Connecting the Dots

The government moved with tremendous authority and precision last week as it announced its economic stimulus plan. The Treasury Department adapted the playbook FEMA uses when it deals with hurricanes. First step: send umbrellas to the afflicted areas. As the President of the United States spoke with his typical alacrity giving the following message and sage advice; “we are sending you a check, spend it,” I began to contemplate what I was going to do with my money.

Doctors have a primary objective when treating patients; first, do no harm. A secondary objective is don’t treat a patient’s “athlete’s foot” while that patient is hemorrhaging in the brain. Economic stimulus should be viewed in the same manner. There is no question we need a stimulus package to avoid a fairly significant recession, but it needs to target the areas of greatest economic concern. I think it is evident that those greatest areas have to do with confidence in the financial and real estate markets.

As we read about every day, owners of “sub prime” mortgages have written down billions and billions of dollars in losses. The problem is that none of those write-downs are getting to the individual homeowners. In other words, even though the over-lying value of the security has been reduced, the individual mortgages have not, which offers no help to the struggling home borrower. A targeted stimulus plan could offer tax incentives to the holders of those mortgages to subsequently reduce the mortgage balance of struggling homeowners and help them avoid foreclosure.

Now, is that fair? Aren’t we rewarding the financial institutions who made these loans and the borrowers who got in over their heads in the first place? No, it is not fair. There are times in life when necessity outweighs fairness. Do I think it is politically practical? Unfortunately, I do not; as I don’t have great faith in Congress to appropriately react to economic necessity.

The second part of a stimulus plan that I think is absolutely necessary is to eliminate the capital gains tax for investment in real estate that is made in the next two to three years. In other words, if buyers and investors are encouraged to start purchasing property again with the knowledge that those purchases will eventually be immune from gains tax, I would have to believe a lot of capital would flow back into real estate. Would it create a revenue shortfall? Hey, I don’t think a lot of gains tax is necessarily going to be paid in the next couple of years anyway. Is it tax relief that benefits the rich? It benefits everyone if capital moves back in to reestablish confidence and value in the real estate markets.

Finally, I think it was a good decision for the Federal Reserve to reduce rates by .75% in the emergency meeting last week. However, I also believe that jamming down short term interest rates will have a limited effect on improving the economic outlook. The fact is that rates were already relatively low and unless confidence is reestablished in the financial and real estate markets consumers are going to be reluctant to spend, businesses to invest and homeowners to buy.