http://www.nytimes.com/2009/07/15/opinion/15wed1.html

In the NYTimes editorial entitled “Waiting Game” the editors list three of the main problems facing the country and the Obama administration:

Stimulus Spending,
Foreclosure Relief, and
Bank Rescue.

I believe they are spot on in their identification of the issues, but I have no faith that our government has the capacity to either make any of the right decisions, or even correctly evaluate the situation. Personally, as an unemployed finance professional I feel extreme frustration, and I know I am not alone in this. I don’t know whether there will ever be another time in my career where I will have a better view of the problems facing our economy, while at the same time having basically no way to influence the situation. Either way, please allow me to comment on each of the above topics.

On stimulus spending, the Times suggests that the most responsible thing for the government to do is to credibly pay for healthcare reform. This will help prevent some of the adverse effects of continued deficit spending on the bond market. Unfortunately, at least according to the current House bill, the main proposals include potentially crushing additional taxes on small businesses and the “rich” – proposals that will continue to hamper the economic recovery and whose financial benefit is questionable at best. As someone who is considering joining a small business on the cusp of size which will be subject to the new tax, I know we would greatly question the wisdom of growing the payroll in the face of the proposed tax schedule.

We all know that foreclosure relief has been an abject failure to this point. As is the Times’ wont, they blame the big bad banks for holding up the loan modification process and question whether Mr. Geithner and other government officials even understand the problem. I would say that even if they do, they don’t want to admit it publicly. I have personally examined thousands of mortgage loans from both the perspective of a securitized bond investor as well as a whole loan buyer and the fact is that there are very few situations where loan modification benefits anyone but the home “owner.” Foreclosure simply makes economic sense – even in areas of extreme negative HPA. Unless an investor believes that HPA will turn very positive very quickly, all the numbers will point to foreclosure. If the government really wants to slow the tide of foreclosures it’s going to have to tell the banks to take losses in the form of principal forgiveness and/or compensate securities investors for the same thing. Otherwise, there’s not reason to slow foreclosures.

Lastly, on the subject of bank rescue, the Times’ editors hit the nail on the head. They correctly identify that banks will not admit losses until they are forced to. At the same time, the recent capital raises are in many cases inadequate (and management know this in their heart of hearts), so banks are still reluctant to lend – which will continue to drag on the economy.

Please feel free to comment, but these are my thoughts of the day.