How to Save America

October 20, 2008 by
Filed under: Articles 

   By Nidal Sakr

(MAF-10/20/2008)  America is in crisis that could be the widest spread and deepest she has ever seen.  All the talk about problem and solution we have heard so far is merely political and does not help in either understanding or solving the problem.

In this article, I will outline what may be the only approach to adequately and effectively solve the crisis.  Although shrouded in political considerations, just like the primary causes of the crisis, the proposal is in no way politically driven.

First, we must acknowledge that today’s crisis is no accident, and was not entirely unexpected.  We must know that our crisis is primarily caused by policies and practices of the expiring administration, and that responsibility for the crisis lies on shoulders of both parties who either caused it or allowed it to happen.  We must also know that while the administration was building its case for war under the premises of September 11, the administration, in fact, did have stark and clear warnings in no uncertain terms of the dire consequences and catastrophic outcome.  In no less than one occasion before the administration launched its “war on terror,” specifically in October of 2001, the administration did have at its disposal a viable alternative venue to safeguard national security interest aside from war.  Again in April 2004, when war in Iraq and Afghanistan proved a failure, the administration did fail to pursue another face-saving venue it had at its disposal.

What To Do?
As the complex crisis itself unfolded over time, there needs to be both temporal and long term solutions:

a) Foreign Policy: Forget War on Terror, But DO NOT Forget About War on Terror
War on terror was launched upon false pretences.  True cost of war is not in losing, rather it is in threats to our security we planted as minefields and timed bombs all the way across the globe, including within our own borders.  During the global war of terror we waged over the last several years, we have left so many victims and created so many enemies.  We have caused so much anger, animosity, and hate, which if ignored will undoubtedly end up leaving us to face repercussions beyond what we can predict.  Worse yet, such repercussions would be entirely at times and places of choosing of our own victims – a threat we can never entirely account for, preempt, or safeguard from.

As upcoming president has committed to a foreign policy that is centered on diplomacy, Obama ought to look for the resources that were available for Bush administration to avert war and to activate such resources.  Only honest, objective, and fair address of the conduct by the expiring administration can ensure stability for both the US and international community.  We must remember that security is the one condition we must have and direly need to solve other aspects of the reining crisis, especially our economy.

The remedy I am proposing will have a positive net gain, while any other venue would only continue bleeding our resources and threatening our security.

b) Economy: STOP the Bleeding, and Correct the Path
Out of the $10 trillion deficit we are facing, $3 trillion to $7 trillion are either directly or indirectly related to “war on terror.”  No economic or any other solution is possible unless this wasteful and unaffordable bleeding of our resources is entirely stopped.  We MUST abandon war on terror ALTOGETHER, and any other alternative would be misguided, misleading, and doomed.

c) Rescue Plan: Help Those Who Deserve it, and DO NOT Reward Culprits
One out of five or six American homeowners is defaulting on mortgage payments and facing foreclosures.  Almost all American homes sold in the last five years have depreciated no less than 20% of their peak values at which most mortgages were taken.  Some of these mortgages were given by subprime lenders to risky buyers, and some were legitimate loans given to credit-worthy home owners.  Aside from subprime mortgages, home owner crisis is mostly caused by two main factors:
1. Drop in home prices exposing unrecoverable loans.
2. Loss of home owner income due to loss or cut in employment.    

The National Crisis Agency (NCA):
While I agree the name may cause further panic, NCA still should prove instrumental in solving the crisis:

1. NCA must sort out subprime mortgages from good mortgages.
2. With some of the $500 billion left in the rescue plan, NCA must buy homes that foreclosed starting from the last quarter of 2008, and who are likely to go for foreclosure in the first quarter of 2009.  Homes should be bought at current market prices providing some cash for cash-strapped banks.
3. NCA should rent the homes it buys at the going rental rate until GNP growth rates average between 3% – 5% annually.
4. Mortgages should be re-negotiated with defaulting home owners who are able to pay rent, at a price close to current price, in which case rent would be converted to mortgage payments.
5. When GNP annual growth rate avearge reaches a minimum of 3% , NCA should sell homes or mortgages in its acquisition to home owners or commercial lenders at current rates at the time of transaction.
6. No save pitches should be made with regard to subprime mortgages, until good mortgages are rendered solvent and under stricter accounting.

