“You Break It, You Own It”

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These were the words Collin Powell spoke to then President George Bush when as president he was deciding to invade Iraq.

I think this is good advice as we look at today’s economy.

Those who broke the economy need to own it, and by all means, fix it.

O.K. then, who broke it?

Three prime candidates

In my mind there are three prime candidates. The first is The Republican Party. The second is The Democrat Party. And the third is the banking system.

Let’s examine each candidate, and then give suggestions on what they can do to fix things.

The Republican Party

With the advent of the Reagan Presidency (1980-1988) there was an ongoing strategy to deregulate the federal government. By 2000 this was nearly complete. Financial markets had become deregulated, and if not deregulated at least ignored (think The SEC). As a result, bankers, investors, and businessmen started acting boldly in the wide open capital markets. One of the sectors they chose to operate in was real estate.

The Democrat Party

In concert with the trend toward deregulation, Democrats demanded that the practice of housing discrimination through “red lining” be outlawed, and that banks be made to dedicate sufficient home loans to lower income earners. By 2000 this too had been accomplished and robust lending practices had started.

Banks

With low interest rates and massive deregulation, banks began to make home loans in record amounts to sub- prime borrowers. They would then package those loans and pass them off as securities to investors. By 2005 the practice became so aggressive that banks were creating loans with essentially little or no backup or collateral. Applications for loans were granted based on what the applicant said was his or her estimated income without the bank checking or verifying the numbers.

An Unholy Alliance Was Formed

If one wants to see corruption in the making, no better example can be seen than with the case of home mortgages. Both political parties were satisfied with the arrangements that existed in the real estate market. The Democrats were happy because many of their constituents were able to qualify for home ownership. The Republicans were happy because their constituents were making money from creating the supply of homes and generating the loans that made them wealthy. And both parties made it possible for the lending institutions to become ultra creative in issuing loans.

In essence an unholy alliance had been created. A tipping point of corruption was bound to take place.

A Tipping Point Was Reached

A flaw was growing in the real estate market. Loans that were secured for next to nothing were starting to have hidden hikes in payments come due. As this happened, delinquent payments grew. At a certain point a tipping point was reached. The entire system started running out of money. Home owners had insufficient money to make escalating mortgage payments, banks could not pay bond holders, and bond holders had no money to pay bills and continue investing. The system collapsed, and money ceased to flow.

Emergency Relief Was Created

Thank goodness for Secretary of Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke. Without their help the nation would have been plunged into a great depression.

As it was the entire world was caught in a cycle of illiquidity. Paulson and Bernanke made it possible for financial institutions to receive money to keep the system functioning.

Paulson’s and Bernanke’s actions took place during the presidential elections of 2008. Three years have now passed since that time and we now stand at another threshold.

It’s time to start thinking about making moves to create a robust economic recovery. Congressional Republicans and Democrats, along with bankers, have a chance to atone for their earlier unholy alliance by ensuring that they now step forward and finally fix what they have broken.

In my opinion, the following two recommendations are critical if the economy is going to grow.

Two Recommendations Will Stimulate Growth

1. The Federal Reserve (Ben Bernanke) must continue to push long term interest rates on U. S. Treasuries lower by continuing to buy them. This will force banks from parking their money in these securities.

At this point, yields on long term U.S. Treasuries are relatively high. Banks can buy these securities and refuse to issue loans to consumers.

But if yields on these long term Treasuries start to come down, it no longer becomes profitable for banks to buy them, so they are forced to start lending to consumers. Remember, banks now have money. Their mission is to make money on their money. Right now, they would rather make a little bit of money by buying bonds, than make a lot more money by issuing loans to you and me.

The nexus between consumers who have been deleveraging their consumer debt, and banks who are making less and less on bond yields, is coming closer and closer. When these two lines meet, banks will start lending again.

It’s about time.

2. Republicans and Democrats in Congress can atone for their blind political ambition by cooperating in supporting the President in passing a jobs creation bill.

At a minimum, Congress needs to pass tax incentives for small businesses that hire new workers.

The President put forward a $448 billion jobs creation bill. One of the largest portions of that would go for infrastructure renewal. Roads and buildings would be built or fixed up. This is intended in part to jump start the economy, and to get the private sector to start investing in new plant equipment and machinery, as well as using excess capacity that has gone unused.

In addition, this will put money in the pockets of workers. If I have an economic philosophy, it is tied to the fundamental importance of ensuring that money best used is money placed into the hands of the individual, even if you have to create jobs to do it. Humans are at their best when they are working and receiving a fair wage for their labor; and then are free to spend that money as they wish. To me that is the essence of a great economy.

The notion that some in Congress hesitate to do this, and pledge themselves solely to bring about spending cuts, is contrary to all logic given the situation we find ourselves in. Look at it this way. What happens if you require a person without money to cut his personal debt? Nothing. The debt is still there, and the person still has no money. In other words, as it relates to our overall economy, it is much sounder to first stimulate the growth of the economy by creating jobs, which in turn puts money in people’s pockets, which then allows them to reduce debt at some reasonable rate while they spend.

Come On Now

Let the atoning begin. Republicans, Democrats, and banks, you broke our economy. You own it. Fix it. Now!!