economic crisis and solution

Some of the folks who were in strong support of government intervention were finally happy to see the $700 billion dollar bill pass in the US Congress on Friday, the 3rd Oct. But paradoxical part of the day was the stock market which was going north went south after the bill was passed. The only reason I could see was there was still bad news flowing in from not only the US but also from Europe and other parts of the world. Although the bill has now been signed by the US president, the question still remains on how the money would be used - who gets the money, which mortgage securities are considered bad and to with what relativity.

Well, my question is, as some of you may have already asked, should the government even buy up these mortgage securities from banks? To add more claritiy, my question is about how the government should intervene rather than should the government intervene. It is long due for regulators to step in and take hold of the situation.

Why should the government intervene? The whole world runs on money. From the time you wake up in the morning - your brush, paste everything runs on money. And the folks who manage all the money have us by the throat. When financial markets freeze,
- business who depend largely on loans to run their daily activities can not obtain any credits or loans,
- employee funds who invest in financial markets can not withdraw any money for their day to day business as some of the schools scrambled to banks on Friday to withdraw money to pay teachers,
- retirement savings are lost,
- even governments themselves, who carry huge deficits on their balance sheets, can not obtain loans as California Governor Mr Schwanazer issued an emergency request to Treasury secretary Paulson stating the state requires $7 billion to meet its demands immediately,
and the viscious cycle just keeps getting worse. For the common man he is going to be affected by all the above.

So how should the government chip in? In trying to understand the role of government in a capitalist economy, I started to analyze where the crux of the problem actually lies. Using the top down approach, all the noise we see and hear is due to banks going belly up and writing off huge losses. The primary reason stated is bad mortgage bets in terms of securities or bonds or credit swap loans etc.. Why are these mortgages bad? The people who have taken these loans to purchase real estate are unable to pay the money for reasons:
- their fixed low interest rates of 2% or so has now become 6%+ i.e approx 3 times. The locked in rate when they acquired the loan was for a fixed time and the time has expired.
- Have been just able to meet their ends while for the past year or so the inflation has added stress to their budgets that has in turn resulted in accumulation of additional credit card loans etc..

So the crux of the problem seems to lie at the lowest level. This is where the government should be concentrating their primary efforts. Biggest assumptions of today are:
- all mortgage loans are bad. There is no or little tracebility in the investment industry since the loans have been packaged and re-packaged by multiple people.

Some of the options, that I believe, could alleviate common man from defaulting on loans are:
- extend the loan time frame. Today if it is a 30 yr loan, extend it to say 40 yrs. The banks atleast get their money back but over a longer time frame. This is not un-common to most of the banks.

Questions arise such as:
- The mortgage loans are packaged as securities by banks and sold or held as collateral. Today the banks are unable to pay up the required amounts to cover these investments and there by defaulting. Defaulting results in the credit swap's (an insurance in financial industry for defauling to pay) coming into play where the insurers have to pay up. So who takes these losses? My answer is the financial companies MUST take these losses since they have hedged their bets on it and obviously relish or pain involved in profits or losses. The government has not role in here. At the same time, most of the loans have not gone bad since people continue to pay but in lesser amounts for a longer period of time.
One big question here is about people who have hedged their bets in real estate purchasing more than one home. I, personally believe these people would invested to reap huge profits from real estate should have been prepared to take on the losses. So who owns these loans. This is where the government intervenes by taking over these loans and ensuring these folks pay up for their bad deeds over a much longer run - either by directly taxing them more than others or by other means.