How Much Does it Cost:
Unlike McCain’s $65 billion underestimate for buying failed mortgages, NCA plan may cost up to $300 billion.  Closer estimates should be available to the Fed from national figures and bank records.

Unlike Fed’s $250 billion plan to save banks, NCA will be making a temporal rate of return on investment equal to rent or mortgage payments it charges.  That would virtually eliminate risk to taxpayers.

As economy recovers, appreciation forecasts on home prices should average no less than 10% per year.  Any temporary depreciation in home prices due to lingering economy is expected to be offset by appreciation when economy starts growing again.

In terms of economy, $300 billion cash injection into credit markets is expected to serve as stimulus that would provide jobs, increase consumer and public spending, and stimulate the economy by the “multiplier effect.”

What you are about to read is no longer taught in American Economics, although it is what bailed America out of the Great Depression and rebuilt Europe, Japan and South East Asian Economies after WWII.

The Multiplier: A concept in Keynesian Economics that says that each dollar government spends on the economy generates many more dollars in growth and circulation.  That amount by which the government dollar multiplies is called the multiplier, which is the reciprocal of the marginal propensity to save.  When the economy is down as it is now, people tend to cut down on spending by large amounts at first then at smaller amounts.  Most of additional income, as the one proposed here, is likely to be spent on consumption not saving.   That, in turn, makes the multiplier quite high, thus getting greatest bang out of every buck the government spends.

Why Housing: Because it is the leading downturn sector which trend must be either stopped from falling or reversed to be able to stimulate the rest of the economy.

How Money is Spent: By buying out homes and mortgages at current prices, banks and lenders will have cash to lend, thus creating new investments, jobs, consumer spending, and the ball keeps rolling.

Why The Two Quarters: In the long run people tend to adjust to shocks.  If you lose your job and subsequently your home, you will tend to relocate after another job, move back with family, or sign a lease on a rental property.  The two quarters I mentioned are one of which we are still at the middle, and the next one coming.  Not only can we react before adjustments are made by those who just lost their homes, but we can also prepare for the ones who are losing or about to lose theirs.

This measure of NCA, as outlined, is relatively costless and painless compared to other alternatives.  However, it requires immediate action before we hit a stage of stagnation where the economy fails to respond to such quick stimulus.  The alternative would be either to do the wrong thing or not do anything at all.  In both cases we will not be able to pull the economy out, without much more costly long-term structural transformations in many sectors of the economy.
Structural transformations would not necessarily be bad, but will for sure prove to be lengthy, painful, and costly.

While in effect, NCA must draft financial and safeguard policies and regulations to regulate its profit sharing-interest free lending.

Once normalcy is restored to home owner markets, in approximately two to three years, government may privatize NCA by public offering, while maintaining its policies as a matter of law.
Government then must provide tax breaks, and investment incentives to the newly emerging interest-free banking to encourage the new risk-averse sector.

In competition, US financial institutions and banks are expected to look into the worldwide fast expanding interest-free banking, and look for new financial, investment, and banking products to offer to household, corporate, and government clientele.

What we have heard on the campaign trail from both candidates only serves their purpose of getting elected.  From economic, foreign policy, and national security standpoint, neither candidate is offering a credible or doable solution.

While the formula presented here may not be a literal quick fix, any viable solution to any challenges at hand may not overlook much of what is outlined here.  Otherwise, we may be at it again at a time that is also not of our choosing.

The Catch:
We must learn from the failed $250 billion bailout government spent on buying shares in major banks.  Any bailout money must go directly to consumers, investors, and small business owners to fast stimulate the economy.  Coupled with bailing out mortgages, this injection into the economy will translate into immediate rise in employment, disposable incomes, and economic recovery.  Otherwise, government will have to employ people directly or indirectly to pay that money as wages, an option most of us have problems with.
While spending the $300 billion, NCA’s biggest challenge would be how to insure that money it spends ends up in the hands of its intended target.

Teaching Economics:
Finally, current crisis is mostly blamed on deregulation taught by classical school of economics and its offshoot monetarists and neo-monetarists.  American Universities must rid faculty from economist-turned mathematicians and monetarists, clear their shelves of the out-of-touch literature, and start looking back into Keynesian and neo-Keynesian Economics.

At times of despair the last we need is some fancy shmancy economics look-alike.  What we need is economics that makes sense, and more importantly one that works.


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