Monthly Archives: October 2008

10/21/2008 A home purchase incentive and self-funded economic stimulus plan.

Here is an example on how to develop a timely home purchase incentive plan and a self-funded economic stimulus plan at the same time. To stem foreclosures and keep people in their homes in a socialist mind set is not enough, we need to have a free market based stimulus plan to get people to come back to the real estate market to ensure on-going prosperity. Our country’s and hence the global economic prosperity hinges on the continuing consumption power of the American citizens. Nothing is more effective than to shore up the home value for every American to fix this global economic problem.

To borrow the 100% free market based SwapRent based solutions and concepts as a temporary wealth and welfare creation policy proposal is very simple. Few people currently would expect the US real estate market is going to recover in the next few years. It would be an easy decision for many homeowners and many would-be new property investors to voluntarily agree to temporarily give up a part (say 25%, 50% or 75%) of the future appreciation potential for the next 2 to 5 years and share it with the federal or local state governments in order to receive a “monthly income” from the government for the next 2 to 5 years. The monthly income to be received, portion of shared appreciation to give up and for how long will be determined through a transparent freely traded market for all participants. The transactions could also be designed to be “reversible” with certain lock-up periods and the homeowners can buy back the remaining maturity of the contract any time when they have the economic ability in the near future if their income situation changes.

The “incentive” resides in the generous pricing of these SwapRent contracts and should be open to all property owners and not restricted to defaulting homeowners only. All the other mistaken bailout concepts that call for granting preferential treatment to defaulting homeowners will only unavoidably foster moral hazard which will encourage and turn many more responsible citizens into voluntary willful defaults and cause more troubles for our economy. Just think of what you would do with your own home if a “bailout program” offers you the opportunity for a 20% write down of your mortgage amount for free. Wouldn’t that give you the incentive to join them? Our entire nation will become mortgage defaulters at the expense of the taxpayers! Any attempt in those incorrect bailout directions might even lead to a further downward spin of our economy.

Now the homeowners could use this SwapRent monthly incentive assistance fund for foreclosures avoidance, household consumption, starting a new business, buying a second home at a bargain price or any other purposes of their own choice to boost our national economy in order for our country to avoid a major recession. Money secured through this exchange of future appreciation potential will be treasured much more than an aimless free give-away from the Government that everybody else gets for no reason as well. The money obtained this way often has a real economically conducive purpose.

Government will be able to make more money back for the taxpayers along the way from selling these quantified appreciation units in the form of the SwapRent contracts in a secondary market to other free market domestic and foreign investors (and even to the very homeowners that have received assistance now in the future when their financial situations change) as more and more people start to take advantage of Government’s generosity in this incentive offer. A self-fulfilling melt-up scenario will automatically happen under the free market mechanism. This will bring back the profit driven motives that a capitalism free market normally relies on for its smooth operation.

From the homeowners’ perspective, making one half of 30% home value appreciation gain within the next 2 to 5 years will be a much better choice than losing the entire another 30% of home value decline if they do not take advantage of such an offer willingly, let alone the fact that they could pocket a handsome monthly income along the way for the next 2 to 5 years. Wouldn’t this be a good way to spend a part of the already allocated $700 billion dollars? Since all the Government needs is the reserve for the monthly subsidies it will not even take that much money to operate. In addition, the capital will be regenerated when the Government resells these SwapRent contracts to other free market investors. If the Government uses money to buy the entire distressed mortgages it would need a much larger sum and lose money for the taxpayers. On top of all that, whenever any other “bailout plan” asks homeowners to do refinance it will make MBS and derivatives investors unnecessarily lose money due to prepayments and may induce more banking credit crunch (a point that many economists have missed!) and homeowners will also incur many unnecessary transactional expenses. By the way, the current Hope Now for Homeowners plan is also asking the distressed homeowners to do refinancing and hence not good for the investors or the banks.

This SwapRent program could easily be embraced by both distressed homeowners and responsible citizens alike for its fairness and immediate effectiveness that save both homeowners and please note, all the MBS investors anywhere in the world. Most important of all, the current or future Administration who implements this plan will not have to be confronted with the question again on how to pay for all this due to the free enterprise self-funding nature.


10/19/2008 Debt leveraging, not the use of derivatives, is the real culprit.

It is debt leveraging, not derivatives, that caused the boom and bust in our financial markets.

In time of financial crisis, socialism could be an easy answer to sell by the politicians, under some other occasions, an idea out of desperation or simply due to the unawareness of some free market alternatives available. Capitalism always survives its own crises and abuses based on repeated innovations. This time around it could be no different. Some innovations may indeed lead to abuse but innovation itself is not the one to be blamed. Drawing on the analogy used repeatedly before again, it is drunk driving, not the car, that is to be blamed for an auto accident.

We have seen many renewed derivatives bashing these days by those who usually do not have adequate insider knowledge about how these financial markets function. We may have had some serious abuse problems of derivatives again in our capitalism system, as demonstrated by the recent financial market turmoils. The problem is not with the tools which derivatives really are. The real culprit is again, the simple concept of debt leveraging, or explained differently, the abusive exploitation of OPM (Other People’s Money) again. The use (or abuse) of derivatives is simply one of the many ways to facilitate the debt leveraging. Restricted from high leveraging abuse, many derivative concepts are actually benign and pervasive in many existing consumer financial products already. They will not go away. People who made comments that they wanted to call for a ban on derivatives are as naive as if they want to ban mortgages or loans all together in our economy, simply because we have been experiencing some human abuse again.

