01/26/2009 A sensible stimulus plan to restore confidence – revisiting an old topic.

I would like to tell the same story about the SwapRent based economic policy proposal in a different way.

Given the crisis nature in the current financial markets and especially the doubtful recovery of the residential real estate markets for the foreseeable future in the US, few investors or even potential long term homeowners would jump back in to buy a real estate property at the moment. Simply put, if they buy now, no matter what a bargain they may get, the house may become even cheaper again later on in a free falling housing market. This is the lack of confidence that many people have been talking about regarding our national economy these days.

To restore this national economic confidence, the give-away bailout money could better be converted into incentive seed money to help put a floor to the residential real estate markets in the US. On surface, if there were access to unlimited capital for the federal government by simply printing more money, the government could for sure easily turn the tide over. Realistically, the federal government does not have access to unlimited capital, nor do they need to. It could simply become a bullish buyer of the residential real estate properties the same way many governments use national funds to buy stocks to shore up investor’s confidence in the stock markets in the past during a financial confidence crisis in many countries. On top of all that, the federal government could also throw in a few tax incentives such as a holiday period waiver of capital gains taxes to add fuel to the fire.

Economically speaking, this seems to be the only way the new Obama Administration could wisely use the tax payer’s money as massive chips on the gaming table to bluff the hell out of world-wide investors’ psychology. Given enough initial seed capital, they may just be able to corner the entire residential real estate market in the US. That is all they would need to do to urgently keep our economy out of an imminent depression by solving the root cause of all our current economic ills. As I mentioned earlier before, once the snow stops to melt in the mountain tops, our dams and levees are actually quite OK to hold the water back into the rivers.

The simple fact is that if the US government does nothing in this direction to push up the real estate markets by bluffing the investors, the national wealth will continue to dwindle within the next decades. Every tax payer will lose more wealth and there would be no potential loss of capital gains tax revenues to collect since everyone will end up in poor house and there would be no “capital gains” to talk about. On the other hand if the cornering is successful. Homeowners, speculators/investors and the governments will all be happy since each one of them could enjoy partial “capital gains” through their share of the fractional interests in the homes. Government’s portion of the shared potential appreciations could best be realized earlier under a no loss policy by selling these SwapRent contracts owned by them to other free market based domestic and foreign investors in order to regenerate the capital needed for the program along the way. Therefore the initial capital the governments put up will indeed only perform the crucial function as a seed money to bring free market investors back into the real estate markets, with no intended profit or loss motives in the process.

If this all makes sense, the next step is to find some sensible methodologies to implement these quite simple economic ideas. This is where the SwapRent methodology comes in. Since the best way for the federal, states and local governments to buy the financial interests in homes is through some transferrable financial interests similar to stock certificates in corporations so that they could avoid high transactional cost and would be ensured of enough secondary liquidity to resell these financial interests to other free market investors later on, they would need some new financial instruments to be invented that could represent easily transferrable fractional interests in people’s homes to do so.

The most immediate way people would think of to accomplish this could be some old concept called a sale-lease back program for homeowners so that Uncle Sam could act as the temporary landlord. But traditional sale and lease back program does have the problems of high transactional cost and low liquidity for the investors. On top of all that, homeowners would have legally lost their homes already, together with many other financial and non-financial complications such as those in taxes as well.

The SwapRent transactions were specifically invented back in 2006 before the crisis even started to facilitate a new form of synthetic ownership of the traditional sale-lease back transaction. A synthetic sale and lease back program, so to speak. This was made possible by introducing the new consumer concept of “economic renting” where the legal ownership is separated from the economic interests and the financial interests in a real estate property. For more detailed info again, please visit the home page at http://www.SwapRent.com .

A good example (just one out of many possibilities) of how to use a holiday waiver period on capital gains taxes to complement the SwapRent program could be a sliding scale of 100% to 0% waiver within the next 10 years of the current capital gains tax rate (100% waived during the first year, 90% the second year, … and 0% in the 10th year, etc.). But again, the eligibility should be made widely available to everyone who may decide to make a new purchase of a residential real estate properties from the date of green light until the end of the 10 year period, not just limited to owner-occupier homeowners. There always seem to be endless policemen in a bailout plan but since this is supposed to be an incentive, not a bailout plan, we do not need to restrict people from accessing the program. There should not and would not be any preferential treatments to anybody. We will need to bring back those free market based profit driven investors/speculators into actions so that the buying frenzy melt-up scenario in the real estate market could really happen. These speculators/investors are an essential part of our free market mechanism.

One caution for the governments though. On the way back to higher property value, we will need to make sure to curb the excessive borrowing by either homeowners or speculators this time around. The troubles we are having today were the results of the burst of a bubble made of hot air. It is hot air because buyers in the past used other people’s money to buy. The leverage induced asset bubbles were doomed to burst. If leveraging was under strict control then the a bubble could be made up of molten lava instead of hot air. On one extreme, the cooled rocks will not burst at all if people don’t borrow money to own financial assets. To be fair, low reasonable amount of leverage may create some hot air chambers inside the cooled rocks but they will not burst like hot air balloons. It could actually be the right way to create long term wealth and welfare for our economic societies.

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