Saturday, January 2, 2010

Thoughts on 2010

Now that 2009 is behind us, will 2010 continue the path to prosperity or will it show that the recovery that started in 2009 does not have enough internal strength to continue leading to a second recessionary period and additional economic disruption.

Now if you consider the economy, there is one problem that I'm not going to be able to solve here. If you consider the only true recovery one that takes us back to the most recent cycle top, you are likely to be waiting for quite a while. It is clear that some of our economic activity was the result of bubble economics where assets were overvalued. Now, housing will take years to approach some of the high prices we saw a couple of years ago and in fact, if we approach those levels, it is likely due to excessive inflation. There is a term going around about the new normal and it isn't a good explanation of our current situation. I think what we have to adjust to is simply a revised starting point.

When the asset bubble burst, a tremendous amount of wealth disappeared. In effect the loss of this wealth reversed a lot of the growth we saw over the last decade. Now of course some wealth was merely redistributed, but a tremendous amount simply vanished as house and asset valuations plummeted.

Now to rebuild this wealth is going to take time and that time can be viewed in two ways. One would be that until all the lost wealth is recovered we remain in recession and in recovery. However, I think that assumes that those levels were appropriate. If you consider that the lost wealth is simply gone and consider the current economic levels the new starting point, we are entering a new period of growth. Yes, in some ways we are retracing areas we "grew" through in prior periods, but that does not negate the growth aspects.

Fundamentally the signs of economic robustness is whether the businesses can make money. They have reduced costs (including labor costs) to levels that allow them to make money at current levels. If they now see growth of any sort, profits will increase and so will employment. However, if a business has reduced its labor force by 20% because its business base has decreased that much, and now it sees 3% growth a year, it is not hiring back all the employees it once had. Further it will replace many of those employees with productivity enhancing technology.

However, these steps will make the business profitable and provide employment stability of a sort for those still employed. So, based on the fundamental changes these businesses have made, it is likely that we will take four or five years to reabsorb those employees let go during the current recession.

So is this a boom economy? I believe it is a growth economy and it is growing from a lower base, but we still have millions of people underemployed or unemployed. To resolve that problem requires three things, only one of which seems to be happening.

The one that I see happening is the switch to domestic and renewable resources. Simply increasing our use of Natural Gas instead of Oil will improve our balance of payments and create jobs. It doesn't have to be an all at once switch and using more solar, wind and nuclear will have the same impact but if we were to see a significant pickup in converting our autos from petroleum to liquefied natural gas, we would have significant employment in executing the conversion and we would retain much more wealth within this country. Of course while we do have bountiful amounts of natural gas right now, ultimately we probably need to go renewable, but right now, I believe liquefied natural gas vehicles will provide Americans with the power and distances they need. Further, is we can start to get significant renovations going in existing homes to add more energy efficiency and renewable energy supplements, we will create jobs in construction.

The two things that I don't see happening yet is the reform of our tax system and a meaningful change in how we modify mortgages. I have talked previously about how we need to tax consumption instead of production so that everyone who sells product in this country pays their fair share. This would eliminate a lot of the motivation to export jobs since the cost of labor would decrease. Of course, this can't be an additional tax since that would simply drive more business away, but if we tax all product sold in this country equally, and eliminate producer taxes except in special situations (social security, carbon), we will see a significant increase in the competitiveness of our employment force.

The final thing needed is to use our stimulus money more effectively and hopefully at less long term cost to the taxpayer. Suppose the Government used the bank stimulus to pay down mortgages in trouble to some more affordable level. I would suggest the best format for this would be as a Government primary lien on the property that would be held interest free until the ultimate sale of the property. Further, in order to encourage homeowners to make payments, this lien could be structured as a 50/50 deal on future equity increases.

As an example, suppose someone had a 400,000 mortgage on a house that is currently worth 300,000. The mortgage is modified to a 300,000 mortgage, the bank receives 100,000 from the Government and the Government acquires a 100,000 lien on the property, that it carries interest free (or alternately interest could accumulate at the treasury rate). Now the initial cost of this modification is the 100,000 and the homeowner now has a 300,000 mortgage on a 300,000 house. If he or she can still not make payments and the house is foreclosed, the bank and the Government share the proceeds with the Government getting its money minus some agreed to fee to the bank first. Remember that the bank was already going to lose the 100,000 before the deal and has theoretically had the use of that money in its reserves for some period of time. However, if the homeowner is successful in making payments the Government lien would simply continue as the equity in the house increased and the homeowner would be able to tap 50% of any equity above the bank mortgage amount. Now the cost of this program on a short term basis would be significant, but, it would transfer the underwater portion of the homeowners debt from the bank to the Government, increase bank capital reserves and give homeowners who qualified an incentive to stay in their homes.

I ike to keep these short and somewhat confusing so I'll stop here. I never really addressed the question of what is going to happen in 2010 but I'll discuss it further in the next few blogs.

No comments:

Post a Comment