Greedy folks used high leveraging, with small own money up-front and high OPM for irresponsible investment opportunities. Wall Street investment banks, major commercial banks and mortgage lenders all did it. But if you think a leveraging of 30 or 60 times is high, try to think about what average American homeowners were doing again. With 100% LTV it is really an extreme infinity leveraging with no money down at all. Furthermore, how do you even calculate the leveraging of a cash-out refinance with a 120% LTV?

So financial disasters were created by uncontrolled high debt leveraging. When times were good, everybody made money much faster, got carried away and went into extremes by innovating further ways to leverage, Wall Street firms and homeowners alike. When the time turned sour, the reverse should understandably have been equally true and that had led to our financial market bust.

If the inability to control the high debt leveraging is the first blunder by the Administration, the wisdom (or a simply careless mistake) of the fact that Federal Reserve abruptly raised the short term interest rates which had caused the collapse, knowing very well we already had an inflated bubble is really the second major blunder. Without using other ways such as shared appreciation or shared equity concepts to deflate the bubble into a soft landing for our economy, piercing a needle through the bubble was really a foolish thing to do.

10/09/2008 A free market incentive plan to melt up vs. a socialist bailout plan to melt down.

A free market incentive plan, not a socialist bailout plan, can more effectively solve our financial crisis.

As Wall Street and Washington have been busy fixing dams and levees fighting floods at the downstream, we should urgently switch their attention back to on how to stop the snow from melting further at the upstream. If the snow melting at the mountain top could be slowed down, the dams and levees we already have may actually not be that inadequate.

What we need now is a strong “incentive plan” for every homeowners and investors in the country to start buying properties again, not just a “bailout plan” for restricted people to prevent foreclosures only. If all homeowners, would-be property investors and even greedy speculators would take advantage of this fair game to utilize the new generous monthly income from the Government’s SwapRent (SM) based shared appreciation/shared equity plan, there would be no more foreclosures and many more new buyers of homes to immediately restore the entire property market to its prior value.

Therefore the SwapRent (SM) plan is not a “bailout” but rather an “incentive” plan to encourage people to start buying properties again. Government should not be a policeman trying to stop speculators to take advantage of this newly created “housing affordability” to buy second, third or even fourth homes as long as they would agree to share the future appreciation of the property with the government. Once we have restored the property market and our national economy back to the pre-crisis level Government could then use interest rate policy and the SwapRent (SM) market rates in each city to manage a slower growth to avoid inadvertently building another over heating bubble at that time. Now the priority is just to get us out of this crisis through this SwapRent (SM) plan first.

American people who are legitimate owners of any properties could use this SwapRent (SM) plan to swap a portion of their future appreciation potential for secured monthly income for household consumption or any other purpose, no question asked. So that our economy will get a major consumption boost to avoid a recession or depression. There are many laid-off people who may want to take advantage of this help to start up new businesses to create jobs. Others may use it to tide their family over to find those new jobs.

If this plan could be executed properly the swift recovery of the entire property market and our national economy will almost be guaranteed since it will be a self-fulfilling prophecy under free market mechanism. The more generous the Government will be to offer these monthly income to the homeowners in return for a portion of the future appreciation of their properties, the more people will take advantage of Government’s generosity since few people would expect the property will appreciate in the near future anyway. Therefore, more participation will translate into less foreclosures, more demand for buying homes including even more speculative buying and the entire property market value will indeed end up appreciating in a major way.

Government will not only benefit handsomely from the increase in value of the $700 billion worth or mortgage securities but also will be able sell the appreciated SwapRent contracts to other domestic and foreign investors to realize a major profit for the taxpayers along the way. The whole turn-around could be realized in one or two years time if managed well.

Through the secondary market of the SwapRent (SM) contracts, homeowners could unwind and have early termination whenever they want. Furthermore, they could establish themselves as the “economic landlord” investors (for a second home in a different city for example) as well to benefit from the real estate price run-up when they have the economic means in the future once the wealth has been recreated by the free market.

Again, the SwapRent (SM) program was a result of a dedicated thorough research based on free market principles with detailed execution plan that someone devoted his own personal time and financial resources over the past 6 years to develop purely based on a strong belief of its economic and social value, not another knee-jerk reaction of some fame seeking economist to dream up some superficial bailout plan on how to spend taxpayers’ money again that often appears in the newspaper op-eds these days.

This could be a very popular rescue plan as it helps all the American people directly to restore our national economy, not favoring any particular interest groups. Politically speaking, this official adoption by the Administration will send a strong signal to American citizens that the Administration respects American people’s diligent efforts to create intellectual properties to promote innovations in order to rebuild our country together under their leadership. It further enhances the future President’s reputation in employing Main Street non-partisan entrepreneurial talents purely based on meritocracy without any Wall Street crony connections or any Washington political contacts.

%d bloggers like this: