Thursday, February 19, 2009

The latest furor about Race, the US being banded a nation of cowards!

One could argue the toss about whether it was the place of the Attorney General, the chief law enforcement officer to make this comment in his department at a function commemorating ‘Black History Month’.

No matter what was said and why, let us just go back to some real truths which need to be addressed and gradually resolved in time. The election of Barrack Obama should make it easier to address the hush topic of race in the open without fear, as sometimes is the case for fear of offence.

Having lived in the US for nearly 15 years and having traveled the length and breadth of the country, I can speak with an element of first hand knowledge as well. People of all races work fairly harmoniously together, and socialize after work, however they go back to their segregated neighborhoods. I believe it is a matter of comfort for them to live side by side with people of the same race, be it Italian American or African American. I have lived in neighborhoods that are new in the Western US where if the area is less than 20 years old, and all the homes are new, they tend to have a racial mix that is representative of the area, and in that sense no ghettoes are created. Of course in luxury neighborhoods, the Indian and Chinese Americans are more represented than even White, as compared with the area’s racial mix.

In a similar vein, watching kids in schools that are in old neighborhoods racially segregated, it also seems to have a system of apartheid, which despite years of trying to integrate, have not actually happened. In college students tend to lunch and therefore socialize in racial groups, and only where some races are totally underrepresented like Indian Americans, they kind of get an honorary white acceptance.

These examples illustrate the need still for their to be a debate, and for whites and blacks to make a conscious effort to integrate more, so that fear of a black family next door does not arise. It is easier said than done, and we have to make an effort. In that respect the word coward, which can be interpreted in many ways, is one that is apt. We are not confrontational enough to call a spade a spade and in that sense we are cowards. Lets therefore not get bogged down in the words used, but just accept the reality and address this issue in a way that will promote racial harmony. We have to first accept there is a problem if we are to find a solution.

Thursday, February 12, 2009

Lets try and break the deadlock

In a functioning democracy with free speach, and now the internet and blogs, we are all able to say our piece whether we agree with a point of view or not. Additionally we all have our personal gripes and favorites and express them in no uncertain terms in all forms of media. Additionally the level of knowledge and ability to communicate them also varies vastly from person to person as can be seen from the various blogs and letters that one reads as well as the comments on these blogs. The prejudices of a lot of people are also aired pretty openly so that one can get a feel of the mood of the writer.

Then there are all the personal hardluck stories, where some shout louder than others over the personal tragedies which we all face in some form or another and handle with different levels of forebearance and fortitude. Even in this area it is common knowledge that in crises the really hard up cases are not heard nor are they found and so do not even receive the levels of basic attention they are entitled to in some cases of tragedy.

In all these how do we find common ground from which we can begin to solve the country's seemingly insurmountable problems. Even in the Houses of Congress it is apparent that politics plays a role as the constituents feelings are sometimes expressed by the congressmen which differ markedly from the party line. In coming to a compromise, there has to be a give and take from both sides and how much one gives is the key and not how much one takes.

In these heady days where there are urgent matters to be settled and compromise has to be reached hastily, certain party line differences need to be ignored and a consensus building process entered into. In the case of the new President he is able to with the goodwill generated from his election and the post election expectations to break the deadlock and come up with some unanimous proposals, so that there are no doubting thomases in the 'I told you so mold'. Even if the proposal when enacted does not work it was not for want of trying, as there are no fixed solutions to these problems and only ones that are hoped will change the status quo.

I believe we really have to come together in these tough times and build confidence which is lacking and which will not be forthcoming without unanimous support.So I request those who are fortunate enough to have the power to change our lives, that they do so with haste before matters get worse and do it effectively, decisively and unanimously.

The only immediate answer to the crisis everyone is grappling with

Sometimes the answers to the serious problems are so simple, it takes one far removed from the daily brainstorming sessions inside the FED to find a simple solution, which will go along way to reducing the length of the recession and add a stimulus faster than any other proposal currently put forward.

Mark to market value all loans on first homes. The write down will be matched by Fed Funds on the balance sheet as a no interest promissory note. In accounting terms, Credit the Loan Assets, by reducing their value, and Debit Loan writedown loss in the Profit and Loss account. A book entry for capital adequacy issues to be made by Crediting the same amount in a Balance Sheet account called Interest free promissory note from the FED and Debiting a Balance sheet account called current account with the FED.

