The waterfall at the entrance to the northern gardens was in full flight today following torrential rains overnight. it seemed an apt description of the falling rocket otherwise known as the stock market in free fall.
Looking at the PE’s of companies following last night’s meltdown I can’t believe my eyes. The current markdowns are beyond all reason. Then I think back and realise that I also thought the same thing at the silly prices shares were trading at earlier. Why should I be so surprised? The same irrational exuberance that flowed freely on the upside is resulting in the monumental meltdown before us today.
Before we all hit the panic button and get out our 1929 scripts to see how this is going to play out, I was given a revelation that maybe there is another way than the crash and burn that has been with us in our capitalist system. Crash and burn may work for the one off disaster but now that nothing is exempt from the current pain, it is time for a new way.
First of all, let’s address the housing market.
Banks have already written down a good chunk of the value of their current holdings. Rather than turfing everyone out on the street when they cannot pay the going rate, here’s an alternative:
Take the current value of the loan on the books and reclassify it as a housing trust investment. Rent the property to the individual at a rate they can pay. Amortise the housing trust investment at the current cost of capital. Offset the amortisation against the housing trust rental income. The difference will go to income or loss. On this basis, people would still be able to live in their homes but equity would not be built up. If on the other hand they wish to build equity in the process, the income/loss would be applied to a deferred profit or loss account and this would allow some ownership to be built up and accrue to holders of the property over time. It would be up to the banks to set up the amortisation period. This doesn’t address the subprime packages of debt sold off by the ton but it does provide a working solution to manage the debt and reduce the current pain.
The result of this plan would be an immediate reduction in the number of For Sale signs up and down the land. Psychologically, this wouldÂ improve the chances for a housing recovery.
Alternative toÂ Employee Layoffs
With all the panic on the street, the layoffs that will result from this process of crash and burn will be a total disaster for the economy. Here’s an alternative:
Rather than laying people off, cut cash salaries in half and issue share options for the other half. This would have the effect of encouraging all employees to improve the share price to increase the value of their options. It would improve current earnings of the company, thereby automatically improving the share price not to mention employee morale.
With everyone working together to improve the company and the company share price, this would unleash new innovation and creativity at a time when it could be severely strained.
As for the impact of the reduction in earnings, the banks already have a way of dealing with mortgage pain from the above example and this would provide help to employees on lower salaries.
Needless to say, there are variations in between for both of the above measures. It would allow for progress with a minimum of outside governmental assistance. It also encourages everyone to work together for the good of everyone. It is in everyone’s best interest to encourage full employment, it is in everyone’s best interest to encourage home ownership, and it is in everyone’s best interest to encourage equity ownership.
Let’s get off the crash and burn bandwagon and buy America now!