6 MEANINGFUL RECOVERY STRATEGY

COMMISSION OF ENQUIRY

World-wide

A new structure for financial stability

Proposed Agenda 2013

Drafted in Collaboration with

Graham D Hollick FCIS FIBSA CeMAP and others

By The Proposer And Chief Researcher

Edward C D Ingram

DISCUSSION TOPIC C

1.1.1. THE ALTERNATIVES TO CURRENT OPTIONS: The alternative to living with the instabilities created by fixed interest bonds and to attempting QE so as to keep those values inflated, would be to buy back the fixed interest bonds at a fair rate and replace them with ‘Wealth Bonds’ index-linked to GDP or to AEG% p.a. 

1.1.2. The alternative to keeping interest rates artificially low for Housing Finance is to stretch the ILS Defined Cost and other models including (most easily) the Hybrid Model, so as to lend more and so temporarily support the inflated property values. 

1.1.2.1. At first, enlarged mortgages for housing finance can be offered cheaply simply because true rates are low enough to allow that, and because a low fixed true rate can be locked in for a period for funding at a defined cost (to wealth) using the ILS Defined Cost Mortgage Model. 

1.1.2.2. Later, when true interest rates rise, the mortgage multiple (mortgage size as a multiple of income) can remain enlarged so as to support property values by reducing the level of Payments Depreciation somewhat compared to the recommended rate. 

1.1.2.3. The outcome, when true interest rates increase, will be large and expensive mortgages and some stressed borrowers but no serious levels of default or arrears. (Ask for the draft book MACRO-ECONOMIC DESIGN 201 or check out the mathematics of lending). Property values will remain inflated and secure for the duration of the rebalancing process / economic recovery process. 

1.1.2.4. A rent-to-buy option exists for borrowers if they prefer that. The mathematics of that model is much the same – it is still a way to buy a house using borrowed money. 

EXPECTED RECOVERY OUTCOME 

1.1.2.5. With mortgages enlarged and people feeling protected by the new ILS models and willing to use them, bank assets will be safe and the economy will move forward with CONFIDENCE in its safeguarded wealth in housing and bonds and with the threat of arrears and government austerity / default reduced or removed. 

1.1.2.6. When people are confident of their wealth and their borrowing budgets, and they are not expecting a lot of inflation, their ambition is to buy more goods and services and they raise the overall level of spending in the economy accordingly. This trends employment towards the maximum level achievable, if all obstacles are removed. 

MARKETING WEALTH BONDS 

1.1.3. The commission will be asked to consider how to open up the market for these ‘wealth bonds’. A range of attractive proposals will be advanced which have been somewhat test-marketed among financial advisers in South Africa. 

1.1.4. In the words of Professor Leon Brummer, (UP stock broking), talking about the link to AEG, “This simplifies everything.” Thus: 

1.1.4.1. It provides a zero, or AAA rated, risk-to-wealth investment as a benchmark with which more risky (to wealth) investments can be compared and 

1.1.4.2. It levels the playing field as between savings and other investment forms, thus taking out a number of other arbitrage opportunities and related instabilities. 

1.1.4.3. That is, provided that taxation issues are addressed for all forms of interest, in which interest and indexation up to AEG% p.a. is tax exempted and does not qualify for tax relief. 

1.1.4.4. Arbitrage and speculative activity between different forms of investment will become more subdued. Investments will be made more on their merits, rather than on their degree of mis-alignment to constantly changing, perceived market rates. 

1.1.4.5. There is a whole range of attractive new products as outlined on this web page, all attractive because of the wealth protective aspects on offer – something never made available in the past and highly attractive to the older and wealthier among us.

ALL READERS AND COLLABORATORS

Your feedback on the comments space at the end of each page is important. You may make suggestions on the page, the strategy, the promotions, the organisation...whatever comes to mind.

You may also like to join the LinkedIn Group named MACRO-ECONOMIC DESIGN where you can discuss issues with other collaborators and commission members.