"Too much information can be confusing."
All of the news on the economic stimulus bill lately remind me of the old bingo games where you put all of the letters in a wire basket and tossed them. The little scraps of paper instead of letters of the alphabet would say: What caused this problem? What are they doing with the banks in the midst of this financial crisis? Which of the five new government programs will help the taxpayer? Are our taxes going up? Will we face inflation in the next several years? Why should I help these people that made poor business decisions? Can my small business survive this situation? What about China and the other countries that back our debt?
All of these questions are very frightening to the average American.
But, we still do live in the United States of America. We still go to work every day. We go on with our lives. Our president said on CNN yesterday evening that "We will rebuild, we will recover, and the United States of America will be stronger than ever."
I am an American, I work hard, I believe in family and I am optimistic.
The following information may be helpful for you to understand what is happening in our economy.
First…the banks.
The financial sector is the major player in this crisis. We just came out of a broadly sweeping credit boom that collapsed. These banks had excellent capital, but could not survive this big of a collapse in the credit market. Although the housing industry and slide of 18.2% in asset value of houses was a major part of this, there were other credit problems as well. Money was flowing at tremendous rates into the U.S. and other countries; a large amount of it borrowed money.
It is all supply and demand. Housing inventories are huge right now. Lots of existing homes available, making the inventory of homes too large. New home starts are at zero. Demand for existing homes is down due to fears in the market, and the uncertainty of the lenders to make loans. This is a lose-lose combination. Most American’s home is their largest asset. That asset has lost value. The boom hurt us all. We need to get to a "bottom" in the housing market and reach a stable value on homes, then we can start "back up". People will know what a home they purchase is really worth. People will borrow. Lenders will loan. Commercial Real Estate vacancies are also an increasing problem.
In the mean time, the Federal Reserve Board Chairman, Ben Bernanke has announced a 3- step program to firm up the banks. First the banks will be given a "stress test" to see how solid their capital is. These "stress test" are to last for two years. Regulators will be working with the major 19 banks to restructure and sell assets or do whatever it takes to get these banks viable. Ben Bernanke feels that this plan is our best hope of stabilization. It will take time to work. There will be tough supervisory and government oversight involved. The "stress test" is how regulators measure capital. The regulators want the banks to have more common stock so that they can lend money. The test are not who passes or fails, it is "how much capital does the bank have to meet the credit needs of our economy?"
The bad loanson their books can be written off,and there are loopholes for others to be written off even before their maturity date. The government will then re-capitalize these banks by taking preferred or convertible preferred stock in the bank in exchange for money. The banks would still have common stock investors. The program is a public-private investment in the banks. The government will be buying bad assets from the banks balance sheets. Ben Bernanke believes that these banks can be stabilized. He states"these banks will not be seized". The goal is to take the bad assets off of the books and restructure the banks to get them functioning again.
The third step of the plan is an exit strategy and once the banks are bank on track, the stock would be returned to the bank for money. There are 19 major banks that will be given the "stress test", and Ben Bernanke has asked the Senate to put into affect new law so that the Federal Reserve will have the authority to close banks that are not financially stable. Currently, the Fed does not have legal authority or framework to shut down banks. We will not have a "good bank, bad bank".
The financial markets are currently not functioning due to bad assets on their books. This is a direction of solving the problem. Trust needs to be restored to the banking system. When the private sector reflects this by borrowing things will improve.
Next…..
TALF Plans 1 and 2: The first TALF office opened yesterday. TALF stands for "Term Asset-Backed Securities Loan Facility". The purpose of TALF is to increase credit availability by renewing issuing of consumer and small business asset backed securities at more normal interest rates. What this says in simple language is that banks need to get new customers at lower interest rates for student loans, auto loans, credit card loans and SBA business loans. These securities will also be backed by mortgages on commercial property and most recently refinanced loans. The simple purpose of TALF is to unfreeze lending markets. The largest shrink in lending has occurred in the above areas. Sales of autos are at the lowest level since 1982. Production and the Gross domestic product (GDP) is down 3.8%. We need credit available so that companies can borrow and make plans to begin production once more. We talked in an earlier letter about the asset-backed securities that had caused the credit crisis due to poorly rated ASB’s. All asset-backed securities came to an abrupt halt in October 2008. This program is intended to make credit available to consumers and small businesses on more favorable terms by issuing Asset-backed securities to stimulate lending again.
The Fed’s basic goal is to improve functioning private credit markets. This part of the programs cost is One trillion dollars. Any small business that is struggling should inquire into TALF.
I have not mentioned the STIMULUS BILL. Not much there for the average taxpayer. Small businesses and corporations should contact their legislatures and senators and ask that they press for tax cuts. We need business and corporate tax cuts and incentives to increase productivity and employment in our economy. The government needs to realize this sooner not later.
Lynda Startzman
Razorback Financial and Income Tax Services, Inc.
