November 2008 newsletter

Exciting Times

The White House. Original image at http://www.destination360.com/north-america/us/washington-dc/white-house.php

A moment in history

I know I'm not alone is thinking that the election of Barack Obama as America's next president is an historical event. As one commentator observed, it represents the passing of what can be called an Old America and the beginning of a New America. People of all backgrounds and upbringings throughout the United States and in countless nations around the world recognized that change will, from next January's Inauguration ceremony on, become the order of the day.

As Obama said in his victory speech, there are enormous difficulties to be faced and overcoming them isn't likely to happen in the first year or even a first term. But I'm personally convinced that his classic statement that Yes, We Can is going to be the new administration's underlying and unshakable resolve. Indeed, I can imagine that in due course the phrase will become Yes, We Did.

Hope on the horizon

I have no doubts that things are no longer going to be what they've been for some long time. Among them will, I'm sure, be an immense difference in America's influence abroad and a significant departure from the ways and thinking of the past. In fact, like him I cannot help feeling more hopeful than I've ever been that the world will be (if I may be permitted to say so) a better place because of the altogether new direction that America seems likely to take.

The bridge building that his campaign brought about, not to mention an opinion that herein lies his especial talent, could well put an end to the divisiveness that has plagued various nations abroad for far too long -- and this cannot but reduce the cost that America incurs in its hapless attempts to keep the peace and vainglorious wish to steer everyone towards democracy.

Economic consequences

Within what could be a sooner-rather-than-later withdrawal from America's military presence in Iraq and Afghanistan lies just one decision that could have a major impact on the U.S. economy. As Obama observed, the Bush administration is spending ten billion dollars a year in Iraq, a country that has an annual surplus of sixty nine billion dollars, a financial situation that leads to a question about whether there's any great point in letting it continue.

Afghanistan is an altogether different challenge, but here, too, a change in America's military focus in favour of reconstruction and redevelopment (albeit this is part of its present goal) could lead to money being spent for a better purpose.

In any case, if neither war can be won -- as more than one authority ( including a leading British Comander ) isn't afraid to maintain -- a decision to settle for losing them could be followed by a well managed extrication that would free up considerable funds for tackling America's other economic (and perhaps more urgent) problems.

The housing crisis

The real estate meltdown has been unquestionably overstated by many people. The gloom and doom exists, but someone recently pointed out that foreclosures add up to less than ten percent of U.S. mortgages. This does amount to several millions of homes, but the problem is the subprime loans that underwrote their purchase -- loans that any prudent lender would not have granted, knowing full well that defaults were inevitable. Such, though, is the power of the media to upset public confidence, just as it's led, without any fundamental justification, to some slowdown in our own housing market.

Even so, something has to be done to rescue the U.S. real estate market from its doldrums. As the candidates in our own recent election all agreed, a healthy housing market is an essential factor if the economy is to have the right underpinning.

Of course, it's too early to tell what the Obama administration will decide, but something in the way of a Stop Order on more foreclosures seems possible and isn't without merit. For instance, if we think back to the Great Depression, one of the hardships at the time was the right -- and lack of hesitation -- of the banks to take over properties if their mortgage payments weren't being met. However, if we also think back to the high interest period of the late 1980s and early 1990s, the banks then tended to take a more enlightened approach and, whenever they could, found ways to refinance defaulting loans. Not much was said about the difference when this happened, but there's no doubt that the banks made more money this way.

Call it creative financing if you will, but both lenders and borrowers ended up being the better for it.

One possibility?

If I give way to some freethinking -- which is a habit I don't have difficulty in doing! -- I can't help wondering whether a version of the Rent To Own idea might be an answer worth thinking about.

If, as I mentioned last month, the US Treasury and its like are going take over foreclosed properties rather than leaving them as a charge on the banking industry's balance sheets (and this, in effect, is what the U.S. $700billion bail-out amounts to), perhaps they could -- or indeed should -- be turned into rental properties. Even better, maybe the rental agreeents could incorporate An Option To Buy when and as the economy improves and the "tenants" can then afford a mortgage.

Without delving too deeply into the details, the concept would, as it were, have some relationship to the 100 year mortgage possibility that my August newsletter discussed. If, as I put it then, people who buy houses actually rent them from the bank, given that they may not live long enough to make the final mortgage payment, wherein, ahem, lies any real difference?

In any case, the rental income could relieve the liquidity problem and ensure that the promise to avoid a charge on the taxpayer could be more certainly kept. Moreover, if the rental agreement ties in an ownership possibility/probability, isn't it likely to be accompanied by a sense of "pride in our home" that usually isn't evident in "normal" tenancies?

As I've said ... free thinking, although I make no apology for it.

Re-engineered cars

In his first news conference President-elect Obama's remarks included his belief that the automotive industry is a backbone of America and deserves some help. If this opinion is combined with his expressed interest in exploring alternative energy sources and obtaining relief from America's dependence on foreign oil, perhaps Detroit needs to change to cars that are more fuel efficient or even powered by natural gas. With this in mind, maybe financial assistance could/should take the form of investment in a different kind of car --- one that one commentator observed could earn the industry a competitive edge that overseas automakers wouldn't have. This would be accompanied by a revival of employment, which in itself could reduce the job losses that are of such concern and show little sign of coming to an end.

In any case, this additional example of freethinking could assist in the turnaround of America's economy that's so badly needed.

Back to the future

Although there's been little mention of it, it does seem to me that the Obama administration is going to apply Keynesian economics to the current problems. Lord Keynes argued that government should allow a country to run up a loss in times of hardship, a principle that FDR followed to pull America out of its Great Depression. The present bank bail-out is a fine example of this approach and additional charges to the State with a view to prime pumping the economy would be in keeping with it.

Of course, the one mistake that successive government made (sidestepping the immense cost of World War II and its sequels) has been to not "balance the books" when times of plenty returned. Instead, the National Debt has been allowed to remain with only scant attention to reducing it.

Within my obvious admiration for Barack Obama and the promise he brings to the United States of America is my sense that, once he does -- as I'm sure he will -- bring his country back to its longtime prosperity, he won't be afraid to wrestle the accumulated deficit to the ground.

As he also said in his victory speech, in America all things are possible.

I'm looking forward to his actions that will prove it!