A vital strategy in Chinese medicine is to seek out the root cause of any disease so that proper measures can be implemented to eradicate the illness. For example, constantly imbibing cold drinks and ingesting food irregularly can cause the digestive system to misbehave, leading to a whole host of symptoms such as heartburns and regurgitations.
Modern Western medicine takes the approach of simply prescribing medications to control the symptoms, but this may not always achieve the desired outcome. Traditional Chinese medicine, on the other hand, utilizes various treatments, including acupuncture and herbal medicine, to readjust the functions of the gastrointestinal tract. This allows it to return to its normal state of functioning, thereby ridding itself of all the symptoms.
So if the stomach is too “cold,” then the treatment will employ warming therapeutic agents targeting the stomach. Chronic illnesses often respond rather dramatically to such an approach in a short period of time.
If we apply the metaphor of Chinese and Western medicine to the state of the US economy, we can see that the root cause of the sluggishness of the current economy is the aftermath of the bursting of the housing bubble in 2008, which triggered a domino effect on other sectors of the economy. The government, including the Federal Reserve, has been pumping money into the economy to prevent its collapse. However, it has failed to address the fundamental problems of the housing sector, which is the very root cause of the economic downturn. Since everybody has to live somewhere, the housing sector comprises a major segment of the US economy, but the federal government has done little to eradicate the root cause of the problem. Now that home prices have plummeted to a historically low level, it is the most opportune time for the government to take advantage of that to counteract the hostile forces hampering the economy of this country.
The prescription:
Using its financial might, the government can easily buy up the bulk of the foreclosed properties, then hire workers to refurbish these abandoned properties, converting them into rental units. These units may be rented out, perhaps with priority given to those who have lost their homes in foreclosures.
Preparation of the medicine: financing the acquisition
Due to its mammoth strength, the federal government can simply purchase the foreclosed properties with 100% financing. In other words, it can purchase with no money down by simply paying the banks who own foreclosed homes with IOU’s backed by the US government, similar to treasury bills. With its massive purchasing power, the government can negotiate rock-bottom prices for purchasing these properties from the banks.
Therapeutic effects on the housing crisis:
Like everything else, home prices are largely dependent on supply and demand. At this juncture potential purchasers are not motivated to buy houses because what’s the urgency? The longer you wait, the better price you get, since the home prices have not yet stopped sliding. So when the government takes out the supply, turning the foreclosed properties into rental housing, it will stabilize or even reverse the trend of declining home prices. When people standing on the sideline see the home prices going up, they will jump on the bandwagon in a hurry to buy, especially when the mortgage rates are so affordable at this current level.
Therapeutic effects on the banks:
The sluggish home sales are in part due to the excessively stringent requirements imposed by the bank on the borrowers’ qualifying for loans. The banks are so tight with their money because they are afraid of further deterioration in home prices which may cause the security of their loans to be impaired. If home prices start to move up or stabilize, the banks’ fear will be mitigated and their willingness to make loans will be rekindled.
As outlined in the previous section, after unloading their backlog of foreclosed properties to the federal government, the banks are no longer constrained by the reserve they must maintain on the bad loans, so they will have plenty of money to fund new mortgages. And the downward spiraling, vicious cycle can now be turned into an upwardly mobile beneficial cycle. The easy and inexpensive financing in conjunction with a rising housing market will cause many onlookers to go back to the real estate market. This will usher a chain reaction that in turn will lead to positive developments in other businesses that benefit from the housing boom again.
If the government can manipulate the interest rate, why can’t it manipulate home prices? Instead of using federal money to buy up mortgages to control interest rates, it should buy up foreclosed properties.
Therapeutic effects on the job market:
Refurbishing the foreclosed properties will create a very significant number of jobs, jobs that do not require exceptional skills. President Obama’s program to retrain workers to obtain new skills can only be partially effective. How practical it is to try to retrain an unemployed restaurant dishwasher to be a computer programmer? As people’s aptitudes vary, so not everyone can acquire a new technical skill in a hurry. Putting the unemployed to work in the housing sector will help create huge number of jobs immediately. The economic momentum can be instantly boosted by the improved housing market in general, since more and more people will be interested in and qualified for buying new homes. So this positive feedback loop will self-perpetuate.
Therapeutic effects on the pocketbook of the federal government as a side benefit:
The interest rates of the ten year treasury bills is hovering around 2% recently and often below that. The federal government can buy homes with one hundred percent financing, which is equivalent to trading the properties with T-bills with an interest rate of 2%. The foreclosed mortgage holders which include private investors and banks can now turn these T-bills into cash so that they may reinvest in other business or real estate. With such low interest rates and carrying cost, the government can rent out these homes with significant positive cash flow. The government can actually make money while lending a helping hand to the housing sector. Depending on the housing demand, these homes can be sold gradually in the next ten years to serve as a stabilizer for home prices.
Recently foreign investors attracted by the rock-bottom home prices are coming in droves to pick up the bargains, often by buying properties with all cash. Many countries large and small including China and Singapore set up their own sovereign investment funds to take advantage of the capital they control in order to maximize their future gains. There is nothing wrong about the government’s investing in its own economy. The future gain which may turn out to be very substantial can be used to fund the shortfall in Social Security and Medicare or offsetting the national debt.
In summary, the principle of traditional Chinese medicine of treating the root cause of a disease is precisely what this country needs in healing the economy, with multi-dimensional financial health benefits to boot.