Many of the proposed solutions also leave a bad taste in people’s mouths. There is the sense that any solution should divide up both the pain and the responsibility for getting real estate back on its feet.

I recently met a remarkable woman, Kelle Sparta, of http://www.spartasuccess.com, who has been a real estate expert for years. She wrote an open letter to President Obama in which she laid out a plan for solving the housing crisis that, indeed, divides up the risks and rewards among all the players who made bad decisions in the first place.

Here is a copy of her letter. It isn’t a quick and easy read. Understanding her solution takes some concentration. It’s well worth it, however. Not only as a specific proposal to solve the housing crisis, but more importantly for our purposes, as an example of how deftly she has structured the solution so everyone involved—the banks, the homeowners, and the government—shares some of the costs and participates in the rewards.

Enjoy!
- Stever

Dear President Obama,

I recently received an email as part of a mailing to the leadership in the real estate industry asking us to consider how to solve the problems of the current housing crisis.

• The banks would have to forgive all late fees and rewrite the loans at no cost (after all, they are getting the benefit of not having to foreclose on a bad loan). They also have to agree to continue to collect the taxes on the land from the homeowner and pay them with the taxes on the home.

• The government issues bonds to investors to raise the capital and then buys the land at current appraised market value.

• The homeowner gets a deeded option to repurchase the land at a later date at the original price paid by the government or current market value – whichever is greater.

• The money paid by the government would go to the bank to pay down the principal balance of the loan, allowing the bank to convert an impaired asset into a performing asset which boosts the bank’s asset rate and lessens reserve requirements, strengthening its balance sheet. This makes the bank more stable, reduces the stress on government resources, and ultimately increases the availability of funds for consumer loans.

• The homeowners would then get a new loan issued by the bank for the lower principal amount and have to pay a reasonable monthly lease (1% per year) on the land. The homeowner would also still be responsible for paying the taxes on both the land and the home.

• The bonds issued by the government for the purchase of the land would be backed by the land with dividends provided by the lease payments.

Here’s how it would work in an example case: Harry Homeowner has a house that he is behind on his payments on. He is in danger of foreclosure. The bank has charged him hundreds of dollars in late fees and there is no way he’s going to get on top of things again. What he needs is a fresh start.

• It will reduce the principle of the loans for the current homeowners allowing them a payment level they can afford to sustain.

• Banks only have to eat the cost of refinancing the loans at a lower interest rate and forgiving the late fees, not the cost of foreclosing and reselling.

• The payments from the land purchases to the banks would allow them to convert impaired assets into performing assets. This boosts the banks’ asset rates and lessens their reserve requirements, strengthening their balance sheets. This makes the banks more stable, reduces the stress on government resources, and ultimately increases the availability of funds for consumer loans. Freeing up additional funds for new loans and opening up credit lines for new spending would be a boon for the economy overall.

• Property values won’t suffer as a result of the plan since any subsequent purchase of the property would be made including the land when the current seller exercises his/her option to purchase the land back prior to conveying it with the property.

• It’s a purchase backed by real estate, which means it’s not going to contribute to the deflation of the dollar.

• It provides a stable investment for older investors who need some way to hedge their bets in this uncertain economy.

• For the purchases that don’t get paid for by bonds, the tax payers will see a return on their investment as the economy recovers and property values improve. At the very least, we are guaranteed to get our money back with the land lease payments as interest. At the best, the appreciation and the land lease costs will provide a tidy profit for the use of taxpayer monies.

• It’s not a free ride for anyone. The banks lose out on the refinance and late fees as well as taking only a slightly more than break-even interest rate. The homeowners lose out on the appreciation of their land and have to pay conveyance taxes and closing costs on the land multiple times. In short – those who made bad decisions get a chance to pay for those bad decisions without being destroyed by them.

So, that’s the crux of the idea, Mr. President. It seems to me that it would work. I’d welcome the opportunity to discuss it with you. I also have some ideas on how to make it easier to be self-employed if you’re interested.

Kelle Sparta
Author of The Consultative Real Estate Agent 
National Speaker, Trainer and Coach for the Real Estate Industry

This week’s Get-it-Done Guy podcast is all about how to set boundaries at work. Listen and enjoy!

