Money, Banking and Financial Services
The financial debacle

What ways are there to solve this structural problem

COMMENTARY

Peter Burgess

The 1 step to end the U.S. economic debacle

Forget bailouts. The U.S. Government has to get greedy and drink the animal spirits of capitalism and buy cheap assets and buy big. The Louisiana Purchase kind of big and cheap. The operative question is what should they buy and why?

The answer is simple. U.S. residential real estate. Why? Because it is likely the best investment in the World. What makes residential real estate a good bet to invest trillions of dollars into?

Because real estate can provide cash flow i.e. rents that will more than cover the government miniscule cost of capital (of nearly zero). It's really not a political debate but more an issue of math which in most cases is hard to argue with a Government 'get greedy' approach.

Typical U.S. House

Price 2005 $425,000 5% mortgage 2,281 tax/insurance $219
Mortgage and tax payment for cost est. $2,600

Purchase price today for same house $225,000
Govt. mortgage rate 3.5% = $860 monthly payment plus $219 (taxes and insurance) = $1,079

What should the U.S. Government do with the house they bought for $225,000? They should rent it out to the current occupant for $1,500 to $1,700 a month and pocket the difference.

The 'unintended consequences' of greed are pretty virtuous when the 'price is right'. It creates a rock solid floor in which rent payments remove the downside risk to real estate.

It a simple fact, when the downside risk is truncated in an investment, what remains is the upside. Just announcing the idea that the government is 'exploring the opportunity' would likely boost the real estate market 10 to 20%.

I say the U.S. government should call the gloomy real estate market bluff and threaten to buy and buy big. Not because they want to save anyone, or anything but because they know a great deal when they see one.

The end result .... debacle over...just remember this was my idea first.