I know that many Americans are looking for President Obama to solve this crisis painlessly. But there is no easy way out. The debt must be paid off and/or written off.
The politically unpopular steps that need to occur are as follows:
- Housing prices need to drop another 15% to 20% to reach fair value. This will result in more foreclosures. When prices fall far enough, the houses will sell and inventories will fall. If you cannot afford the payment on your home, you should become a renter. Not everyone should own a home.
- The government and Federal Reserve need to shine a bright light on the bad debt within the financial system. The collateral or lack thereof backing up government loans needs to be revealed by Treasury and the Federal Reserve. Covering up the worthlessness of these assets is contributing to the frozen system.
- The remaining mega-banks that have caused this crisis -- including Citigroup (C), Bank of America (BAC), Goldman Sachs (GS), Morgan Stanley (MS), and any other insolvent banks -- need to be allowed to fail, if failure is indeed their destiny.
- Failed companies with failed strategies must go bankrupt. Allowing companies (such as General Motors (GM) and Chrysler, for example) to fail brings about restructuring; the remaining healthy companies can buy the good assets.
- Only infrastructure projects that benefit the citizens of the country should be undertaken. These would include water pipe replacement, electrical grid upgrades and repairing structurally deficient bridges.
- Keeping interest rates at zero in an effort to force savers to borrow and spend is penalizing the frugal to benefit the profligate. Borrowing our way out of a debt crisis will never work.
- Consumers should be encouraged to pay down their debt loads and increase their savings rate. The sooner this can be accomplished, the sooner the country can resume growth.
- The median 401k balance was $18,942 at the end of 2007, with 39% of workers having a balance below $10,000. Approximately 8,000 Americans turn 65 every day. 20% of the U.S. population will be over 65 by 2030. An aging population with virtually no retirement savings must increase their savings and cut consumption dramatically.