Affordable Mortgages or Affordable Housing?

There' s nothing like having a bad plan hidden on the pretext of a greater good. We saw the same justifications for secret Iraq invasion planning, and the President's defiance FISA and of the JAG's input on Geneva.

The same is happening with the recovery. The same President which refused to permit oversight is continuing his convoluted plans in Cheney's dungeon.

This discusses the flaws behind Paulsen's approach (visit the link), and outlines a framework to address the core economic and oversight issues. The common element is the breakdown of the legal services industry, as discussed here.

Warning: This is not investment advise. Talk to a trained financial-legal professional before making any decisions.

Paulson's "solution" fuels the factors which caused the Great Depression: Too much supply, not enough sustainable demand.

Today's supply isn't measured only in manufacturing goods, but the supply of financial products. Sustainable demand must be developed to absorb Paulson's continued supply of financial products.

Prices today do not include only consumer goods. They include the price of financial products. Those who say deflation isn't a problem are ignoring the deflationary pressures in the non-manufacturing/non-consumer goods: Financial products -- housing prices, stock prices, and corporate assets in derivatives. A financial crisis means that the down-side risk wasn't adequately covered, as it should have been.

One solution is for Secretary of State Clinton to work with the major powers to develop sustainable export markets in Africa. United States credibility problem is Katrina.  Time to embrace the lessons of Katrina and develop a comprehensive plan for the world.

The leadership is not focusing on the reason we have mortgages -- to provide a home -- but looking out for their interests: "How can we get away with providing more mortgages to people, but not address the real problem: The lack of affordable housing."

DC is putting the lipstick on the same pig, but claiming things have changed since the Great Depression. They're repeating the error. It's still a pig.

Oversight Reform

The problem relates to a failure to modernize the legal services industry. If we had credible legal services, these impeachable offenses would have been challenged in court or in Congress long ago. Real solutions require reform in the legal services industry. (Discussed here).

Economic Solutions

The objective should be to create sustainable export economies for both manufacturing and financial products.  Secretary of State Clinton will be busy growing foreign export markets, while cooperating with the major powers.

One solution is to focus on expanding the pool of solvent, liquid buyers of these financial instruments. This means finding consumers in the Third World, and for Wall Street to enter -- with regulation -- the micro-loan business to develop a growing export market overseas.

This will take time, and require specialized training. The lessons of the World Bank and IMF will need to be applied to modernize these international development efforts.

This approach cannot be unregulated. Without regulation, the US will fuel another bubble in other countries who have fewer resources to manage the social implications should their bubble burst, as we've seen in Zimbabwe.

The US will have to compromise. American leadership must put aside some financial-military differences with the Chinese and Russians: "We must create stable economic conditions so that the world can help grow these export markets in Africa, and responsibly absorb the excess capacity, output, and financial instruments."

It will take time. The key will be to work with our military opponents to put aside our differences, and focus on a common objective of sustainable development in these foreign export markets.  Then cooperate.

Are the United State, Russia, and China willing to put aside some of their geostrategic differences with regional powers, and accept that locals must have greater control of profits; in exchange for creating additional markets for the consumer goods and financial products Wall Street under Paulson hopes to supply?

I of III Current Problem: Paulson Fueling Factors Behind Great Depression

Put this is your, "Thanks, but you've missed the point"-category. The American leadership is incorrectly looking at this as a financial product-packaging problem (supply), not as a problem of consumers (demand).  Consider this sign putting emphasis on supply:

Paulson: "Similarly, we've acted to stabilize the GSEs and to purchase GSE mortgage-backed securities, in order to increase the availability of affordable mortgage."

They're less concerned about housing for consumers or demand. Their greater concern is their financial product that they're selling. They want to continue moving inventory -- the mortages and those attached financial instruments -- without accepting that they need to slow down and wait for credit-worthy borrowers.

As with the Great Depression, they're pushing too much supply -- in this case, a financial instrument -- into the shrinking hands of consumers. They're not solving the problem, but making the problem worse.

