a process of self-regulation by a profession or a process of evaluation involving qualified individuals within the relevant field. Peer review methods are employed to maintain standards, improve performance and provide credibility.
POINT NUMBER ONE - Stabilizing Housing Prices.
- Existing mortgages - not new mortgages
- Primary residences - not vacation homes, rentals, cottages, etc.
- Must qualify without FICO
- Must qualify under 36% Debt to Income (DTI)
- Loan rebased to the lower of outstanding balance or appraised value.
- Marketable by Ginnie Mae
Assuming this is an accurate reflection of Denninger's first point, the IER likes it, but let's break this out point by point.
Those who find themselves holding title to a bunch of new properties at fabulous prices will now have the ability to either fix them up and sell them for a tidy profit, thus establishing the new baseline for housing of that class, or rent them out for a very appealing ROI and have true income properties. Go long HD stock.
Anyone who has partied a little too hard knows all too well the Technicolor yawn is coming sooner or later, so just stick your fingers down your throat and get it over with. There is no way to avoid this outcome. Imprudent banks and homeowners (lending and buying at the peak) are facing this reality. The only game we are playing is a multi-trillion dollar game of musical chairs. Either way, the problem is still there, we are only determining whose butt isn't in a chair when the music stops. Someone has to take the hit, so let it be the ones that loaned and purchased at the peak, rather than suckering in those who didn't. Cosmic justice, folks...cosmic justice. It's how an intact society is passed from one generation to another.
Lower prices would free up consumer discretionary spending and savings. That spells higher margins and more capital investment - both are going to be needed to kick start the economy. One of the main reasons the economy stinks is that housing is NOT an investment, but it has tied up all our capital. Higher housing prices are no more conducive to economic growth than higher energy prices or higher food prices. Using this market clearing mechanism should be the centerpoint of any government sponsored "recovery plan." The previous "painless" incarnations of economic recovery have only made things worse. Pain is part of economics and is a good thing. It teaches prudence in the same way your central nervous system teaches you not to shave with a cheese grater.
POINT NUMBER TWO - Usury
No credit cards (or other forms of unsecured debt) can be issued for more than 10% (1000bps) over current FED FUNDS.
I like this and give it the IER seal of excellence. Here is why.
Any bank that can't make a profit on their plastic with the swipe fees and 1000bps over their overnight rate has bigger problems than deadbeat mall rats. I've had a credit card since 1986 and have yet to carry a balance over from month to month. Total interest paid since 1986? $0.00. Not one dime. Total amount of defaulted credit card debt? $0.00.
My credit card company makes plenty of scratch on the swipe fees, since I put almost every transaction on the plastic. So, now that I have shattered the humeral head of my right arm patting myself on the back, why is this important?
It puts banks back in the business of hiring black hearted meanies to deny people credit. Perhaps we don't need to be issuing every college kid a credit card with a 5 digit limit. Perhaps banks need to withdraw credit cards when people don't pay, or lower their credit limits.
In other words, treat credit as a luxury of the responsible, rather than a right of the Great Unwashed. We need to incentivize the less credit worthy to save and use cash in order to develop the skills of handling their spending in a more responsible manner rather than reinforcing mindless consumerism and allowing those least capable to live beyond their means.
If banks can't subscribe the risk for a customer with FF+10, they shouldn't issue the card.
POINT NUMBER THREE - Repeal Bankruptcy Reform
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was Grade AAA legislative raw sewage. This was written by MBNA and it shows.
Bottom line: make debts dischargeable and the lenders will be much more choosy about lending. This follows all the same philosophical underpinnings of the previous two points, and Denninger is spot on. This is not populist smack-talk, but forcing bankers to do their jobs and occasionally say "no" when prudent. I am comfortable speaking for Denninger on this point when I say that banks are debt merchants and they obviously want to sell as much product as is possible. They also need to bear the risk for issuing their product. I know for a fact that Denninger is an advocate of prudent risk management in the business sector and on this point he also gets a gold star from the IER.
POINT NUMBER FOUR - Glass Stegall
Banking and "investment banking" (trading firms and hedge funds) are two distinct and separate business models. One is in the business of shunning risk and the other is in the business of trading risk, so it stand to reason not to allow the two to co-mingle funds.
All in all, Denninger is on the right track. I'd like to share his optimism for the marketability of the new Ginnie Mae mortgages just prior to a controlled detonation, but other than that, he nails it.
Open up and say "Ahhh," America. It's time to blow chunks.