The Economic Crisis and the best solutions to end it quickly

Corporate America squeezed the middleclass until there was no more left to squeeze out of them.  The middleclass, which was borrowing money to pay for their cars, kids’ college education, house, medical bills, and countless other items, faced a dilemma. The dramatic increase in gas prices, quickly followed by higher electricity, heating and food prices, suddenly forced them to make a choice: pay all of the bills and starve, or pay some bills and feed the family.

All of a sudden, they weren’t making enough money to pay back everything they owed and feed themselves. They stopped paying the only debt they could walk away from; their mortgage. Credit card and student load debt are both protected by bankruptcy laws, so unless they were totally destitute, they had to keep paying their credit card debt (student load debt will stay with you until you die).

When the middleclass stopped paying their mortgages, the banks, realizing the dilemma of the middleclass, started taking back any credit lines they had already extended that wasn’t used yet.

The effect of these actions was a double blow to the banking and financial industry.  The main source of income for them was suddenly gone, and the value of any mortgage related assets they held was dropping fast. Because of this one-two punch, the financial industry was crippled, almost overnight.  Even faster, they went to the Federal Government for a bailout, with the threat that if they didn’t get money they would stop lending altogether.  The White House gave them what they wanted. The banks started lending, but only to people with spotless credit and with enough cash to show they didn’t really need the loan. The majority of the people couldn’t get any credit because the banks knew the middleclass couldn’t afford to pay back any more loans. In addition, they made the situation even tougher for the middleclass by doing massive layoffs. This snowballed into the crisis the world is now in.

The government can give the banks every dollar they ask for, but it will do nothing to help fix the economy. The money would allow the banks senior executives who started this crisis to keep their jobs, and that’s basically all. They will lay off more and more people and continue to freeze credit from anyone that’s in a bind. Adjusting someone’s mortgage from 30 to 40 or 45 years, which is how the banks were contributing to help consumers, only helped the banks.

The root cause of this crisis needs to be addressed, and until that is done, the crisis will continue to grow. The middleclass must be able to afford the bare necessities out of their wages, without having to borrow.  We’re at a point where both parents in a typical middleclass family have to work, and it still does not give them enough income to pay day to day expenses.

As corporations kept reducing employee benefits, the employees had to make up the shortfall from their wages. In additions, corporations were picking office and factory locations based primarily on convenience for the senior executive making the decision, and not on what’s best for the majority. This forced middleclass workers to move further and further away from work in order to find housing they could afford. With these long commutes came larger daily costs to get to work and back home, not to mention the impact on the quality of life. Coupled with climbing housing prices, outrageous college costs, medical expenses, energy bills and so on and the only ones who can afford these luxury items are the rich.

To fix this economic crisis, the largest expenses need to be reduced or eliminated. Housing prices will continue to fall until the middleclass can once again afford to buy houses, so that will fix itself.

Immediate steps:

1.       Reduce all outstanding mortgages below jumbo loan amounts by 25 to 50 percent and reduce interest rate to specified fixed rates, without any fees or costs. In cases where there are first and secondary mortgages or home equity loans, they should be combined to create one new loan reduced by the amount above. An example would be: a $200,000 balance on an adjustable rate mortgage with 27 years left would become $150,000 at 4.5% fixed rate with 27 years remaining. Another example: a $250,000 balance on a fixed rate mortgage with 13 years left with a $100,000 home equity adjustable rate loan would become $262,500 at 4% fixed rate with 13 years remaining.

To ensure fairness, this must be done for all homeowners, and not just for ones that are late on payments. This would also have the side effect of reclassifying all outstanding loans and would allow banks to put a value on their toxic assets. For banks that refuse to participate in this program, Fannie and Freddie would buy the mortgage from the bank and make the adjustment for the homeowner. The offending bank would then be restricted from receiving benefits from any government programs, including selling future mortgages to Fannie and Freddie.

2.       Forgive all outstanding student loans.

People should not have to borrow money to send their kids to college. All public colleges and universities should be affordable, or free, for every family that wants to send kids there.

Starting immediately, the student loan program should be dismantled, and money allocated to public schools so that any family that wants to send their kids to one can do so without needing a loan. Bailout money should then be used to pay off all outstanding student loans for all middleclass and below families.

3.       If needed, the next step would be to examine credit card debt for a similar type program.

To help pay for this and reduce the federal budget, a process improvement review should be performed at every federal agency. Technology solutions should be implemented to automate and streamline manual or outdated processes. The purpose here is to be able to process more, using the same or less resources. Resources would be reallocated to alleviate shortages elsewhere.