[evilgenius]

In the midst of this current collapse I thought it would be a good idea to start a new thread that gave us a chance to talk about our ideas for how to solve this mess. I'll post an idea I have and everybody can either shoot me down or bring up their own ideas. I'm a natural born doomer, so I guess I don't mind a lot of talk about how this mess is unsolvable, but the nature of this thread is to bring up ideas to the contrary so too much of that would be counterproductive, really.

My idea is that instead of propping up the banks to the degree that the government is that effort should be scaled back some and the money applied to a mortgage supplement plan. I think that all mortgages across the country should be rolled into a plan where the payments are reduced to an arbitrary level, say 4%. The difference between the new payment rate and the actual rate on the face of the mortgage documents would be made up by the supplement plan. In this manner both those in trouble and those not in trouble with their mortgages would receive the reduction. Those that are not in trouble would be likely to save some and spend some, thus providing stimulus at an effective level of the economy. Those in trouble would get a break for the duration of the plan. During this break the troubled mortgages would be audited in order to determine whether they are usurious. If they are determined to be usurious they would be re-structured to be affordable.

In this manner the credit instruments that underlie the derivative crisis would also be brought to a controlled rate of collapse that could be taken into account and the rate of return on the derivatives reasonably adjusted. The investments concerned can probably not be saved at this juncture, but they can be brought to an understood point of loss wherein an effort to fix that problem can be better understood.

What, you think I'm crazy to believe that anything can be done? What suggestions do you have?

[nobodypanic]

maybe it's just me, but i'd say that all mortgages are usurious.

BTW, interesting idea.

[mos6507]

I agree with forcing the interest rates down. The rate resets are the major reason people started defaulting. But we're so far into it that even those who can make their payments want out because their houses are now worth considerably less than what they paid for them. Any attempt to artificially keep housing prices at inflated levels will keep new buyers on the sidelines. New lending practices may turn people with otherwise good credit away just because the only way they'd be able to buy starter houses would require too large a share of their monthly take-home pay. Or if such people are allowed to buy in, such people who are living hand to mouth will likely suffer a layoff and lose the house also, compounding the problem. So no matter what there has to be a blood-letting in order to bring house prices back down to fundamentals.

[Fishman]

What, you think I'm crazy to believe that anything can be done?"
Yes


"What suggestions do you have?"
None, enjoy the ride down, as has been stated before, it's better with lots of popcorn.

[jupiters_release]

maybe it's just me, but i'd say the monetary system is usurious.

[Tanada]

My solution is much much simpler.

Make compound interest ill.

All debts can receive only simple interest over a fixed time period for the debt. If you have a 30 year house loan with simple interest you will pay the cost of the property plus the interest, which even at 10% is nominal compared to compound interest where you are paying far more than the cost of the property over the lifetime of the debt. In the old testament the followers of God were restricted to receiving 20% interest total on a debt. I borrowed $105,000.00 to purchase my home. Over the first five years I have paid $60,000.00 to my mortgage company. My debt for the home however is now $92,500.00. Taking out the taxes and insurance and other services that are lumped in with my mortgage I have paid approximately $40,000.00 in interest on my debt and only $12,500.00 on my principal.

While a Bank may consider this to be a fair system it was not always this way, at one time in America your loan was calculated in such a way that your interest was a small portion of each monthly payment, not the vast majority of it. For example when my parents bought the home I grew up in back in 1968 they got a simple interest 15 year loan. The amount of the debt plus 5% was divided up into 180 equal payments. There was no compounding of interest for the length of the loan. However if you missed a payment or were late there were substantial penalties. Now perhaps the fact that we lived in a small town where the bank President and Loan Officer were upstanding members of the community who were known on sight to everyone had something to do with it, but certainly you would be better off with a simple interest loan at 20% than the usury system of compound interest in common use today that resembles loan sharking more than lending.

[AlexdeLarge]

I'm not one of Karl Denninger's sycophants, but he has one of the best plans out there for the moment.

http://www.denninger.net/letters/genesis.pdf

I think if the bozo's in Washington proceed with bankrutpting the dollar, they should at least spend the "borrowed" money on something that will keep us warm and the lights on........

