spending money on domestic infrastructure is a good thing and is an opportunity to upgrade what should have been looked at anyway; it is also an excellent way to achieve medium- to long-term efficiency and employment goals and the funds need to be expended sooner than later to effect the flow of money into the parched systemSecond, individual loan modifications should be pursued proactively so we can stem the foreclosure rate; we can look at reducing rates, or elongating the mortgage term, or even forbearing a part of the principal, all in aid of a making the monthly payments affordable.Third, the package should encourage both people and banks in the purchasing arena; the quicker we clear the inventory, the sooner we will see the light of day. Treasury should look at indemnifying loans up to the conforming limit.Fourth, the Federal Reserve in coordination with the Treasury should look at bringing rates down across the board, up to the conforming limit at least, to four to 4.5 per cent for refinancing purposes as this will help the homeowners stay in their homes.Fifth, consideration must be given to any ideas for expediting the sale of foreclosed homes, including having domestic and international consortiums buying blocks of homes in return for the promise of excellent returns; it clears the inventory of homes, thereby helping the pendulum swing to the seller’s side and, assuming the consortiums come in with the cash required, retaining liquidity for needy borrowers. It also puts people to work in related sectors like title insurance, appraisal and property management.Sixth, if we wish for consumer spending to budge, tax incentives and rebates are essential to the echelon of society which has a higher propensity to consume. To further foolproof the mechanism, Treasury should consider issuing debit cards up to the amount of each individual rebate with an expiration date.I voted Democrat and consider myself a centrist, oscillating between the virtues of social liberalism and the prudence of fiscal conservatism, both within reason. The situational analysis reveals truisms that are timely for the moment. One does hope, though, that the package not only jump-starts the US economy but also helps sustain it for the greater good of the world.
By Mohsin Hafeez. The writer is a consumer banker in the US.

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