Iceland Votes No on Bail Out Repayment!

I reported on Iceland scheduling a referendum on whether it should pay back its bailout. The voters appear to have voted no repayment on the bailout.

Mortgage Crises, Share Economy

The Tarp Watchdog, Neil Barofsky, is concerned abuot that ninety percent of mortgage loans are backed by Fannie Mae, Fredie Mac and the Federal Housing Administration. This has increased the risk of another housing bubble. Millions of home owners have refinanced.

A long term solution is extending the idea of the share economy. An MIT Economist, Martin Weitzman proposed the Share Economy as a solution to stagflation. Companies would pay their workers a fixed percentage of their gross revenue rather than a fixed monthly wage. That way, when recession hits, the company would not have to lay people off.

Extending the idea, mortgage payments would be a percentage of the wages. The investments based upon them would not be fixed-rate instruments, but a simple percentage of the payments received from the mortages on which they are based. For example, twenty individual with $100,000 to invest might contribute $5,000.00 to each of twenty mortgages for a total of $100,000.00. Each borrower would agree to pay thirty percent of their take-home pay to the mortgage. Thus each investor would receive 1.5% of each worker's gross revenue. Should one borrower suffer a medical setback or a layoff, this would get propagated to the mortgagors. Of course, other borrowers might do better than expected, so with good diversification and "the law of large numbers," it would approximately balance out. Should one of these investors themselves have a mortgage, the changes in their income would be propagated to the investors funding same, so they would not be squeezed. And this idea works well with commercial mortgages such as for hotels and shopping centers. The hotelier would pay a percentage of the room rents they received, and the shopping center would pay a percentage of the rents, which often are a percentage of what the stores sell. Thus commercial real estate trusts would not go bankrupt unless they couldn't pay basic upkeep; then, they would cease paying revenue when the buildings crumble and the ultimate investors would get the appropriate share of the value of the raw land.

Yogi Berra said that "It is difficult to make predictions, especially when they concern the future." Weitzman's share economy means that when a business owner predicts higher demand or better prices for the firm's products, the workers don't suffer layoffs. We should extend this idea to mortgages and for those receiving income from real estate or securitized mortgages. This means that homeowners don't suffer foreclosures and financial institutions don't fail just because someone is more optimistic than the reality turns out to be. There is already precedent for this, one can convert some types of student loan to an agreement one pays up to twenty percent of one's income rather than a fixed payment.

This idea of extending the share economy to segments of the financial industry is certainly not new. As Hyman Minsky pointed out in 1995, using speculative assets can lead to a cash shortage and a collapse. A long term solution is extending the idea of the share economy. An MIT Economist, Martin Weitzman proposed the Share Economy as a solution to stagflation. Companies would pay their workers a fixed percentage of their gross revenue rather than a fixed monthly wage. That way, when recession hits, the company would not have to lay people off.

Extending the idea, mortgage payments would be a percentage of the wages. The investments based upon them would not be fixed-rate instruments, but a simple percentage of the payments received from the mortages on which they are based. For example, twenty individual with $100,000 to invest might contribute $5,000.00 to each of twenty mortgages for a total of $100,000.00. Each borrower would agree to pay thirty percent of their take-home pay to the mortgage. Thus each investor would receive 1.5% of each worker's gross revenue. Should one borrower suffer a medical setback or a layoff, this would get propagated to the mortgagors. Of course, other borrowers might do better than expected, so with good diversification and "the law of large numbers," it would approximately balance out. Should one of these investors themselves have a mortgage, the changes in their income would be propagated to the investors funding same, so they would not be squeezed. And this idea works well with commercial mortgages such as for hotels and shopping centers. The hotelier would pay a percentage of the room rents they received, and the shopping center would pay a percentage of the rents, which often are a percentage of what the stores sell. Thus commercial real estate trusts would not go bankrupt unless they couldn't pay basic upkeep; then, they would cease paying revenue when the buildings crumble and the ultimate investors would get the appropriate share of the value of the raw land.

Yogi Berra said that "It is difficult to make predictions, especially when they concern the future." Weitzman's share economy means that when a business owner predicts higher demand or better prices for the firm's products, the workers don't suffer layoffs. We should extend this idea to mortgages and for those receiving income from real estate or securitized mortgages. This means that homeowners don't suffer foreclosures and financial institutions don't fail just because someone is more optimistic than the reality turns out to be. There is already precedent for this, one can convert some types of student loan to an agreement one pays up to twenty percent of one's income rather than a fixed payment.

This idea of extending the share economy to segments of the financial industry is certainly not new. As Minsky pointed out in 1995, using debt to create physical assets and the the hedge finance of our modern capitalist system can (and obviously has) evolved into speculative bubbles, like we see in real estate.

Meltdown Rescue, Participatory Democracy Style

As we hit the one year anniversary of the bailout:

A participatory democracy approach to stopping the meltdown. The businesses that needed credit that could not get it, would apply to the government for the funds they needed for day to day operations. Remember that the problem was that the commercial paper market threatened collapse! The businesses would be watched by sortition juries. There were plenty of unemployed who would be available to do this. This would include crews that would film inside the business and posting a feed and for, the publicly traded businesses, the executive suite and top management would be put on round-the-clock monitoring, with veto power by the sortition juries over any action.

Then, the banks and other large institutions would be allowed to fail.

Those facing foreclosure would have their bank accounts monitored and strict laws would be passed saying that their pay or any other payments sent to that account. The individuals would stay in their home and be allowed to make essential purchases, as allowed by their sortition jury, orthodontia for their kids, continuing their kids education. But non-essentials such as eating out, vacations, a new flat panel TV, etc. would be stopped. All expenditures out of the account would have to be approved by their sortition jury. In other words, individuals would be allowed to keep their status quo so they would not suffer losing their job, not eating, etc., but they would be forced to hunker down.

In other words, we would keep the status quo going, but those who might have been profligate would be stopped.