–Will Obama’s latest mortgage relief plan be a hit or a miss?

Mitchell’s laws: To survive, a monetarily non-sovereign government must have a positive balance of payments. Economic austerity causes civil disorder. Reduced money growth cannot increase economic growth. Those, who do not understand the differences between Monetary Sovereignty and monetary non-sovereignty, do not understand economics.
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Stephen Gandel wrote this piece for Time:

Is the Government Going to Lower Everyone’s Mortgage Payment?
Tuesday, September 6, 2011 at 3:02 pm

It’s been about two weeks since the Obama administration floated the idea of a massive mortgage refinance, and there seems to be little consensus on whether the plan would provide a boost to either the economy or the housing market.

The plan is to allow the millions of homeowners who have government owned mortgages to refinance those home loans at today’s lower interest rates. Lower mortgage payments should make it easier for struggling homeowners to make their payments and stay out of foreclosure. What’s more, a massive refi could also boost the economy. The idea is that if people had to spend less on their mortgage they would spend that money elsewhere, buying cars or shoes or whatever.
[…]
Still, a number of economists are giving the plan a thumbs down. The most prominent detractor is Ed Glaeser, an economics professor at Harvard University and a housing market expert. Glaeser says the plan is a poor idea for stimulus because the benefits for homeowners would be spread over 30-years, yet the cost to mortgage investors and banks and taxpayers, which own the loans at what are considered high rates today, would be immediate. That is the opposite of how good stimulus is supposed to work.

As always, the Harvard professors do not understand Monetary Sovereignty. They do not understand that any money spent by the federal government (Is there any in this plan?) does not cost taxpayers one cent. In a Monetarily Sovereign government, federal taxes do not pay for federal spending.

But he’s right about it being a poor plan.

What’s more, Glaeser says lower mortgage rates are unlikely to boost the housing market or even stem foreclosures. Bank analyst Richard Bove says the plan would be a dud because it really doesn’t boost the money in the economy, just transfers it from banks to borrowers.

Bove is right on target. But of course, the government’s idea (really, the Tea/Republican idea — give credit where credit is due) is for the federal government to spend nothing, but magically stimulate the economy. That’s something like filling the water bottle without adding water.

And normally, I would agree with Bove. Normally, if borrowers spend money in the Gap there really shouldn’t be any difference for the economy than if they were sending money to the bank or investors. In fact, the later could be better for the economy because banks or investors could put that money back in to the economy in the form of new loans or investments. But that’s not happening right now. Lending has been on a year and a half slide. And investors are running toward Treasuries, and so far those plunging bond yields have done little for the economy. So right now, putting money in consumer’s hands instead of the banks may make sense.

The problem is the ridiculously low interest rates That is where I disagree with MMT, which says 0% is the “natural rate of interest” (whatever that means.) Historical data shows that contrary to popular wisdom, high rates stimulate, because they force the government to pump interest dollars into the economy.

Lowering the number of foreclosures will boost the housing market. There may be as many as 15 million borrowers in the U.S. who owe more than their house is worth. Lower their payments and you are likely to lower the number of foreclosures. Fewer foreclosures should lead to rising housing prices. And rising housing prices should be better for the economy.

Agreed.

. . . the current recovery is unusual not just for its slow pace of job growth, but also because of the lack of a housing recovery. In the past, housing recoveries have always led more general economic recoveries. That’s not happening this time, and it may be the reason the recovery has been so disappointing.

Yes, that’s one reason, but not the main reason, which is the timidity of the stimulus programs. “Too little, too late” has been the chief characteristic of all federal efforts.

All in all, this plan is typical of Washington politicians. They think our federal government –our Monetarily Sovereign federal government, with the unlimited ability to pay any bill — is “broke” (Boehner’s word), so must cut spending. They want the banks — many of which have gone bankrupt, and none of which are Monetarily Sovereign — to cut their income. It’s beyond ignorant.

And isn’t this eerily similar to Obama’s Mortgage Modification fiasco of two years ago – the one that none of the banks wanted – so they stalled, and stalled and stalled, until perhaps one out of a thousand applicants received a reduced mortgage rate, but all spend countless hours, submitting and re-submitting endless forms and waiting on telephone hold?

Message to Obama: Banks are businesses. Like all businesses, they will do what they feel is profitable. Duh.