The Great Depression rightfully adjusted the supply-demand disconnect. The problem then was that it suddenly changed.  Today's error is to continue focusing on maintaining supply, but without adequately addressing the demand side. The error in the Great Depression was to raise interest rates. Today's error is to fail to punish those who continue to create this excess supply of financial instruments.

Today's "easier access to credit"-announcement does not address the problem of excess financial inventory. Rather it fuels the problem and creates a bigger bubble but under the guise of a recovery. This isn't a solution, but putting more inventory and supply into an economy with shrinking demand.

II of III Channel Stuffing: We Can Expect A Faster Collapse Down The Road

These financial products are somewhat like manufacturing goods: If you make too much available, you have incentives to do (unsustainable) things to achieve performance goals.

Paulson's approach shoves more financial inventory into the supply side for a momentary blip. This is called channel stuffing. But this will draw more consumers who should otherwise wait -- because of their (still) deteriorating balance sheet -- into the current accounting periods; and leave us with fewer consumers in future periods. The drop off with be that much more of a "surprise" but foreseeable.

The corporate boards know or should know this.

Despite this accounting trick, the US economy is shrinking; and the revised numbers say the initial forecasts are worse. This means better data is saying things are worse than originally expected. That is not a good sign: The data collection, actual processes, and other activity is still not meeting forecasts despite the solutions.

This is the problem which we had with the Great Depression: Too much inventory, not enough consumers, and a deteriorating consumer balance sheet. The problem is when the consumer balance sheet on the demand side is deteriorating faster than the balance sheets of the financial balance sheet of the firms providing the supply of goods and financial instruments.

III of III United States Has Not Addressed the Consumer Balance Sheet

Making loans easier to access does not solve a fundamental problem: The deteriorating ability of the consumer to repay those loans.

Paulson's statement deserves attention. He's implicitly admitting his plan doesn't help demand-side at the final end; it merely makes the stream of (already bloated supply of) financial products easier to access behind a smokescreen of a "recovery".

Paulson: "Today's initiative to support small business and consumer finance market, is similarly aimed at increasing the availability of affordable lending."

Credit is important. The stores you are buying things need financing to sustain their operations to supply those goods.

But the only problem isn't that the capital is in short supply; but that even if the goods were available, there are not enough solvent consumers to absorb that excess capacity. Making  loans easier-to-sustain-supply doesn't ensure the demand is sustainable.

The problem is when the goal shifts from profitable operations to whether or not the (already bloated) industries are going to (still) have too much capital chasing too few (solvent) consumers. Making capital easier to access merely ensures that the industries -- that would otherwise go out of business -- can still get access to and supply capital despite shrinking consumer demand. This is exactly what the FED attempted to stop by raising interest rates during the Great Depression.

If the Fed lowered interest rates in the Great Depression would that have fueled more excess capacity? Sure, and as today, not addressed the imploding consumer balance sheets. As then, there's a debt-financed bubble.

Again, this doesn't call for a Great Depression; nor an increase in interest rates. Rather, the concern is that the "lesson of the Great Depression" is being perverted to justify the very activity that will make this economic downturn worse for the businesses: It will ensure that too much capacity and supply is chasing a more quickly shrinking pool of solvent consumers.

Making a financial instrument easier to access doesn't change the balance sheet of the homeowers (consumers). It merely finds a new way to continue spewing forth -- at their hoped for same rate -- products, without addressing the real people this is supposed to help. Their actions say that the US government's (incorrect) primary concern isn't with the homeowner or end-consumer, but with their friends providing products on the supply-side.

This is analogous to have in the Great Depression made it easier for a manufacturing company to continue making too many products, without addressing the consumer's ability to pay for that increase in supply.

The US government's "solution" will fuel deflationary pressures. It will create more excess supply of financial products, and drive down prices to chase a relatively smaller number of buyers less able to afford these products.

We can't realize change by making the same financial products easier to access by the same distressed consumers. The real change must be the demand-side -- the balance sheet of the consumer. Their real ability to pay must improve sustainably.