Playbook to Economic Recovery Starts with Real Estate

Historians will write that the current economic recession was the worst heist in U.S. history, capturing more victims than any other financial crisis.

Wall Street and bankers fleeced more money out of the pockets of investors from stocks, securities and real estate mortgages than thought imaginable. The Security and Exchange Commission was asleep at the switch on Wall Street and financial regulators elsewhere were either unaware of what was happening or incapable of handling the jobs they were hired to perform.

The government is providing $50 billion from the $700 billion financial rescue plan approved by Congress to mortgage servicing companies as incentives to modify mortgages. That figure will have to be increased largely to give lenders the incentive to modify loans to combat the record number of foreclosures.

The government has to buy its way out of this mess in order to straighten the economy out since law enforcement didn’t do its job, Congress failed and other regulators didn’t  catch the criminals and swindlers who ripped off the system soon enough.  

The Treasury Department said that the modifications so far have pushed the total amount dolled out to $18.3 billion. As foreclosures rise, the pot will have to be increased.

This recession is anything but normal.

As Congress challenges Federal Reserve Board Chairman Ben Bernanke on Capitol Hill, in his efforts to save the economy from a worse mess, and the White House presumably works with Congress to come up with more of a plan to clean up the mess, regulators are coming back into play.

The battle to re-regulate financial markets has a long way to go before things get better. The housing market and the overall economy aren’t going to improve until at least four parts of the economy improve.

(1) The pent up buyer demand for housing will need to emerge with increasing and consistent sales — and that means lower interest rates to get buyers off the fence.

(2) Getting buyers who are unsure of taking the leap to buy a home takes improving consumer confidence, which will only develop with greater transparency. Closed-door sessions is what got us into this economic mess as traders on Wall Street sold mortgage backed securities at all-time record levels, and few people away from Wall Street understood what was going on behind the scenes until the nation’s economy blew up.

(3) Whether you like to call them asset backed securities, mortgage backed securities, derivatives, toxic assets or plain old bad mortgages, the government will either have to buy at least $500 billion worth of them from mortgage companies or otherwise stop foreclosures. The figure could eclipse $1 trillion and depends on how many people walk away from their mortgages. At present the choice is a political one since these decisions are made by Congress and the Obama Administration. But it’s also where the Fed comes in with a proposed wider scope of responsibilities. The Fed would be able to buy more toxic assets and have greater discretion to handle the nation’s financial failings.

(4) Lastly, there’s the creation of more jobs. Employment is the key factor to getting people to make purchases of any type. Without jobs people don’t buy much.

The U.S. moved from being a manufacturing industrialized economy to being a service economy over the last 20 years. Now the nation is moving into a new technological economy. Studies show that more than 60 percent of all commerce will be conducted via the Internet over the next decade.

The transition will provide more jobs. It will be time consuming as the recession lags on and banking regulators monitor the economy. The stress tests that banks underwent understate lenders’ exposure to derivatives. JPMorgan Chase held $87.4 trillion in derivatives at the end of 2008, including $8.4 trillion in credit default swaps at the center of the financial crisis or more than half held by all U.S. commercial banks.

“Just their credit exposure alone represents nearly four times their capital,” said Martin Weiss, president of Weiss Research, Inc. “However, in their more adverse scenario, the banking regulators are estimating JPMorgan Chase’s total counterparty and trading losses will not exceed $16.7 billion, a fraction of the true potential losses in a financial crisis.”
According to banking regulators if the economy were to track the more adverse scenario, losses of the 19 biggest banks during 2009 and 2010 alone could reach $600 billion.

John Hines is a staff economist with which forecasted the economic crisis would start in the housing market and spread to the overall economy. Housing Predictor forecasts more than 250 local housing markets in all 50 states.

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