My recent theory is that both of these viewpoints are true. Literally, they’re both true. There are psychological mechanisms that make each of these a self-fulfilling prophecy.

Self-interest usually manifests in turning everything into a transaction, monetizing as much as possible, and tracking things closely. It turns out that when you introduce money into a conversation or transaction, literally the brain areas involved in altruism, helping, and asking for help all shut down. So if you expect everyone to treat you as if they only want transactions from you, you’ll mention money or exchanges or act in ways you would act when putting together a transaction. Those actions will then actually trigger the same impulse in others. You mention money and the people you’re dealing with become more self-interested and less likely to be collaborative. So a world view where everyone looks out for themselves and everyone is greedy becomes self-fulfilling to the person who holds it.

Similarly, the social psychology reciprocity principle shows that when you give a gift that someone perceives as freely given, they feel obliged to respond by giving back, often in greater amounts than the original gift. So giving provides a self-fulfilling mechanism such that the person who gives freely and believes others are generous will trigger exactly those impulses in others.

What’s important to note is that this isn’t just psychological blinders, where both people interpret the same events differently. This is literally a self-fulfilling principle that plays out in behavior. If you act as if people are greedy, you’ll do things that prime their greedy impulses. If you act as if people are generous and worthy of help, you’ll actually activate reciprocal behavior on their part.

Be careful the world you wish for. You just might get it.

When it comes to something like oil, however, I believe markets are a really bad mechanism. The time horizon for market pricing is far, far shorter than the lifespan of the world’s oil supply. So pricing becomes based at best on marginal cost to produce, rather than on anything relative to the actual value to society. For example, according to the book “The Omnivore’s Dilemma,” about 1/3 of the world’s population only gets fed because we have genetically modified corn that requires special petroleum-based fertilizer. I would suggest that the market price of oil (to the extent that it’s a market and not simply OPEC’s arbitrarily-set price) doesn’t include any component that has to do with the future of the world’s food supply. Most (all?) market players just don’t know enough about the full supply chain of which oil is a part to price it properly.

This, in my mind, is where Government comes in. I consider the role of government to adjust the playing field so prices and practices result in what’s best for overall society long-term. Government is the only entity that can change things around to align the individual incentives (“how do I get rich?”) with the community incentives (“how do we do what’s best for us as a society?”)

Sadly, I’m not sure there’s anyone in Government who thinks that way. As far as I can tell, most politicians in Congress believe their job is to grab as much of the common pie as possible for their constituents, rather than representing their constituents in determining how to spend our community-wide fund on projects to benefit the entire community.

According to an MSNBC article today, Bush met with the leaders of 20 countries Saturday night. To quote the article:

“After the almost 40-minute meeting and his six-minute statement, the president left the White House for a nearly two-hour mountain bike ride in the nearby Virginia woods.”

Jeez. I really wish I had his meeting facilitation abilities. At a meeting with 20 world leaders, all of whom are undoubtedly known for their keen wit, brevity, and ability to grasp huge honkin’ financial issues in seconds, it would still take me 10 minutes to do introductions. After all, I like to spend about 30 seconds having each person state their name, the country they lead, and their form of government (“Parliamentary,” “Representative Democracy,” “Puppet Dictatorship,” etc.)

That would leave only 30 minutes for the meeting itself, clearly not enough time to lay out the mess, explain the economic issues and how policy can resolve them, etc. Whatever his other problems, it seems Bush is able to resolve a 20-country, unprecedented global financial meltdown in 40 minutes, just by talking for six minutes… astounding! Perhaps it’s the two-hour bike rides? They send enough oxygen to his head that he can think super-clearly.

This is what passes for world leadership.

We have the most advanced technology in history and the ability to feed every man, woman, and child on the face of the planet. Yet we’re still plagued by poverty, famine, gross wealth inequality, and violence. Our human abilities simply aren’t up to coping with issues of this magnitude. We’ve created systems so complex that even the major player (e.g. Paulson) can’t understand them. And our leaders? They’re as clueless as the rest of us, it seems.

So this whole meeting brings up only one major question: Where can I get a job that lets me take two-hour bike rides while the country—ostensibly my responsibility—melts down around me?