There will be an immediate reduction in Foreclosures, immediate reduction in mortgage payments on the lower principal, and some kind of amortized capital repayment of say 2% per annum of reduced loan value to satisfy those who feel they are getting a free lunch for being highly leveraged. 75% of the gain on sale of the home, should be clawed back and the whole debt reduction amount will be with the person for life, much like Student Loans.

This will mean those ready to foreclose and declare bankruptcy will think twice as this will be an effective renegotiation of their loan. Those who have already paid off debt or have reduced debt, who are usually the older people and likely to vote in elections will not be mad as these debt reductions are not write-offs, just delayed for the future.

In effect what this will do is immediately release a lot of funds, arising out of lower interest payments direct to the economy by people who are most likely to spend it on immediate consumption, and not pay down debt. This will give an immediate boost to the economy, more immediate than any of the current plans. This will not be inflationary, as the same amount of money is still in circulation, just that instead of interest payments, it will be used to buy consumer goods. The Housing crisis will immediately come down to manageable proportions and the once off hit of even 5 trillion in write-downs will not really have a negative impact as this money will not be released, just an accounting entry to change its format on the balance sheet.


This is the ONLY SOLUTION to the present crisis

It appears that the Gnomes in the US government are grappling with a crisis they know not how their actions will solve!! The example below characterizes one primary reason that the stimulus will anger more people than will create demand. If I were a hard working honest person, who suddenly sees the value of my main asset, my home and my retirement savings account lose 50% in value in a matter of months, how can I continue to pay a mortgage off that is much more than the value of my home?

Arguably, they are worse off than those who have lost their jobs, home, and are on unemployment benefit, which has now been extended for over a year. The latter have no debt burden. The former are drowning in debt. Everyone is therefore in crisis and there is no relief at hand for those still in work!!

This scenario of those in work and those out of work both in a deep depression, no amount of tax reductions, tax credits are going to increase their spending, as they now draw down on credit card debt as well. In many ways those out of work who have declared bankruptcy, and have all their debt wiped clean excluding student loans, are the best off. They have no worries, as they sit at home in a rental drawing unemployment benefit not having to pay off any borrowing. Those with the mortgage, credit card debt, home equity lines, and car loans, are those who will not recover for a decade, having to work to pay off this debt, and so will NOT spend however much you give them even with no strings attached.

The answer is simple and one had better do this now and not later after the recession has gone on for a long time with people wondering why it has not ended. Just the first mortgage only must be reduced to the value of the property or collateral. Then there will be less foreclosure, less delinquency, and a greater likelihood of having disposable income to create instant demand, by those very people who are more likely to spend this mortgage reduction on consumer durables and disposables. Needless to say any future capital gain on the sale of the property can be clawed back by the bank/govt. and so no perceived long-term benefit will result. In a future bankruptcy their lower reduced debt will be with them for life not being extinguishable.

So Mr. President heed this advice as being the surest, quickest and only way to stimulate the economy, and not let the housing crisis overhang any possibility of recovery in the foreseeable future.

The very real crisis in the neighborhood- enough to turn the stomach

The economic crisis is really having a social upheaval between oneself and ones neighbors to an extent it did not before. Given the collapse in the housing market, I illustrate by way of an example to make the point about the changed economic circumstances arising out of changed expenditure.

Mr X and Y are neighbours, living next to each other on a new housing development to which they moved two years ago, each paying US$1M for their lovely home with all mod cons. Mr X worked for a mortgage brokerage, earning US$100K gross, and Mr Y worked for the Government also earning the same. They both put down 10% on the house and borrowed the rest from the same lender, paying the same monthly interest on the mortgage of $4,500 a month. This took a chunk out of their monthly income. When the recession hit and the bottom fell out of the mortgage brokering business, Mr X lost his job, and went on unemployment benefit, being forced to foreclose on his home and walk away leaving the property with the lender. Mr Z bought this property at auction for US$500,000 with a down payment of US$100,000. His monthly mortgage payment is $2,000 and his income is US$50,000. The annual property taxes that Mr Y pays is US$10,000. It is based on the price paid at 1% and so Mr Z pays US$5,000. Due to the deductions and lower income Mr Z pays no taxes, while Mr Y pays US$5,000. Mr Y net annual income after mortgage interest and taxes is $31,000, while, Mr Z who earns half that has $21,000. A difference of $800 a month.

