Basic Economics

To Christina Romer

I wrote you September 5, 2009 about the rising price of peanut butter and jam sandwiches with a glass of milk. I wrote to you because the President doesn’t listen to me. Believe it or not, I think you listen. It helps that you have been right, there hasn’t been any inflation, I’m waiting for the Yuan to rise (you will see a real bump in consumer prices because so much of consumer goods is made in China) and interest rates to rise because of the national debt.

Geithner has pressed on the gas pedal (gas = people’s money) with a heavy foot, oblivious of the amount of gas in the tank (the national debt). He has not fixed the engine (securitized mortgages in the banks) so we use more gas than we need to and we risk to have another breakdown. The cars’ owners took out insurance from AIG for engine troubles, and Geithner paid AIG to payoff the insurance policies without an engine change. Geithner will use the people’s money to pay the owners to fix the engine. I tried to keep it simple for the President to understand, may be he doesn't understand the car analogy either.

Some consider housing as the backbone of the American economy. The
mortgage modification program has provided 17 revised mortgages. Reset
mortgages will continue to trigger for a year. The number of
homes whose mortgage exceeds market value is unsustainably high.
Unemployment contributes to more foreclosures. The administration
has only provided band-aid fixes. They have never defined the problem
and this makes it difficult to arrive at a solution.

The following suggestion was sent to the President, March 8, 2009. I felt it was better than Geithner's plan, 13 months later, we know Geithner's plan hasn't worked.

The government consolidates all bundled securitized mortgages, uses a
task force of Audit firms to re-value them, then re-distributes the
actual mortgages back to eligible holders.
The banks will properly show mortgages in their long-term assets
instead of current assets when they held the securitized slices (An
improper accounting shift to enhance executive bonus's).
We will end up with a mortgage market true to capitalism.

Detailed explanation.

Securitized mortgages means mortgages were bundled then tranches of
the bundle were sold off. Every mortgage is local so this instrument
is invalid.

1)Collect all bundled mortgages.

2)Classify the Mortgages
Within each bundle is a list of mortgages.
All the mortgages must be placed on a master list.
This list must be sub-divided in the following order:
Region/city New England, Rust belt, New York, East coast,
Florida, Nevada etc
Interest rate Standard prime, escalating interest rates including subprime
Current market value divided by mortgage
Mortgagee income to mortgage amount -ability to repay

Within each region you will be able to determine three categories
Low, medium and high risk.

3)Calculate the write down.

4)Collect all holders of bundled mortgages

5)Pro-rate the write down according the portion of the bundled mortgage holding.

6)Classify holders
Banks allowed to issue Mortgages in US and those not allowed.

7)Re-distribute the gathered mortgages to the banks allowed to issue
mortgages in the US.
The US government only has jurisdiction over banks allowed to issue
mortgages in
the US. The other holders will get no mortgages, it's a risk they
took. If this is too severe offer silent partner relationships with
the banks with title.

The redistribution will have to depend on what the data looks like.
Redistribution must be as fair as possible so should be done before a
Judge (We want justice). Ideally regions would be distributed to a
regional bank but markets may have to be tranched among several banks
to fairly spread the risk