My biggest concern about Bush in 2000 was that every company he’s ever run, he’s run into the ground. That concerns me. Past behavior is, alas, the best predictor of future behavior.

“Shrub,” by Molly Ivins, recounted the messes prior to his being elected. At the time, I imagined he and his policies wouldn’t be the best for the country, but I honestly didn’t believe they could screw up an entire country.

And to be fair, he and his policies only exacerbated structural problems that had been in the works for years. Heck, Clinton’s the one who lowered Fannie Mae mortgage standards allowing the subprime mortgages to start to take hold. And the financially illiterate actually took out the mortgages. And the further financially illiterate (the financial and banking sector, as it turns out) bought the repackaged mortgages.

But at the end of the day, it’s the leader who needs to be seeing farthest. As is common knowledge by now, they didn’t bother to read the report entitled ‘Bin Laden Determined to Attack Inside the United States.’ And even though such minor folks like Warren Buffett have been warning about derivatives for years, their market ideology got well in the way of noticing that the numbers didn’t add up.

There’s not much I can do about it from where I sit. Except vote.

Mr. Greenspan is apparently living in a world without people. I’ve been aware of Wall Street and its tendancy to, er, stretch the boundaries of good and bad faith since Greenspan took office. In case he didn’t notice, we had a Savings and Loan Crisis, a Junk Bond collapse, Long-Term Capital Management’s collapse, the Internet bubble popping, then a wave of corporate scandals that even took down Arthur Andersen. Where was he during this 20-year march of greed that he could champion deregulation under the belief that people wouldn’t be greedy and would act in good faith without regulation to impose penalties when they didn’t?

How could he cling to a theory that depended, oh-by-the-way, on the naive belief that people would do the “right” thing even though the instruments let them become unbelievably wealthy by doing the wrong (but legal) thing?

I just don’t get it. And I find myself repeating it over and over in stunned disbelief. He actually believed that Wall Street would police itself, after having presided over several TRILLION dollars worth of corruption and greed with several successive financial instrument “advancements.”

I’m so very, very glad that the man is no longer making policy. Of course, having the head of an investment bank now in the position doesn’t exactly fill me with confidence. Goldman has a good reputation, but at this point, I’m not at all sure that anyone steeped in the financial industry culture for 20+ years has the objectivity to know whether the system is fundamentally broken (they have a vested interest in believing it’s not), or whether it simply requires some trillion-dollar tweaks to put it back in order.

The scary part is the vapidness of the whole race. All of the candidates seem to be smart people. They can form complete sentences (most of the time), and they can combine the sentences into paragraphs. So already, they’re better than some of the gems we’ve had in the White House in times past.

But at this point, I’m truly scared. We have multiple crises in the U.S.: economic, environmental, and educational, to say the least. We need serious policies to address these problems, and policies that measure outcomes and change in the event the policies aren’t doing what we want them to do.

That would seem like common sense, right? Implement a policy and if it doesn’t work, change it? But we don’t operate that way. Most policies seems to be set ideologically, with little or no outcome monitoring. In the rare cases we do measure an outcome, we choose sloppy measures that can often drive more harm than good. (See: “No Child Left Behind” and “Test Scores” and “Teaching to the test rather than teaching children to think”, respectively.)

The current Presidential election is proceeding with the same utter lack of thought. No one’s asking what skills a President should have, how to measure the skills, and then examining the candidates against that measure. Instead, we’re just collectively blustering, slinging mud, and basically blathering on like idiots.

What I want in a President is wisdom. I want a President who is thoughtful, who seeks out a variety of views, and who makes decisions that seem appropriate for the circumstances. I don’t want someone who simply knee-jerk follows the party lines–the parties aren’t particularly competent, in case you haven’t noticed.

I would judge that by watching the way a candidate runs his or her campaign. I would look at the decisions he or she makes, who they talk to, whether they talk about the issues, policies, and solutions, or whether they stay solely on the “character” issues. (Yes, character is important. But it’s only one piece of the puzzle. I want character and competence, but the whole competence question seems to have vanished, except as an attack on character.)

So … we’ll get the politicians that our system selects. And we’ll get the politicians we deserve. By definition. I simply fear that what we deserve may not be the path we’d want.

