BUY A HOME

Well we have all learned that owning a debt as an asset can be a risky proposition. Bonds used to be considered to be safer investments than shares but that is no longer the case. Mortgage based bonds have been the bad boy of investment and have given a bad name to all bonds.

But then all investments are essentially debts. Issuing shares in a company is simply another way to raise capital instead of borrowing directly. The difference is that the "borrower" pays back from profits, rather than from operating income. We own a home, but in most cases that is simply a very large debt. Even a deposit in a bank is used to lend out to others since that is how the bank can pay you interest on the deposit.

We now have the rather absurd situation where the only investment being made by the private sector is in Federal Government debt instruments, i.e. T-bills. And this in turn is being used by the Feds to invest in shares in private companies. The result, Uncle Sam is becoming the largest single share holder in corporate America.

I chuckle at those calling for channeling Fed funding of the banking system to businesses in hopes that this will stimulate the economy. The old supply side argument about prodding the economy through investment. I chuckle because the concept of encouraging business investment, when demand for its output is down, makes no sense. Why build larger capacity when you are operating at low rates of capacity utilization? Witness the auto industry, that has to close plants, not build new ones. Yes, you can make your production more efficient, but to what purpose if no one buys your output?

No, the only way to stimulate the economy is to stimulate consumer demand. To do that we must incur debt. Very few automobiles are sold for cash. Very few vacation trips are paid in cash. Very few homes are sold for cash. Not even such items as large TVs and refrigerators are sold for cash. Yes, health care is paid in cash by insurance companies. But education is paid largely through loans.

So, what should we do? Well in spite of all the ruckus, the best way to stimulate demand is to invest in a home. Yes, invest in that very debt that is blamed for all the mess. But it gives you shelter, as well as an investment, something T-bills or shares in General Electric cannot offer. How to stimulate demand for homes? Yes, direct Federal funds to this activity. Make funds for home buying attractive once more.

Does this sound familiar? You betcha. This is what we have been doing for the last decade. As much as one may lament the property fed boom, it did keep the economy going well. And it is probably the only way to get it cranked up again.

I am not alone in calling for this, the entire "Economic Greek Chorus" is chanting that there will be no recovery until the housing market rebounds. A corollary will be to invest in mortgages, no, not direct purchase of mortgages, but to invest in those granting mortgages, or, dare I say it, mortgage based assets.

Leo Cecchini