Three Strikes, the Economy is Out

July 31, 2012 at 7:18 am Leave a comment

With economic growth again stagnating, there are three things policy makers in this country could do instead of putting their heads in the sand and hoping that the Euro doesn’t implode any time soon.  First, they could come to a “grand bargain” on deficit reduction and tax policy keeping us from having to peer over the “fiscal cliff” after the November elections.  But this scenario is more fanciful than a Harry Potter book. 

A second step policy makers could take is for the FED to not only extend but increase its bond buying program in the coming weeks.  This scenario is quite possible but we’ve been there and done that.  The market is already rising in anticipation of FED action and, at this point, the artificially low interest rates are about keeping the economy from getting any worse as oppose to providing an indirect stimulus for it to get better.

Which brings us to the third and, in my ever so humble opinion, most intriguing option.  The Wall Street Journal is reporting that the Federal Housing Finance Administration (FHFA) is once again considering authorizing principal reduction for underwater home owners.  HAMP has been around for a while, but the overseers of FANNIE and FREDDIE have actually taken their job seriously and have not been convinced that principal reduction is a good deal for the American taxpayer.  They are concerned, among other things, that principal reduction might encourage defaults and, at the very least, provide mortgage reductions to people who are actually making their payments.  But now, a Treasury report is being used to provide further evidence that such a program might actually generate a cost savings for the American taxpayer.

This is a program that should be given a shot.  First, there are pockets of this country where large numbers of mortgages remain underwater and with the economy sluggish, it is about time we realize that we’re not going to grow ourselves out of the housing crisis any time soon. 

More importantly, a widespread principal reduction program could provide the quickest, most credible stimulus to an economy that desperately needs some good news.  Homeowners would be given a floor for their housing values and many of those same homeowners would find themselves with much needed equity.  In addition, this stimulus could be provided without Congressional approval.  I understand the arguments against moral hazards, but now’s no time to be standing on principal when policy makers need to see what they can do to help out the nation’s economy.

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Will Credit Unions Recover for LIBOR Fraud What a great way to criticize your boss!

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Authored By:

Henry Meier, Esq., General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association.

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