The conventional wisdom is that the subprime housing crisis is stalling America's economic recovery and stifling consumerism and that vacant or abandoned housing must be demolished to reduce supply and stabilize bloated home prices. These misconceptions merely camouflage the underlying problems:
- structural unemployment resulting from the export of U.S. jobs, industries, service functions research and development, and revenues instead of goods and services,
- the need to restructure underwater housing mortgages to the current market value of the real estate via foreclosure or lender/homeowner negotiation to make them affordable without government intervention or cost,
- consumer demand that is (a)mainly satisfied by foreign-made goods which increases U.S. unemployment, our trade deficit, and our national debt and (b) impeded by debt overhang.
(A) The jobs crisis can be solved through re-industrialization via cost-free legislation requiring that:
- All research and development by any U.S. Company, its affiliates, or joint ventures utilizing scientific discovery and/or new design, processes, and materials developed or created by any U.S. government agency and/or institution or sponsored and/or supported by government grants or tax credits must be permanently conducted and kept domestically until otherwise authorized by government.
- All innovation based upon said government sponsored scientific discovery and/or design, process, and materials and/or resulting from government grants for research and development must be produced domestically for three to five years after which it can be globalized through patents, copyrights and/or joint ventures. This would make way for the next wave of innovation, maintain a renewable jobs base, avoid protectionism, insure a favorable trade balance and provide the incomes and revenues that enables consumerism and creates fiscal and social stability. Non-compliance by U.S. companies would result in duties and/or embargoes on said innovation produced overseas. Note: Innovation creates its own markets and has a multiplier effect on service and supplier job generation. Tariff penalties levied on non-compliant products.
- Make and keep the U.S. the high-tech research and development, innovation, and production center of the world and a magnet for the world's talent by increasing funding of government, university, and private research institutions This would be helped by automatically issuing green cards to all qualified foreign university graduates in science, math, engineering and other essential disciplines trained here or abroad requiring that the recipient work in the U.S. for three to five years with a priority for citizenship eligibility.
- Establish full employment through domestic insourcing of low-tech production to depressed areas of the U.S. instead of offshoring. Low-tech domestic manufacturing can be made cost effective and competitive in the U.S. and global economy with:
(a) educational, technical, and apprenticeship training partnerships between industry and school systems combined with extant government skill training programs; (b) utilization of abandoned or surplus industrial facilities modernized and equipped to maximize productivity; and (c) cost-efficient universal health care and need-based Social Security systems made affordable by a fair, revenue neutral, graduated flat tax code (with the elimination of all special interest subsidies, loopholes, tax deductions, tax shelters, and tax havens) to save our cities and states (provide fiscal and social stability), and make U.S. companies globally competitive by relieving them of these unaffordable medical and pension burdens. Decent jobs would provide the income to maintain and/or improve living standards, increase U.S. demand for domestic goods and services, and enable or sustain home affordability.
- Sovereign funds and/or sovereign entities and their affiliates must not be allowed to steal our cutting-edge technology and know-how through equity investments in our high-tech companies, start-ups, and/or research entities or projects, restricting them to only providing financing with adequate safeguards against industrial theft.
(B) The solution to the subprime mortgages mess is deflation to market value to make underwater housing affordable through the judicial system (bankruptcy and foreclosure process) or negotiated arrangements or debt restructuring between lenders and homeowners in lieu of foreclosure. The banks, servicers, Wall Street, hedge funds, speculators and rating agencies have made fortunes out of the housing bubble and the subprime scams and it's time they took a "haircut."
It is not the purpose, duty, or obligation of government to: (a) bailout the mistakes and bad investments of the private sector whether they be business or individual or (b) enable elected officials to devise policies and/or proposals that pander for votes or campaign support from special interests at public expense. Proposed government schemes to bailout banks (again), homeowners, and Fannie Mae and Freddie Mac with refinancing programs for underwater homeowners, subsidized debt service, government guarantees, and home rental support have not and will not work. They are unaffordable, divert scarce funds from more productive job creation and skill training uses, and compound and postpone the national debt crisis reckoning. People need quality jobs and opportunity, not dependency.
The simplest, cheapest, and best solution to the subprime crisis (and personal debt overhang problem) is to change the bankruptcy laws to permit and facilitate judicial cram-downs on underwater home mortgages to market interest rates and values and limit fees, penalties, and legal costs through the restoration of the former usury limits of 6 to 7 percent for interest and restore former personal debt forgiveness regulations. This would:
- not cost the federal government anything, not add to the national debt, minimize government involvement, and place responsibility and cost on the culpable private sector parties where it belongs;
- give mortgage lenders the options to (a) voluntarily restructure mortgages for financially responsible underwater homeowners by reducing the mortgage principle and/or debt service to market and extending the maturity or have the courts do it in the event of default and write off the costs -- eliminating government subsidies, (b) foreclose on homeowners who are unwilling or unable to meet market reevaluation of debt service or pay real estate taxes, (c) facilitate foreclosure and save costs by allowing at risk, financially responsible or temporarily unemployed underwater homeowners a rental deal with a future right to repurchase their property at the remaining mortgage principle amount if the terms of the agreement are met, (d) rent to former homeowners or new parties, (e) resell the mortgage or the property or gift the property back to local government for public auction when and if it regains possession or gets ownership and write-off loss, (f) create off balance sheet entity for toxic loans for later sale as market conditions improve, (g) establish a program to give returning servicemen and disabled veterans priority or special deals to rent or buy foreclosed or repossessed housing by offering tax incentives to lessors or sellers;
- maintain the tax base of communities and stabilize neighborhoods.
It would be insane and shortsighted to destroy good housing stock to reduce real estate tax obligations or maintenance or insurance cost requirements on repossessed properties.
Benefits: (a) A government laissez-faire subprime policy would save taxpayers billions and make underwater housing affordable through market revaluation, (b) Re-industrialization would create the jobs and revenues necessary for economic recovery and debt reduction and (c) Viable universal health care and Social Security systems made affordable through a fair graduated flat tax code and need, cost, and delivery-based efficiencies and reforms would enable re-industrialization and make domestic low-tech outsourcing feasible.