[Mominator]

It's interesting that it seems that most of the suggestions are that the banks take a hit. I'd agree, only I'd hedge it that it's not a crucial hit.

I think, yes, something needs to bleed. I think this blood letting could come from cutting banks amazing profits to a less amazing level. I could be wrong.


There needs to be a better identification system for mortgages at risk. People marginally at risk should have their interest lowered--like from 6.5 to 4 %
People at immediate risk should be evaluated for a 40 cent on the dollar reduction in debt load. Hey, this is what the bank would sell their bad debt for anyway. The bank takes that maximum loss (really, they might have recieved the entire loan's worth through interest & payments that were recived anyway). If the 60% reduction is enough to prevent foreclosure the house stays off the market which will prevent even more people from being upside down on their house AND the bank continues to get money.

I've never considered myself an expert in finance, but these are the two things that have come to mind in the last weeks.

[thor]

My solution is much much simpler.

Make compound interest ill.

Compound interest is the most insidious financial instrument today, it has been designed to suck everyone dry except the bankers themselves. Banking is parasitic by design.

[Cid_Yama]

The Govt needs to nationalize all those mortgages then use the stimulus money to hire people to rent out those properties at levels people are able to afford to pay and to hire people to maintain those properties.

That way you sweep up the toxic mortgages by grabing the properties and using them to make the money back, and you re-house, and re-employ millions of Americans.

If the banks fail or are nationalized in the process, boo-hoo. Let the banks make the ultimate sacrifice, they are the ones that got us into this mess. It's only fitting they pay for their transgressions.

[jdmartin]

I'm of the firm belief that until you bring real jobs back to the citizens (I'm talking America here), the problem is unsolvable. The huge trade deficit that exists is like a vacuum cleaner sucking wealth out of the country without anything coming in to take its place. Nature abhors a vacuum, and obviously economics does as well, so something fills it - namely massive unemployment, underemployment, and asset devaluation. As far as I see it, it really doesn't matter if your mortgage is $2500 or $1500 or $500 if you don't have a job, or if your job kicks you $10 an hour.

Bottom line is we're all going to have to get used to a much lowered standard of living, unless we enact trade barriers that send the Chinese & Vietnamese back to the fields. If we're not willing to do that (I'm betting we're not), then we will have to exist on a much smaller scale - not everyone can be employed for money, so some people will stay home and raise kids or vegetables or both. TV's will be purchased when the old one dies, not when the new model comes out. Cars will rust around us before they're traded in for a new model.

I'm not convinced that this scenario won't be good for us anyway. If nothing else, it will send a bunch of the people out of the material world (why else do most people work if not to buy things?) and into some other world, which is hopefully spiritually and emotionally fulfilling. I think there's problems that will be difficult to deal with - for example, the spread-out nature of suburbs - but I'm unsure that the downsizing of the American consumer is TEOTWAWKI.

[lawnchair]

As far as I see it, it really doesn't matter if your mortgage is $2500 or $1500 or $500 if you don't have a job, or if your job kicks you $10 an hour.

Bottom line is we're all going to have to get used to a much lowered standard of living, unless we enact trade barriers that send the Chinese & Vietnamese back to the fields.

I think there's problems that will be difficult to deal with - for example, the spread-out nature of suburbs - but I'm unsure that the downsizing of the American consumer is TEOTWAWKI.

Well, the $500 mortgage is not inconceivable on a steady $10/hour wage. Certainly the $250/month mortgages around here are doable. Problem is, as you point out, no one is really willing to pay $10 or even $7 an hour, when we can import from people who are allowed to work for much, much less.

Simpler is all well and fine. And a move toward 30-hour-weeks and stay-at-home-parents seems like a fine reaction. The biggest issue, though, is that if low-end jobs disappear (or get filled by well-educated white guys) we'll have one hell of a crime problem. There was plenty of crime already when 'inequality of toys' is all we were worried about. When it's 'baby's gotta eat', it will get brutal. Given a choice, Americans would logically prefer to ignore extreme violence/starvation in China or Africa if it reduces petty violence/burglary on their block.

[rangerone314]

I believe in the US personal debt is about 14 trillion which is about same as GDP. I think it is the same in the UK.

The last time this was true was 1929.

