Monday, October 18, 2010


The stacks of Post-it notes and loose paper upon which I jot down ideas for this blog are starting to take over my desk, so here are a few Idea Starters from the pile.

Good Grief!
Looking at the current political scene I am reminded of Charlie Brown once again facing Lucy and the football. It's not hard to see the Republicans as Lucy and the Democrats as the ever hapless Charlie Brown. Ever since President Obama took office he, and to a lesser extent, the Dems. in Congress have tried to be bipartisan and include the GOP in crafting legislation. And each time, it seems, after only one Republican lawmaker agrees to sign on if the bill is just changed a little, swish, the ball gets pulled away and the Dems. land on their collective butts.

Will they ever learn? Did Charlie Brown?

You Mean I'm Still Paying Taxes! 
There's a dirty little secret (actually, not so secret, just ignored) fact about all those wonderful IRA and 401K plans in many Boomers retirement accounts. They're TAX DIFFERED, not tax free investments. And with a mandatory age of, I think, 72 when you must begin taking money out, there are going to be a bunch of seniors facing income tax bills well after they've stopped working. The government giveth and the government taketh away. Get over it.

The Unemployment Problem is Worse Than We Think.
Now, why would I say that? Well how about the fact that many of the mortgage brokers in the last two or three years of the real estate bubble were freelance, independent contractors. As were many real estate appraisers. As were many home inspectors. And as were most real estate agents. If you don't draw a paycheck from an employer you also don't get unemployment benefits.

For example, at the height of the boom on the Outer Banks of North Carolina, where The Queen of the Frontier and I had a real estate firm, there were over 1,300 sales agents or brokers. The off season population of the entire 124 miles of coast is about 34,000. That's about one real estate agent for every 26 residents. Including children! And the vast majority of them worked as independent contractors.

Are Low Interest Rates Hurting the Recovery? 
Maybe they are. I know that this idea is completely counter intuitive, but let me explain.

There are several ways to look at mortgage interest rates. One is to see the rate as being "set" by what the Federal Reserve decides at each meeting. This is one of the main tools that the Fed has for fighting inflation. Another is as a hedge against risk, ie. a borrower deemed a poor risk will have to pay a higher interest rate and a good credit risk will borrow at a lower rate. There is a third way, which is to see mortgage interest rates as reflecting demand for mortgages in the market. Okay, you ask, but so what.

Currently mortgage interest rates are at all time lows. Most would see this as first, a good thing, if you want to borrow and second, a good thing because it means that that the Fed is keeping inflation in check. But what about a down side? If you're a banker doing mortgage business and want to stay competitive you're faced with a bit of a problem. You need to offer the low rate to your good risk borrowers, but in the current economy can you trust that even the good risk client will have job in 6 months? You also face the problem of a disappearing margin. Banks are offering depositors less than one percent interest on their savings now. If the Fed pushes rates much lower banks will have to lower savings returns even lower yet. Can you say zero? Bankers are already so afraid of any risk that they've effectively stopped all lending in places.

And that's where we begin to lurch toward the real bad problem: Deflation! Deflation is when prices for goods and services go down over time. And it's not just prices. It's also wages. It's just fine, at first, for the consumer who gets a bargain, but human nature being what it is leads to a very unhappy ending. People stop buying as they wait for tomorrow's, or next week's, lower prices. Store shelves remain full so orders for new goods stop. Distributors can't clear their warehouses, so they stop ordering goods. Manufacturers stop making stuff. Raw materials remain in the ground. The economy shuts down. Did I mention the wholesale layoffs?

Deflation is a very bad thing, just ask Japan. So right now the Fed is fighting deflation by...wait for it...printing more money. Now, I don't have as much of a problem with that as some of the Tea Party types. We have had a very low rate of inflation for some time. Private wages have been stagnant for over a decade. In certain sectors, like consumer electronics and computers, we've come to expect that just waiting a few months will let us buy that flat screen for a couple hundred less than we could today. What worries me is that the Fed is also keeping interest rates low. So, they're fighting inflation by lowering interest rates and fighting deflation by inflating the currency!?! What the heck am I missing here?

I think a better plan would be to continue a bit of inflation through the currency and raise the bank exchange interest rate by one or even three percent. This rate increase will provide the following positive effects to the economy. First, banks, who currently have no stomach for risk at all, may see that, yes they can make loans and make a profit. Second, and I think an even better result, home buyers will see interest rates rising and stop sitting on the side lines. Just plug some numbers into a mortgage calculator program and see what one or two percentage points does to a monthly payment.

For example, a loan of $100,000 for 30 years at 3% (I've seen lower rates offered) has a payment of $422/month. Push the rate up to 5% (still a very low mortgage rate) and you pay $537/month. Finely, try 7%, which is historically around the average, and you'd pay $665/month. If potential buyers think that rates will increase they may, just may, start buying real estate again. The same would be true for businesses, you know, the corporations that at last count were sitting on over $1.5 Trillion in cash. "Time to build that new plant before the rates go up any more."

I'm I crazy? Just ask Her Highness, she'll tell ya. But it can't be any crazier than what the economy is doing now, so what the heck. Let's give it a try.

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