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The Next Step in Stimulus

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Government ownership not the solution to mortgage crisis.

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Stimulus:

1. Something that incites to action or exertion or quickens action, feeling, thought, etc.
2. Something that excites an organism or part to functional activity.


I guess we all like to be stimulated, sometimes for pleasure, sometimes to get over a hump (mental or physical) and some times just as way of getting out of the starting blocks. Today we're going to see efforts to stimulate, efforts to temper stimulation and attempts and hopes there will be stimulation.

Efforts to Stimulate

The House of Representatives approved a bill that would insure $300.0 billion in mortgages. The highly anticipated and controversial bill introduced by Barney Frank passed 266 to 154 and now faces a possible veto by the President. This is an unprecedented and mind-boggling package. Often Congress will apply a band-aid when a tourniquet is needed: This time they are looking to mummify the problem when perhaps only a tourniquet is needed. I say "perhaps" because the question is there, as to how folks that are paying their mortgages (you might want to remember them as they are 90% of homeowners) are going to react. Without a doubt anyone on the margins thinking about tossing in the towel or maybe not living up to their obligation will be enticed to get in line and have the government become co-owner of the property.

According to the Congressional Budget Office, the bill will eventually costs tax payers $2.7 billion in addition to another bill that was passed which would provide municipalities with funds to buy and rehabilitate foreclosed homes.

I think people clamoring for these bills should be careful of what they ask for. I grew up in Harlem in the 1970s when urban blight was on par with movies like Mad Max and Waterworld. Many properties were owned by the city as they had been abandoned for a long time. Over 20 years later, virtually all the empty lots that dotted the community have been sold and new wonderful buildings now stand where there was once only crumbled brick and broken bottles. The problem now, however, is the folks that used to live in the neighborhoods can no longer afford to do so.

I suspect Maxine Waters, Congresswoman from California and sponsor of this $15.0 billion bill (which passed by a vote of 239-288 with 11 Republicans voting in the affirmative), understands this could become a kind of bait and switch that leaves old homeowners out in the cold after taking a few dollars during this difficult period. It would be great if these folks toughed it out and held onto their homes rather than being stimulated now only to deeply regret it later. It would be wonderful for all Americans to work out deals with their respective banks and keep their homes. Those that can't hang on will learn a valuable lesson. Or will they?

Efforts to Temper Stimulation

The President has vowed to veto these bills in their present forms but there is a chance that Treasury Secretary Hank Paulson will craft a compromise. So at the end of the day I believe we're all going to have greater exposure to the housing crisis even if the overwhelming amount of folks took good care to avoid the situation and lure of getting a home for nothing down.

With most fiscal conservatives already off the presidential bandwagon, the White House doesn't have much to lose by compromising.

This is a heart-wrenching situation and it could have unintended consequences that change the real estate market forever, and not in a good way. There is also the slap in the face of those folks that saved up 20% down payments and keep up their payments. I suspect some will say those people are rich and have never had to worry, but I think those people are mainly factory workers, laborers, technicians, plumbers, teachers, firemen and other neighbors who simply did the right thing, which isn't always easy.
No positions in stocks mentioned.
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