Economic Crisis Hot Docs: U.S., Europe, Japan in Recession, Summit Could Be a Milestone

- Solve the loan problem.

- Solve the derivative problem.

- Reassemble whole loan mortgages.

The U.S. economy is shrinking fast, because businesses cannot get loans that they need to operate normally. Banks and lenders already own $ billions in bad loans, and they are afraid to make new loans. The government gave $ billions in bailout money for banks to start lending, but banks hoard the money to save themselves.

Our financial system became untrustworthy, because it mixed $ billions in bad loans in with the good loans. Now, banks do not trust any of the loans, and the entire credit market stopped working.

The U.S. economy will continue to shrink until we untangle the loans. Once the bad loans are isolated, they can be fixed one at a time. Then trust will be restored. Credit will flow, and the economy will grow.

So far, our government is spending $ trillions on bailouts and pork projects, out of ignorance and political ideology. The real solution is much less expensive than that.

The USA has fixed this problem before, and it is not hard to fix again.

A) Start with the Resolution Trust Corporation (RTC), which our government setup to solve a Savings and Loan problem in the 1980s.

B) RTC buys up components and derivatives to reassemble whole mortgages.

1. Total securitized mortgage market is estimated at $1.3 Trillion by a Professor of Economics at Ohio State University. (Also see the graph from Deutsche Bank at “The Death of Securitized Mortgages” http://www.nakedcapitalism.com/2008/06/death-of-securitized-mortgages.html )

2. Government buys components and derivatives at the lowest market price set via a reverse auction. (Google on “reverse auction”.)

3. Squatters, who sit on their derivatives in order to extort big $ from the rest of the system, can be forced to sell. (Law is analogous to eminent domain, or sales forced on cybersquatters that registered the domain names of well-established companies.)

4. Government pays derivative squatters at market price set by previous reverse auctions, perhaps with a penalty to the squatters.

5. Sellers give up all rights. No new law there.

6. Banks, investors, and insurers now have cash instead of questionable loans and derivatives, so the banking system is healthy with cash to lend.

7. Credit will flow, and the economy will grow.

C) Government reassembles whole loans from securitized mortgage components and derivatives.

D) Government sorts the newly reassemble whole loans (mortgages) into groups according to risk/quality.

1. Government uses traditional mortgage experts and guidelines to sort the home loans into quality groups, for example, a high quality group would include homeowners with 20% (or more) equity in their house at today’s market price; and house payments that are 25% (or less) of homeowners monthly income.

E) Government (RTC) sells groups of reassemble mortgages to traditional mortgage banks.

1. This solves the problem of renegotiatin

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