How about this, instead: Reduce everyone’s mortgages by the exact amount Obama wants, but have the federal government give the banks that amount, plus a small bonus. So the banks profit immediately and profit again when foreclosures go down, and the economy and consumers gain spending dollars. And no, the taxpayer pays nothing (the federal government does not use federal taxes for spending).

Now there would be a plan that would help the economy (though not as much or as quickly as eliminating the FICA tax. But that’s another story).

Rodger Malcolm Mitchell
http://www.rodgermitchell.com


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No nation can tax itself into prosperity, nor grow without money growth. Monetary Sovereignty: Cutting federal deficits to grow the economy is like applying leeches to cure anemia. The key equation in economics: Federal Deficits – Net Imports = Net Private Savings

MONETARY SOVEREIGNTY

Rodger Malcolm Mitchell

18 thoughts on “–Will Obama’s latest mortgage relief plan be a hit or a miss?

  1. “Reduce everyone’s mortgages by the exact amount Obama wants, but have the federal government give the banks that amount, plus a small bonus.” Rodger Malcolm Mitchell

    Why give the banks anything? People hate them and with good reason since they practice usury and counterfeiting – so-called “credit” creation. And what about savers? The bank system has cheated them too – of honest interest rates.

    So how about this instead? First tell the banks all future loans must be 100% reserve. This would massively deflationary by itself as existing credit was paid off with no new credit to replace it. Then send monthly and equal bailout checks to the entire population, including savers, equal in total to amount of credit paid off the previous month. Continue till all US private debt is paid off.

    The above would bailout the entire population without changing the size of the money supply and without pitting savers against borrowers. It would also fix the banks in nominal terms and prevent them from getting into trouble again via leverage.

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  2. F. Beard,

    I don’t know what your personal definition of “usury” is, but with interest rates so low, I assume you are going back to the early Judaic prohibition of any interest on lending. I doubt whether a modern economy can run on a no-interest system.

    Even the no-interest, Islamic banks charge what they call a “utility fee,” which functionally is interest, though there are differences in process.

    You said, “First tell the banks all future loans must be 100% reserve.”

    Banks can obtain all the reserves they need from the Fed window, other banks or the public. Their lending is limited by capital, not by reserves.

    “Then send monthly and equal bailout checks to the entire population, including savers, equal in total to amount of credit paid off the previous month.”

    This would encourage the borrowing you seem to hate; the more one has borrowed, the bigger the check they receive.

    “Continue till all US private debt is paid off.”

    But, if banks continue lending (at 100% reserve), all US private debt never can be paid off. Also, this would reduce the money supply, as debt is money. Reduce debt and you reduce the money supply.

    . . . prevent them from getting into trouble again via leverage.”

    It wasn’t just the banking (lending) end of the business that got the banks in trouble; it was the investing and re-banking end. The whole notion of bundling loans into an investment package, then selling that package to investors, is a sure path to disaster. Should be outlawed.

    Anyway, I’ve seen this philosophy somewhere, but can’t recall where. Refresh my memory. Who is espousing this?

    Rodger Malcolm Mitchell

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    1. I don’t know what your personal definition of “usury” is, but with interest rates so low, I assume you are going back to the early Judaic prohibition of any interest on lending. Rodger Malcolm Mitchell

      Correct. The Hebrews were allowed to collect interest from foreigners but not fellow Hebrews (Deuteronomy 23:19-20).

      I doubt whether a modern economy can run on a no-interest system. Rodger Malcolm Mitchell

      Common stock as money requires no borrowing or lending, much less at interest. But I would not forbid usury, just eliminate all government support for it such as legal tender laws for private debt.

      You said, “First tell the banks all future loans must be 100% reserve.”

      Banks can obtain all the reserves they need from the Fed window, other banks or the public. Their lending is limited by capital, not by reserves. Rodger Malcolm Mitchell

      Well, there should be no lender of last resort such as the Fed. But if reserve requirements are not sufficient to halt bank credit creation then other means should be used during the bailout. Otherwise the banks will just leverage the new money into an inflationary spiral.

      “Then send monthly and equal bailout checks to the entire population, including savers, equal in total to amount of credit paid off the previous month.”

      This would encourage the borrowing you seem to hate; the more one borrows, the bigger the check they receive. Rodger Malcolm Mitchell

      No. I make a distinction between genuine loans of existing money which are legitimate and so-called “credit” creation which is not. If credit creation was stopped then eventually all outstanding credit would be paid off with vertical money from the US Treasury.

      “Continue till all US private debt is paid off.”

