Incentivize Home Puchases By Offering Cash

Per Howard Meltzer of Carnegie Mellon University who suggested this evening on the News Hour with Jim Lehrer that the government should offer home buyers a tax credit. I have an alternative, why not offer home buyers cash? Give home buyers cash to buy a home. How much? Maybe offer 1% of the purchase price for homes valued up to $500,000.

Sports Owners, Sport Superstars, and Hollywood Are Next

The financial Cat 5 continues to wreak havoc on our economy. American athletes are some of the highest paid employees in any industry. Sports teams owners are often very profitable too. The financial savagery that this Monster of 2008 is wreaking will not spare the Derek Jeter's, Arods, or others. There is likely to be push back beginning with the consumer.

To be continued...

Issue Banks Certificates That Can Only Be Used To Lend

There might be a way to force banks to lend capital they receive. Bear with me as I am likely bundling stories from the Panic of 1907 with the 1929 Crash as I have recently read books on both from multiple authors.

Any way I think it was during the Panic of 1907 that cash became very scarce among the banks. There were many different types of banks back then so I am not sure I have the type of bank correct. Since there was a scarcity of cash the trust (I think Trusts) banking companies created a coupon like certificate that was like an IOU. This IOU was like its own currency equal to cash. Call it a coupon, call it what you will, but these IOU's sort of became a currency between the trust companies until cash was pumped into the system. These IOU / coupon like devices were basically equal to cash as they were backed by the government and the trust companies were able to function until the cash started to flow. These certificates were allowed to be included when calculating total capital.

Fast forward to the present. The Treasury can do something similar. The Treasury can issue special Tickets / coupons to banks that have the same exact value of cash but that could only be redeemed by the banks when the banks have borrowers lined up ready to borrow. These coupons would have no other purpose but for lending.

To recap: The Treasury can issue IOU / certificates to the banks that are equal to cash but can only be used to lend to borrowers. These coupons would serve no other function but to be issued by Treasury to banks and redeemed for cash by banks only for borrowing activities.

Of course the devil is in the details but since many ideas are getting floated it is hard to know what will get us out of this problem. Since the Treasury is in the dilemma of giving cash to banks and then watching them sit on it, this may help.

Federal Fiscal Stimulus Should Be $2 Trillion

The US should match China with a fiscal stimulus package that totals $2 trillion spread over 4 years. This would add about 3.5% to annual GDP and will help counterbalance the massive declines in GDP from the consumer, corporate and local government sectors. It should be front end loaded and scaled down over the 4 years.

"Nobody Knows What The Hell Is Going On"

This is a quote an elderly gentleman has used who closely follows the economy and the markets. He used it 6 months ago and I think it is a very accurate depiction of what is going on in the financial markets. The leaders and regulators are figuring it out as they go along. The economic storm is so large and fast-moving that throwing solutions into the mix and seeing what sticks and dismissing what does not is the way to move forward. As ad hoc as that is, it makes sense.

Q4 2008 GDP Could Decline by 5% (Annualized)

I very roughly estimate that Q4 GDP will decline by 5% (annualized). I base this on the export component of the October ISM. The ISM was released earlier this week. According to the report, exports in October collapsed.

When Q 3 GDP early estimates were released there were two components that held up well. One was exports and the second was government spending. The consumer component dropped by about 3%. With exports collapsing and the US consumer collapsing the Q 4 GDP rate of change is likely to be severely negative.

Of course, government spending could spike particularly if there is a new stimulus plan. But how long can the government "hold" up GDP? The US consumer makes up 72% of US GDP. Until the US consumer recuperates this economy is likely to decline.

I am saddened by the news and believe that eventually things will get better. It is just that it is going to take a lot of time for that to happen. But eventually things will pick up. For the time being, we slog our way through this very difficult stretch.

Note to the Fed: Lower Rates By 1.00% to 0.50%

The Fed should immediately cut interest rates to zero. The Fed has a chance to get in front of this crisis. Acting quickly and with force would be seen as a positive by the markets. Act now and signal to the markets that you mean business.