What the Stimulus package should really focus on

Infusion of TARP funds has not really brought liquidity back in the market. More and more companies are asking for bailout money and even the bailout is not helping the common man. The Obama administration has a great chance to set the economy on the right path and ensure the government plays a positive role in setting the correct path for the US economy for years to come by adopting simple and effective policies. We definitely need to have the Obama administration adopt good commons sense trade policy, economic policy, industrial policy, manufacturing policy, technology policy amongst others.
Targeted tax cuts to stimulate employment and economic growth are needed.
In fact we are now afraid of deflation. Companies are cutting back, employees who are still employed are being asked to take pay cuts, and companies are dumping unsold inventory at losses just to get rid of the carrying costs of inventory.

At the same time while property values have dropped, the property taxes have not.

So if corporations are cutting back and the gas prices have not pulled back in line with the price of barrel of oil, the fixed cost for a family still comprises of mortgage interest and travel costs being the highest.

Instead of tax breaks to the middle class to the tune of $1000/- per couple what really needs to happen in my humble personal opinion is as follows:

1. Reduce the long term mortgage interest rates to say 3% (both new purchase money rates and refi rates)
2. Let those who are able to refi due to loan to value ratios holding up should be allowed to refinance.
3. Those who cannot refinance due to home values having depreciated below the amount owed, the lender should be forced to absorb at least 50% of the loss and the rest could be funded via the TARP ( or split between TARP and adding to the back end of the mortgage to be adjusted as home values appreciate over time)

The effect of this would be as follows:
1. It will get rid of toxic mortgages that have yet to adjust
2. It will immediately provide liquidity to homeowners who will now have more disposable income which will bring financial stability to their personal life as well as provide stimulus to the economy as these folks will increase spending to a smaller extent than before the meltdown (one hopes they have now learnt not to spend spend spend)
3. It will generate employment in the lending industry and related ancillary industries like real estate brokers, title companies, appraisers, home improvement companies etc
4. Home values will start to stabilize

Sure folks holding the debt (big investors) will have to absorb losses and banks will not get super interest rates but then the interbank borrowing rate is under 1%.

The US government should also look at adopting sensible trade policies, energy policies and industrial policies as this is the role of any government regardless of whether US is a free market or not...

This is just one different way of looking to stimulate the economy instead of just providing bail out money willy nilly, or increasing government spending on pork projects in name of infrastructure spending….

Of course you can adopt a few variations of what I have proposed here......