      But, if banks to continue lending (at 100% reserve), all US private debt never can be paid off. Rodger Malcolm Mitchell

      OK. Good point. I should have said “Continue till all US private credit is paid off.

      Also, this would reduce the money supply, as debt is money. Reduce debt and you reduce the money supply. Rodger Malcolm Mitchell

      EXCEPT the bailout checks would be metered to keep the money supply constant as existing credit was paid off. So-called “credit” would simply be replaced with vertical money from the US Treasury.

      . . . prevent them from getting into trouble again via leverage.”

      It wasn’t the banking (lending) end of the business that got the banks in trouble; it was the investing end. Rodger Malcolm Mitchell

      The banks drove borrowers into unserviceable debt and cheated savers of honest interest rates. Now the economy cannot support the banks. The parasite has damaged its host.

      Anyway, I’ve seen this philosophy somewhere, but can’t recall where. Refresh my memory. Who is espousing this? Rodger Malcolm Mitchell

      And as far as I know, no one else has advocated this yet.

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  3. F. Beard,

    You said, ” I make a distinction between genuine loans of existing money which are legitimate and so-called “credit” creation which is not. If credit creation was stopped then eventually all outstanding credit would be paid off with vertical money from the US Treasury.”

    Sorry, I have no idea what this means.

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    1. Sorry, I have no idea what this means. Rodger Malcolm Mitchell

      Well let’s make it simple. Let’s say a US Government worker receives $1000 as wages. This is vertical money. He deposits $300 in a demand account and with the other $700 he buys a 6-Month CD from the bank. The bank then loans out $700 for 6-months. That is honest lending. No horizontal money (“credit”) is created. The $300 in the demand account remains untouched by the bank. So in this situation, the bank operates as an honest broker between those who genuinely wish to lend and those who wish to borrow.

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  4. F. Beard,

    Not simple enough for me. Sorry.

    By depositing $300 and buying a $700 CD, the worker actually has lent the bank $1,000, which counts as $1,000 of debt as well as $1,000 worth of credit. The bank owes the worker $1,000.

    For every dollar of debt there is a dollar of credit. They are two sides of the same coin.

    Look up “Debt Outstanding Domestic Nonfinancial Sectors.” It’s the broadest (and in my opinion, best) measure of the domestic money supply.

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    1. By depositing $300 and buying a $700 CD, the worker actually has lent the bank $1,000, which counts as $1,000 of debt as well as $1,000 worth of credit. The bank owes the worker $1,000. Rodger Malcolm Mitchell

      Yes, that is how banking currently works. Let’s change the example then and assume the worker deposits the entire $1000 in a demand deposit. The bank then lends out $900 with only the loan recipient’s promise to repay as the loan asset. Now instead of $1000 that can be spend on demand there is now $1900. $900 has been created from “thin air”. But where does the purchasing power for that $900 come from? It comes from all money holders. Banks are thus counterfeiters. It would have been better for the worker to hide his money under the mattress and not allow the bank to leverage it.

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      1. This is wrong on two levels:

        1) Banks don’t leverage deposits. Banks leverage capital.
        2) Private lending must be repaid out of future income – there is zero long term effect on purchasing power. This is not to say asset bubbles can’t occur, but there are much less extreme ways to prevent them than abolishing private lending.

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        1. 1) Banks don’t leverage deposits. Banks leverage capital. Jeff64

          OK. Fine. And what are capital requirements? < 5%? So banks can leverage 20 – 1? It still sounds like counterfeiting to me. I have $1000 but can lend out $20,000? What allows this? A government-enabled lender of last resort and other privileges for the banks?

          2) Private lending must be repaid out of future income – there is zero long term effect on purchasing power. Jeff65

          That is morally irrelevant. The banks are essentially borrowing purchasing power without permission and without honest compensation. That is theft. Furthermore, under what circumstances is the purchasing power repaid? Only if we have price deflation which is a disaster for employment. So the banks steal purchaser power during the boom and steal jobs during the bust. Moreover, that stolen purchasing power is often used to outsource and automate the victims’ jobs away.

          This is not to say asset bubbles can’t occur, but there are much less extreme ways to prevent them than abolishing private lending. Jeff65

          Private lending would not be abolished just government privilege for the banks. That would greatly limit their ability to leverage. Government privileges include a lender of last resort, government deposit insurance, legal tender laws for private debt and legal hindrances to alternative forms of private money such as the capital gains tax. In other words, let’s have a true free market in private money creation.