Giving the banks more money to loan out (create more debt) is pointless since we are currently suffering from TOO MUCH debt.

Sometimes if you eat something really bad, there is no cure except to go through the whole nasty episode of diarhhea and puking. That is what our economy is doing essentially... a huge economic purge.

The gov is trying all kinds of medicines on something that can't be cured, simply has to run its course.

[Snowrunner]

What, you think I'm crazy to believe that anything can be done? What suggestions do you have?

*Yeah, I can finally post again*

Yes I think you're crazy to think that this can be prevented. The system was gamed and now the payment is due.

The reality is that TPTB currently still think they can rewind the clock and keep going on with business as usual, it won't happen.

In their futile attempt to prevent a complete meltdown they will only dig the hole deeper we're all going to land in.

If they really would unerstand what is happening they'd be trying to set up a new system that could replace the old one, but none of that has been happening so far.

[outcast]

The problem with our economy is solvency. Banks are insolvent, financial institutions are insolvent, and more and more families are insolvent. Fix that problem and the rest will attend to itself.

[Tanada]

The problem with our economy is solvency. Banks are insolvent, financial institutions are insolvent, and more and more families are insolvent. Fix that problem and the rest will attend to itself.

With all due respect your solution only treats the symptom, not the disease. They have been attempting to make the banks solvent for six months by throwing cash at them and all it is doing is delaying the inevitible.

[sjn]

I find it incredible the number of posters on this site who believe it's simply a matter of "fixing" the banking system and we'll be back to growth and all will be well!?! I'm at peakoil.com, right???

Seriously, the entire paradigm this civilisation has been operating in was never sustainable, the system itself is severely flawed and not reality based. Money is not what makes the world go around, it's an abstraction, a creation through fiat by the authority of, belief in, and consent to (government) power and faith in the system.

Financial capital is a proxy for the available energy and resource flows through the entire system, the availability of credit is premised on future flows, but that can only be realised through actual real productivity (energy/resource flows that support the system). Bailing out the financial system is non-productive, in fact it subverts the available resources, leaching capital from everything else. Currencies represent capital, but they are not themselves intrinsically worth any more than ability to perform that function, as actual capital declines, any attempt to prop up currencies divorces them from the underlying capital and makes them meaningless.

The only "fix" is for us to determine what is worth saving of this civilisation, and redirect capital to triage. We need to be concentrating on what will follow the EOTWAWKI, ensuring those who survive have the best chance to live a decent life and an opportunity to learn the lessons from our failure. Inflating fiat currencies and bailing out financial institutions really isn't helpful.

[SeaGypsy]

Ok, this will hurt. An American may not dare say these things in public but here goes:

1/ respond to the writing on the wall for banking& insurance by immediately nationalizing them. This will involve trusting the Government

2 tax the hell out of cars. Exempt only the disabled. Make small motorbikes/scooters cost $5 a year to register& cars $50,000
Spend the difference on getting buses into where they will be needed in the short term; light rail in the longer.

3 do a buy back for a year like Howard did with guns in Australia.

4 let the auto industry die. Buy up the plants& retool for ultralight public transit& 2& 3 wheeled vehicles with maximum 200cc engine.

5 have a full hard look at reality. Get everyone around the telly for the speech of a lifetime by Mr O. "Folks, we are screwed....."

Get the best of what's left in the American Psyche and rebuild a much more robust society. Come on America; LEAD!!!

[shady28]

Ok, this will hurt. An American may not dare say these things in public but here goes:

1/ respond to the writing on the wall for banking& insurance by immediately nationalizing them. This will involve trusting the Government

2 tax the hell out of cars. Exempt only the disabled. Make small motorbikes/scooters cost $5 a year to register& cars $50,000
Spend the difference on getting buses into where they will be needed in the short term; light rail in the longer.

3 do a buy back for a year like Howard did with guns in Australia.

4 let the auto industry die. Buy up the plants& retool for ultralight public transit& 2& 3 wheeled vehicles with maximum 200cc engine.

5 have a full hard look at reality. Get everyone around the telly for the speech of a lifetime by Mr O. "Folks, we are screwed....."

Get the best of what's left in the American Psyche and rebuild a much more robust society. Come on America; LEAD!!!

