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What's the deal on this economic stimulus??? Good, bad or indifferent...

By
Mortgage and Lending with Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 NMLS ID# 158606

One of my great friends, Ken Webster, or Sir Kenneth to the common man, called me today to B.S. and talk about life, love (married people having babies), and our economic stimulus.  After sharing with me a brief overview, I told Ken that I'd love to hear his rant and rave.  He said...funny you should ask, Bettag, because I've written all of my printable thoughts down on paper.  He e-mailed it to me.  I told him that if it was stimulating, in a purely non-sexual way, and appropriate (of course), that I would feature him on my blog.  So, I am no inviting Mr. Kenneth Webster to publish his thoughts to the greater world, North America most appropriately. and more importantly, giving him a special invite for which you can comment as to whether or not he'd be worthy to join the classy group of AR bloggers.

Ken....

On Wednesday morning, the 23rd of January, American homeowners could borrow money on conventional conforming loans at a rate of 5.375%.  This lasted for about 4 hours.  At this same time the 10 year treasury was yielding roughly 3.3%.  This was the first time since the mid summer of '03 that mortgages were so cheap and 10 year notes yielded less than 3.5%.  What caused this?  The answer is not that the Fed lowered rates (rather, this was a contributing factor to the bond rally coming to a swift halt).  The reason is that Washington acknowledged there was a problem.  Why did it last such a brief period of time?  The federal government took decisive action and put immediate inflationary pressure on the economy which scared off those looking for opportunities to loan money to US homeowners and the US government on extremely advantageous terms.  The savings from these loans relative to the status quo financing would have begun injecting an ongoing stimulus into the US economy, largely from foreign investors, and saved the US taxpayer billions of dollars in both the short and long term.

 

On Friday, the 18th of January, the news out of Washington was that an economic stimulus package was in the works.  The acknowledgement that such a package was needed was a first and sent shock waves through the world markets on Monday, Martin Luther King Jr. Day, while our markets were closed.  The world-wide sell-off left investors with an appetite for American bonds; a safe place to ride out a recession.  However, before our markets even opened the next day, the actions from the Fed's emergency meeting were announced and tamed what was to be a large equity sell-off.  This did not stop the bond rally.  It kept going until early afternoon when the news that regulators were getting involved in a bail out plan of those that had insured bonds which never should have been underwritten in the first place.

 

It took three separate significant actions on the part of government entities to alter the natural order of economic cycles.  First was the ongoing hype pumped out of Washington about a stimulus package that amounts to a watering down of the money supply with greenbacks which will not have existed prior to their printing and circulation in the US (it is progressively worth less and less anywhere else anyway).  Second was the Fed slashing rates making it less expensive for businesses from all over the globe to borrow money here in the US (an attractive place for everyone else in the world to borrow given the Dollar's ongoing precipitous slide against every other 1st world currency).  Third was the prospect of a bailout for bond insurers.  Combined, these were enough to convince investors all over the globe not to loan Americans' money and to instead put their bets on equities; a safer place to ride out an inflationary period here in the US.

 

Since the Summer of '03 the average rate for a 30 year fixed mortgage rates has been about 6.1% according to data from freddiemac.com.  During that time span, data from the National Association of Realtors indicates that approximately 34,000,000 homes have sold.  If, the average home price is about $200,000 and 2/3rds of the homes purchased were financed with a loan of 80% of the purchased price, then about $3.6 trillion in home loans are out at rate of 6.1%.  If the bond market rally could have been sustained (i.e. the talk out of Washington acknowledged the problem and a commitment to fight inflation) for a period of 8 weeks at the levels we were at, much like in '03, these loans could have all been refinanced and reduced by .75%.  This would have freed up over $26 billion annually for the American economy with no intrinsic inflation.  Much of these deals would have been provided by foreign investors and none of it would have come at the direct expense of the American taxpayer.  The lack of inflation would have curbed the run up in energy costs and many other commodities prices which would be a significant relief to the average American, too.

 

Perhaps such a relief to the average American would help him or her break out of a negative savings rate.  Low interest rates on mortgages would help stabilize the housing market as much as anything else would as well as help those in sub prime mortgages qualify for less expensive loans.  Lastly, as a taxpayer, I am all for the government refinancing it's debt at lower rates at the same time.

 

Instead, we are choosing to inject $100 Billion into the economy one time.  The American taxpayer gets the bill.   Since the American taxpayer can't pay we will just add it to the money supply and inflating our currency.  Since our dollars are not worth as much, the federal government will have to pay a higher rate to service it's dollar denominated debt adding to the burden of the American taxpayer.  Also, get used to paying $3.00+ at the pump because our imported oil is not going cost less in dollars.  The only benefit for the housing market is to be an increase in the jumbo loan limit . . . too bad buyers don't cause a chain reaction upstream or this might do some good.

 

The idea behind the stimulus package is not entirely faulty.  But this isn't 75 years ago either.  We are not our only source of funding.  So, when the entire world lines up at our door on a Tuesday morning ready to convert their currency to dollars and loan us money at incredibly advantageous terms for the foreseeable future, terms that will create savings for Americans and stimulate our economy in much more efficient and sustainable ways than we can do by ourselves, let's let them in.  Let's take their deals.  Let's not give them every reason not to do business with us when it is good for us.  Then, after we have sold our mortgage backed securities and our t-bills, if that is not enough, then try some rate cuts and tax rebates if they are needed.  Since the world receives benefit when our economy is healthy and vibrant, why should we pick up the entire tab to make it so and not allow others to share in the cost with us?

 

Kudos Ken....you are a well thought individual and a stellar human being to boot.  Thanks for your thoughts bro!

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Comments (3)

Ginger Wilcox
Sindeo - San Francisco, CA
Now, that was a really good post/letter from your buddy Ken.  Obviously a very smart individual.  I am going to have to come back later and reread.  Excellent points.  The increase in the conforming loan limits could have a good impact in my area, but I can see where that might not be so helpful for the overall economy.  Very thought provoking.
Jan 29, 2008 02:05 PM
Richard Sweum
1st Security Bank - Everett, WA
I love this guy!  He's preaching to my choir.
Jan 31, 2008 02:01 AM
Larry Bettag
Cherry Creek Mortgage Illinois Residential Mortgage License LMB #0005759 Cherry Creek Mortgage NMLS #: 3001 - Saint Charles, IL
Vice-President of National Production
I'll let Kenny know....he's my little mofo stud!
Jan 31, 2008 03:48 AM