          And if you have another means to abolish the boom-bust cycle, let’s hear it.

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        2. F Beard,
          A surefire way to have stopped the GFC: abolish the practice of banks selling loans they have made. They should make enough profit on the interest margin and it keeps their skin in the game.

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  5. F. Beard,

    I swear I’ve seen this argument somewhere.

    Anyway, whether the worker deposits $1000 or $0 in a demand account, does not affect the bank’s ability to lend. As I said previously, bank lending is not constrained by deposits, but rather by bank capital. A bank with $0 deposits could lend trillions, if its capital were sufficient.

    Your question about “purchasing power” implies that money creation causes inflation. Yes, based on supply and demand, increasing the supply would reduce the value of money — if demand did not increase.

    However, increasing the money supply is stimulative, so demand does tend to increase with increased supply. Further, the Fed’s control over interest rates, helps prevent inflation.

    While increased money supply may have had a closer relationship to inflation pre-1971 (the end of the gold standard), that relationship seems to have disappeared afterward.

    Money supply vs inflation

    As for “counterfeiters,” that is the illegal creation of money. Bank lending is legal.

    Rodger Malcolm Mitchell

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    1. “… so demand does tend to increase …” Rodger Malcom Mitchell

      Don’t you mean “real output” tends to increase? Agreed. There is no doubt that “asset backed money” is a brilliant invention but not the way it is current implemented which is highly unethical.

      “Further, the Fed’s control over interest rates, helps prevent inflation.” Rodger Malcom Mitchell

      I wonder. What does it matter if it costs 15% to borrow if asset prices are increasing at that rate too plus a couple of percent? However, with a limited supply of money interest rates would automatically increase due to supply and demand. But that is not the case since the banks are not supply constrained.

      Bank lending is legal. Rodger Malcom Mitchell

      So was slavery. What we have today is debt-slavery to a counterfeiting cartel.

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  6. F. Beard,

    You’ve switched the discussion from economics to ethics. If you consider something unethical, fine. That’s your personal feeling. But don’t make the claim your position is science or economics. It isn’t.

    Calling bank lending “counterfeiting,” then comparing it with slavery is disingenuous at best. And please don’t say that borrowers are slaves. That’s just twisting English to make a dubious point.

    The debt-hawk fear of inflation is not supported by the facts, as I have shown you. Hypotheses are nice, but data is better.

    Rodger Malcolm Mitchell

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  7. ” Our money system is based on systematic, government backed theft of purchasing power from all money holders for the benefit of the banks and the so-called ‘credit worthy’. . . . The savers are begging for a depression.”

    Theft of purchasing power” implies inflation. So where is the inflation? Don’t answer. Your pyrotechnical lexicon has made me so excited, I won’t sleep, tonight. 🙂

    Rodger Malcolm Mitchell

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  8. So where is the inflation? RMM

    Housing prices is one place. Many savers were priced out of the market by the banks and the borrowers. And now they (the savers) are waiting like vultures for housing prices to fall even further. You can expect no support from them for any bailout of the borrowers unless they receive a cut too.

    I won’t sleep, tonight. RMM

    I am glad to have stimulated your thinking. We both have similar goals except I’m a bit more radical than you. Meanwhile our common enemies, the deficit hawks and the gold bugs are a threat.

    I enjoy your work. Thanks and thanks for humoring me.

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  9. Mr. Beard has his own, private definitions for words like “counterfeiting,” “permission,” “honest compensation,” “theft.” Also, he believes apocalyptic language is a substitute for facts.

    So, for instance, when he says, “The banks are essentially borrowing purchasing power without permission and without honest compensation,” do not expect him to supply supporting data, or even to pay any attention to data you may supply. But his pyrotechnics can be amusing if you don’t mistake them for economics, which is a science demanding facts.

    Rodger Malcolm Mitchell

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  10. “Over 400 U.S. economists, including Professor Herbert Simon, a Nobel laureate, and the late Robert Eisner, a former president of the American Economics Association, have backed a GPI initiative stating that the GDP ignores social and environmental costs and is thus “inadequate and misleading as a measure of true prosperity.” Despite increasing interest, however, an intractable political and corporate culture has successfully arrested efforts to change the nation’s system of tallying accounts. The quarterly release of GDP figures has become a national ritual, albeit one that is little understood by the public.”

    http://findarticles.com/p/articles/mi_m1594/is_3_10/ai_54623303/

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