That got me thinking about how much our own stories do and don’t have anything to do with actual events. Certainly the book “Mistakes Were Made (but not by me)” by Carol Tavris, Elliot Aronson documents thoroughly how we distort our own memories to tell a story consistent with how we’d rather view ourselves.

This is my response to Steve:

Check out “The Halo Effect” by Phil Rosenzweig. In it, he basically discredits 99% of popular business books and research by pointing out that after-the-fact explanations where the outcome is known always come out the same, regardless of actual circumstances. The “halo” of known success (or failure) causes all the players to remember the past in a very specific way.

For example, ask people why XYZ Co. was successful and they’ll always talk about a visionary leader, good teamwork, flexibility, etc. You can predict those explanations with such certainty, apparently, that any research based on after-the-fact explanations is virtually worthless. (Because if you can predict in advance what people will say, then it obviously can’t be based on the actual situation.)

To avoid the halo effect, you would have to approach people in companies before success is known. Then ask them to describe the current environment. Then 10 years later (or whenever), see if their in-the-moment descriptions correlated with later business performance.

Though Rosenzweig limits his discussion to company success, I believe we also have a halo effect with successful people. We love the rags-to-riches, hard-work-and-skill-wins stories. No matter the truth of a situation, those are the stories we use to explain known success.

(Why is Bill Gates so extraordinarily successful? You’ll hear about strategy, ruthlessness, etc., etc. All the standard after-the-fact explanations. But that misses the point. There are lots of strategically brilliant, ruthless people who didn’t dominate the computer industry. In Bill’s case, mommy was on a board with the chairman of IBM, the head of Digital Research missed the chance to produce DOS so Bill was the 2nd choice, and IBM was stupid enough to let Gates keep all the rights to the software. Without those factors, all outside his control, he might have been just another 2-bit software developer. But that isn’t a story that we like to tell.)

When I look as objectively as I can at my successes and those of my friends (and many of my Harvard MBA friends have been very successful), I notice that hard work and skill seem far, far less important than, say, choosing the right industry, negotiating a compensation structure based on someone else’s work (e.g. paid as percentage of someone else’s transaction), and being lucky in your timing. Finance and entrepreneurship fit the bill.

But no one likes the story, “I made $100 million because I was frickin lucky.” That raises the question of whether the person deserves it, etc., etc., etc. We don’t want to challenge whether Gates deserves it because deep in our hearts, we hope we can make it big and don’t want to question whether or not we deserve it.

I’m sure Hillary frames her life as hard work, ambition, etc. And I can’t blame her. I suspect anyone in that position would frame their life that way. In part because of the halo effect, and in part because saying, “our achievements owe as much to luck as to skill” isn’t something many of us are willing to admit to ourselves.

Despite frequent moves and attending six schools between elementary school and college, science was in the air. I got a firm grounding in how to think critically, how to use data, and how to observe the physical world around me in pursuit of Doing Great Things. Whether my school was in a failing Pennsylvania steel town or in a full-on major city, science was present.

Science has given us great things. And therein lies the problem.

We’ve had it so good that we’ve been able to forget how we got here to begin with. In the convenience of indoor plumbing, central heating, and home-delivered groceries, we’ve managed to convince ourselves that the world naturally exists to make our lives easy, and it must be our inherent worthiness—not the hard work of millions of scientists, engineers, manufacturers, distributors—that has given us our standard of living.

In business, we have created a huge industry for business intelligence based on data. Hard data is used by successful businesses the world around to design, produce, and market products. That’s one of the cool things about business: when profits are down, people are sometimes willing to look at data to figure out what to do. Amazing how putting people’s year-end-bonus in jeopardy can bring them to appreciate the outside world, rather than the fantasy world they’ve made up.

(Equally puzzling are the many companies who collect data that could point the way and then never look at it or discard it when it doesn’t fit the CEO’s pre-determined course of action.)

In daily life, however, data, science, math, and engineer have become almost the subjects of contempt. It may be hip to be an engineer, but only if it’s going to lead you to a billion-dollar payday (look at the numbers: despite the hype, most entrepreneurs never make more than a modest living. It’s precisely because it’s a near-miracle that we hear about billion-dollar Facebook boy or the Google geeks). It’s the money we’ve come to admire, not the achievements, thinking, and science that got us there.

