Here's How We Can Fix Housing, Banking, And The Consumer Balance Sheet In One Fell Swoop

Bowling Strike

Photo: Flickr/Tinou Bao

Last year I wrote a piece called “Tranche Warfare” describing what I believe is the Japanification of our country in general, but specifically how the commercial real estate market crash is unfolding.  Today I write about how I think we could actually remedy the biggest issue that got us in this mess – housing.I call this idea Three Birds, One Stone and it goes a little something like this (hit it): The Federal Reserve should set up a special lending facility, like it did for the commercial paper markets after Lehman filed, for 12 months to eligible homeowners/buyers to refinance their home mortgages at 2% with 40-year amortization schedules.

By eligible homeowners I mean people that have the means to service their debt, even if they’re underwater in their mortgage. I would not offer this to people who have no chance to carry the debt, nor would I offer this to people of more than ample means who don’t need the help (ie. the stinking rich).  In other words, I would target the middle class because we built this great nation on the backs of this middle class and then spent the last 30 years trying to break them.  That’d be the one stone, now here’s the three birds:

  1. Recapitalize the banks by paying off the mortgage debt they hold; Repay the bondholders who bought rmbs from Wall Street
  2. Help clear the glut of vacant homes around the country that are dragging pricing down
  3. Free up the consumer to “go out and shop” (thanks GWB, for telling us that was the way to support the troops while you started two elective wars on credit, dope), which would be good for the economy

In conjunction with this Three Birds, One Stone strategy the Fed should end QE and immediately raise rates, even if that means the S&P falls to a more sane value, and end the cycle of uber liquidity which has given us two horrific asset bubbles in one decade and is now building a commodity bubble so big that agflation is toppling dictatorships across the middle east, which subsequently is causing a spike in oil prices. Moreover, in Three Birds, One Stone the taxpayer benefits from Fed largesse, not corporate America. I sincerely hope Bernanke and Geithner are considering policies other than the ones they’re pursuing but I doubt they are.

Now some may say raising rates would bring the TBTF banks, and therefore the economy, to its knees – if so, I say we use the Nordic playbook.  In the early 1990’s Norway, Finland and Sweden had banking crises.  In order to prevent bank runs their governments placed a blanket guarantee on the banking system, but they made the banks pay a price by placing them in receivership and wiping out shareholder equity.  The countries then infused taxpayer capital alongside the creditors while they liquidated and restructured ensuring that the taxpayer isn’t just buying worthless debt at PAR so they could pretend the banks were solvent (they were not). 

Seems to me we’ve been pursuing the wrong strategies for the wrong reasons, and that clearly the Nordic model to resolving a banking crisis was our best choice.  And barring a new banking crisis, which is certainly a possibility (probability?), I don’t see Bernanke and Geithner now putting the banks into receivership because that wouldn’t jive with their claims that TARP was a smashing success.  Curiously, a Fed economist named Richard G. Anderson at the St. Louis Fed authored a piece entitled Resolving a Banking Crisis, The Nordic Way in November 2009 that states: “The Nordic bank resolution is widely regarded as among the most successful in history.”  Makes you wonder why we didn’t pursue this strategy in the first place but I’ll leave the conspiracy theories for Governor Body (Jesse Ventura) because I “ain’t got time to bleed”.

Can you hear me now?

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.