I like you answers, but they're too extreme to be practical.

How about some mods :

1 - Let the banks fail, and use the bailout money to reinforce FDIC. This means people can get their money out of the failed banks which, at the rate we are going now, ultimately they won't be able to do. This is in essence a bailout of the average joe who is trusting the FDIC moniker. After the mass failures, people will have money and need somewhere to put it - so the (or a new) banking system will rapidly come back alive.

2 - Tax the sale of any personal transport vehicle that gets a combined highway / city MPG of less than 24 or 25 mpg by levying a $10,000 tax on the vehicle sale or +50% of the MSRP, whichever is more. The only thing excluded from this should be large delivery vehicles and commercial / construction vehicles with more than 2 axles, and vehicles not licensed for the highways. This gets rid of most of the loopholes. Raise this standard 1mpg every 2 years for the next 20 years. Any company who fails to meet the average standard of 24/25 mpg should have their entire executive staff, include CEO, fined 100% of all pay and compensation for the year they lapsed. That fine must be paid by the executives, not the company.

3 - Provide tax cedits to auto makers who go above the mandate in #2. ie, if the average vehicle you sell gets 26 mpg, you get 10% off your taxes. If the average is 35 mpg or more (100% above), your company doesn't have to pay taxes.

4 - Do the same thing as #2 above for power companies that use renewable power. If 10% of your power is from renewables - you get 10% off your taxes. If 100% of your power generation is from renwables, you don't pay taxes. Make sure the definition of renewable is strict - ie Nuclear doesn't qualify.

5 - Set limits to executive compensation pay based on profit and revenue. example : if your company has 1 billion in revenue or less, but no profit, the max CEO pay is 120k. For each billion in revenue with no profit, the max pay goes up 30k. Set a maximum percentage of the profit that can be used for executive compensation, like 5% of profit. Highly profitable companies will still have extremely wealthy CEOs and executives, but if they perform poorly their pay drops off a cliff (relatively speaking). Totally eliminate stock options as a method to pay executives, since it is so easy to manipulate and hide.

6 - Make it a crime with long mandatory jail sentences for politicians to take gifts, including trips or even so much as a paid for dinner, from lobbyists of any kind. They should make decisions based on the subject matter, not the pocketbook of the lobbying organization.

7 - Pass a law forbidding anyone who is CEO of a company with more than $1 billion in revenue for more than 2 years from holding any federal public office. Combined with #6 above, and not having stock options from #5, this would eliminate most of the conflict of interest in Washington (ie, you hold shares of Haliburton so you give them all the contracts kind of thing...)

8 - Senators, Representatives, the President and VP, and heads of state cannot hold shares in any publicly traded company while in office. This is an obvious conflict of interest for any and all of them. Loopholes such as giving them to your wife or children, then getting them back when you leave office, should also be considered a felony with serious jail time for all involved.

9 - A publicly traded company offering employment to the people in #8 above before they leave office should be considered a felony, with serious jail time and heavy fines for anyone involved (including the public office holder if they fail to report it within 30 days).

[dorlomin]

In the midst of this current collapse I thought it would be a good idea to start a new thread that gave us a chance to talk about our ideas for how to solve this mess.

I have said it before but I think that there needs to be a minimum wage in key industries in countries that are in a global free trade network. The world needs consumers and if the producers are in a never ending 'dutch auction' to undercut each others pay then the world will run out of consumers faster than it runs out of credit. Many low cost producers will lose out initialy, but the new consumers created in those countries will mean the jobs losses can be partialy or wholely made up with service sector jobs. Industries like hard rock mining, oil and gas, steel and other smelting, car manufacturing, white goods manufacture etc are good places to start. No one can sell goods in a tarrif restricted world market unless key industries are paying people enough to ensure they can be consumers.

The governments around the world should also be far more aggresive in taking over banks that are in effect dead and instead use the existing structures in them as a means of supplying credit to people directly. People cannot buy cars and houses unless someone lends them money, banks cannot create credit to lend to consumers as they take losses and rebuild capital. Have the government take over the worst banks and use them to distribute loans to people to help keep credit flowing.

This is temporary obviously but it should put a prop under the economy and buy time for a managed power down.