By Dave Jarvis
Fear always has a way of spreading. It moves like a plague through different markets and into social issues and security issues, all without people ever really understanding that they are being ruled by it.
Most American homeowners these days are looking toward the future with trepidation. They are concerned about energy prices, they are worried about falling home values, and most importantly they are fearful of all the negative dings mounting up on their credit reports. They are worried that their long-term financial record is being ruined by forces beyond their control, and that they are assured a life of poverty and expensive credit.
Because of this they fail to respond quickly to obvious market pressures that would otherwise convince them to sell their home and find a less expensive way to live. If they were to do so, their credit would be ruined and no one these days wants a bankruptcy, or foreclosure or loan default on their credit.
But one of the most important benefits of a market economy is the way markets signal consumers as to when it is time to change their lifestyles. Today, we see smaller vehicles on the roads because consumers responded to market signals regarding the price of oil and changed their lives accordingly.
Now economists are calling the obvious transformation in our country from SUVs to compact cars a big reason for the falling demand for oil. So, positive results are coming from the economic signals being sent through the markets when people are able to respond to those signals. Our economy becomes healthier because of it.
But a very dangerous problem still exists in the housing market, a danger that threatens the long-term prosperity of the United States. Americans are afraid to change their homes in the same way they have with their cars because the risks are much greater.
Selling their homes in this market could mean enormous losses because home values have dropped in many areas to much lower than the existing mortgages. And there really isn’t much market for home purchases because so many are stuck fighting for their current homes.
The only answer for most Americans would be to allow the banks to foreclose on their homes, or to go bankrupt or to sell their homes for well under their mortgage value and continue to pay a mortgage for a home they no longer own. In any of these cases, the fear of a lifetime of bad credit and the financial problems that go with it is tangible.
Meanwhile, investors in mortgages are well aware of both the fears of existing homeowners and of their increasing inability to meet their mortgage obligations in an environment of high energy prices, diminishing credit availability, and the increasing weakness in the job market. So even existing mortgages are risky investments because of the looming presence of consumer fears.
The effects on the credit markets are being felt everywhere: in the stock markets, in the currency markets, and in the commodities markets. And the only way to rebuild our credit markets is to address the fears in the mortgage markets. If we can do that, and it is a difficult task, we can nip our economic problems in the bud before they create further panic in the job market and before inflation goes out of control.
The medicine I suggest is one few are eager to consider because it requires a great deal of courage. It would also cause a temporary crash in home prices, in the stock market and in the currency markets. And it would cause inflation to spike temporarily as well.
But it would definitely bring us to the bottom of our current recession and would have the immediate effect of rebuilding our credit markets.
We need to give every American a fresh start with regard to their credit reports. We need to wash every negative ding that has hit American credit reports for the last three years. And we need to advertise this “credit reporting holiday” in advance so every American has the opportunity to get their financial house in order before their credit is cleaned.
The result of such a move would be a great number of bankruptcies and foreclosures, and banks and mortgage companies would get hit hard as they would anyway eventually.
But in my scenario it is a controlled action that would change the entire economic outlook for our country. Afterward, credit would flow freely, confidence would abound, and liquidity would make a strong resurgence. And the American economy would once again be the safest bet in town.
There would be a great deal to clean up afterward. And our currency would have taken a big hit. But in the end, addressing our fears today is a much better idea and much healthier way to manage an economy. And in so doing we quickly cure ourselves of the disastrous effects of fear.Dave Jarvis of Hooksett is a Republican candidate for the 1st Congressional District seat.