OBAMA IN AS PRESIDENT…WHAT’S NEXT FOR THE ECONOMY!

Peachtree City, Atlanta, and the whole world witnessed a major historical changing of the guards on November 4th as massive voter turnouts and a desire for change culminated in the election of Barack Obama to be the 44th President of the United States!  His message rang load and clear as the Liberty Bell. Change has come to America!  So what’s next you say America!  I hear you loud and clear.  

Well, let take a educated guess at what we can expect to happen next.  Well first there’s the low-hanging fruit the President-elect can pick.  From all indications including what Obama stated in his interview with CNN, Obama’s transitional team along with the old Congress and President Bush can get together on a stimulus package before President-elect Obama and the new Congress are sworn in. Look for this to happen before Christmas, which would be welcome news for retailers, and, perhaps, for stock markets. Right now it is estimated that there are some 7.5 million American homeowners with negative equity and another 2 million at risk of going negative if house prices keep falling.  (No we have not seen the bottom yet!). So it would be reasonably to believe that one of the first major policy initiatives of the new President will be a New Deal for people who are struggling with their mortgages.

Now let’s look at the mechanism…. Hank Paulson’s plan allows for the Treasury Secretary to go back to Congress for more money to recapitalize the banks. Will it happen?  Well according to what I see and hear everyday, the banks need the money.  Also, the credit crisis on Wall Street looks to have lessened, well at least slightly!  So that give Obama the perfect opportunity to turn to bailing out distressed homeowners. How’s he going to do it?

First, let me inform you that it will be no surprise to see some of the financial gurus from the Clinton Administration to find homes again in Washington.  So who are the players on team Obama?  No one will know who Obama staff will be comprised of for several days however, there is a list of heavy hitter that may impress a lot of folks. 

Austan Goolsbee is currently his Sr. Policy Advisor and a Professor of Economics at the University of Chicago; Warren Buffet, Billionaire investor; Paul Volcker, Former Federal Reserve Chair; Eric Schmidt, Google Chairman; Robert Rubin & Lawrence Summers, Former Treasury Secs; Robert Reich, Former labor Sec; Christina & David Romer, Macroeconomist & Professors at the University of California; Jeffrey Liebman, Economist & Harvard Professor.  Liebman was also a part of the Clinton Administration; Jason Furman, Sr. economic advisor to Obama; and Daniel Tarullo, a Professor at Georgetown University and is the go to guy on currency, foreign investment, and trade. Oh, yeah and don’t forget about Colin Powell that make a compelling endorsement of Obama despite his ties to the Republican party.  

Oh yeah, the plan!!!  The plan may be to revive some version of the Depression-era Home Owner’s Loan Corporation (HOLC). If you were around then you may have difficulty ready this or remembering for that matter.  Anyway, that Federal agency was set up to prevent foreclosures in the 1930s by purchasing distressed mortgages from lenders and then renegotiating both the term and the size of the loan with borrowers. Pretty appealing to policy makers at the moment who are trying to stop the blood letting.

Back to the Paulson plan.  So far, banks have used money from the Feds to buy equity in other healthy banks. That makes perfect sense if you’re trying to recapitalize your balance sheet and reduce risk. But remember the political motivation of the Paulson plan was to get banks to modify the terms of the mortgages they owned and prevent Americans from losing their homes. That isn’t happening yet, much to the amazement of those geniuses on Capitol Hill. Therefore instead of providing banks with fresh capital and asking them to modify mortgages for distressed homeowners, the Federal government can simply do the job itself. It will finance the HOLC the same way it’s financing everything else (borrowing money). The borrowed money goes to the banks for recapitalization and the purchase of mortgage securities. Then, the HOLC refinances those seven million Americans into 30-year mortgages with lower interest rates and a lower valuation on the house.  Well, who said it was a perfect plan or world for that matter!!

However, it won’t prevent house prices from falling but it sure would provide the market with what it desperately wants: some mechanism to separate bank balance sheets from falling U.S. house prices. It cuts the housing cancer out of the financial system and quarantines it in a new federal agency.

Guys, why are you scratching your heads?  If you’re Obama, what’s not to like about it? Of course there are massive problems with it, not least that it encourages people to quit paying their mortgage now and wait for the bailout. But we don’t have time for every problem today. But what we need right now is a plan to save homes and/or give homeowners some relief and jumpstart the stock market. 

Keep hope alive baby.