So now, we’re seeing that in America, almost half of our populous doesn’t believe in evolution, and half of those who do, don’t believe in natural selection, despite it being one of the most solid theories in science. Of course, most don’t know the difference between a scientific theory and an opinion (yes, Virginia, there is a difference), so even having the discussion is a losing battle.

Honestly, I couldn’t care less whether people believe in evolution, so-called “intelligent design,” or the flying spaghetti monster. But I care a great deal whether people know how to look at the physical world, monitor data, and—most importantly!—change their beliefs when the data shows they’re wrong. And even then, who cares if people live in fantasy land, except for matters of collective life and death.

For example: war. Peak oil and resource usage. Agribusiness and food production. Pollution. Nuclear energy. Global warming.

I’ve been feeling apocalyptic today and reading up on many of those issue. Amazingly, the American media has proven worthless in exploring any of those topics. Journalists no longer seem to research issues, but rather just present people of differing opinions and let them slug it out. Journalists overlook the fact that one person might be a recognized leader in their field with two hundred peer-reviewed papers, and the other a lobbyist for a special-interest group with a vested interest in suppressing the science. It’s bizarre(*).

Michael Crichton, the fiction writer (that means, ladies and gentlemen, that he writes lies. That’s what fiction is: lies designed to tell a dramatic story) seems to be carrying as much weight in climate debate as scores of scientists. He wrote a fiction book, State of Fear, whose untrue-but-engaging lie states that climate change isn’t happening. What’s amazing is that people hold him up as an important player in the non-existent-in-the-scientific-community “debate” about global warming, even while the very people he quotes in his book, have publicly said he distorted and cherry-picked his data to reach the conclusion he wanted. Yet people consider him more credible than the intergovernmental panel on climate change.

It’s weird. We have a huge problem imagining things we’ve never gone through before. So the idea that some of our big problems could destroy our way of life permanently (and if not within our own lifetimes, within our children’s) is literally inconceivable. But the numbers point that way more and more. Hubbard’s Peak, the prediction of the end of cheap oil, has been written about for years both oil geologists and investment bankers who have made billions understanding the science and numbers behind oil. Yet other than a rise in per-gallon gas prices, the general populace seems unconcerned. (The fact that our crop productivity relies on petroleum-based fertilizers seems to have gone largely unnoticed. Oil declines, and food might, too. Isn’t that a fun thought?)

So for whatever it’s worth, if you want to have a planet to live on in your old age, and if you want your children to have lives that aren’t spent dealing with crisis, look at data. Demand research. Learn to separate fact from fiction and wishful thinking. Understand the difference between expert opinion and shrill emotional manipulation.

And please, indulge in flights of fancy, wishful thinking, and imagination for creating your dreams and aspirations(2), but ground yourself firmly in fact when deciding how to get there.

(1) As Pat M points out below, I make a huge sweeping generalization without support, here. Pat is right, I was wrong. See my reply to Pat below, which gives links to some actual follow-up that’s much more accurate than my opinion. back

(2) Recommended aspirations: enough food for everyone, a stable climate, preventative actions taken to mitigate long-term problems in energy supply and global warming, and just maybe, a halt to nuclear proliferation.

You can argue all you want about whether it’s our job to feed the world, but as long as we’re racking up a $7 trillion dollar debt spending money on other countries, you’d think we could spare a few hours’ worth of our war budget for humanitarian causes.I feel rather sad that my childhood image of America as a prosperous country that was a world protector and helper doesn’t resonate with our current policies(*).

I guess we all have to stop believing in Santa Claus sometime…

(*) Heck, the chairman of Bear Sterns could fund a significant chunk of that world hunger policy just with the money he took home from the sale of his company at $2 per share. Or John McCain (reported net worth: $100 million). Then there are all our wonderful folk heros who could pick up the tab personally and never even notice: our much-ballyhoo’d Google founders, Larry Ellison, John Kerry, Warren Buffett, Bill Gates, Steve Jobs, or any of our other iconic multi-multi-billionaires.