So Mr Y who sees his neighbor doing a job that pays less than half his, living next door, having paid half of what he did for the house a few years later, saddled with a mortgage that exceeds the value is in a negative equity position to add to his woes, while the lower income neighbor has a positive equity of the $100,000 down payment. What is Mr Y to do? Does he walk away in bankruptcy, that could jeopardize his job? And with no money to put on another home, will have to be a renter in a place of similar value but with a much lower rental than his current mortgage freeing some disposable income.

These are some of the real choices people will have to make, and with the temptation to walk away being so great, could exacerbate the mortgage crisis further, even by those who still have jobs, but are appalled at having to pay interest and capital on a borrowing that far exceeds the value of the home.

Thursday, January 29, 2009

The Bonuses to be paid of US$18B and the Pork Barrel in the Stimulus

The above are two current topics from yesterday’s happenings in Washington and New York, both having the theme ‘business as usual’.

It is unconscionable and Obama reiterated this, that banks, which continue to accept Federal bailout money, pay huge bonuses to staff based on their performance last year. Why should effectively, tax-payers who lose their jobs, subsidize well-paid executives just because it was drawn into their contract of employment. If the bank had gone bust these executives would not have received this bonus and so it is fair that if the govt. saved the bank from foreclosure, the bonuses should be pared to a reasonable figure of not more than $500,000 at the top and pro rata down to the others. Needless to say that if there was no bailout money for a bank they should be free to pay out what it wants to whom it wants as long as its shareholders are in majority agreement to the payment.

On the other matter, where the House of Representatives split completely on party lines, the Democrats should know better than to insert ludicrous spending into this bill which will only inflame right thinking voters, into believing that Congress live in a different world to them. It must be remembered that the pork barrel will help certain communities with money on projects that are nevertheless questionable, however it is the principal of the practice that is at stake. The President promised that there will be change and it will not be business as usual. So in order for him to have credibility he must pare this down significantly in the Senate version and when it therefore returns to the House at least 50 Republican Congressmen could be persuaded to support the final version, by so doing.

These are all examples of good governance that should be applied from the commencement of the new administration. We will soon be confronted with a few other similar ideas, and the other contentious issue is the buy American plan to help the US economy. It should however not be mandatory, as it would inflame the exporters to the US and thereby prevent them from buying US goods, an altogether silly idea. Of course subtle encouragement is OK in any country and why shouldn’t the US also engage in helping their domestic industry. We must be sensible and think when we make rash and hurtful comments, as they come back to haunt us. This issue is also one in the same light and a similar judgment call should be made.

Monday, January 19, 2009

Martin Luther King Day, January 19th 2009

Today is Martin Luther King National Holiday in the USA. Tomorrow is Barak Obama’s Inauguration on Capitol Hill. The recent poll amongst US blacks resulted in them overwhelmingly agree that Dr Martin Luther King’s I have a dream speech delivered on the base of the Lincoln Memorial, has finally become reality.

In essence the speech was that he believed one day all Americans, Black and White will be equal and live without the bondage created by race. I need not say how apt the inauguration of the new US President, the first African American, follows the MLK holiday which is the reason why the African Americans finally feel empowered to even state this fact.

As an immigrant American, I get misty eyed at the significance of this symbolism and wish I had the time to watch the inauguration. Sadly I have to work and will miss the news and TV coverage of this momentous event. My thoughts and prayers are with the event and the new President, and I hope that he will be able to achieve some of the expectations the whole world has on his Presidency. We cannot predict the future, but having optimism that events will improve is worth holding on to.

The crisis the world is facing this year is unprecedented and occurs once in anyone’s lifetime. In some cases this is number two for some people like my father who was born in 1928 and so lived through the crash of 1929 and the depression of the 1930s where his grandfather who had so much went bankrupt. Even then the world crisis affected the world not just a country. This time too no matter what one says it has affected everyone in one way or another. The solution to this crisis needs someone with charisma, hope and optimism to be in charge and I believe we could not have hoped for a better person to take the helm. The saying goes that God works in mysterious ways when the heart is right!! HE SURE DOES.

It is therefore apt that with the fulfillment of the dream, the new challenge of the century is now handed to the man who takes up this mantle. I wish I were able to see a video of the whole “I have a dream” speech as one needs to listen to this again today to understand more fully the whole significance of the day and how it seamlessly relates to the events of tomorrow. I pray that all young people in the world are taught this story of courage to give them an overview of history and of how important an event tomorrow is.