Monday, August 29, 2011

Relevant Articles

I've been derelict in referencing articles relevant to my blog, but here are three I perused over the weekend. (A quick aside - most of these articles come from Yahoo Finance. I like to use yahoo as a browser for several reasons, and their articles are esay to access and comment on.)

#1: "Debt Will Haunt the Market for Years to Come" by Howard Gold. Title pretty much says it all, altough I would assume that to mean that we 'stay the course' and do nothing. The article quotes Raghuram Rajan (google him up). Relevant quotes: "Recoveries from crises that result in overleveraged balance sheets are slow and are typically resistant to traditional macroeconomic stimulus."
"Overleveraged households cannot spend, banks cannot lend and governments cannot stimulate." Another quote attributed to Carmen Reinhart and Kenneth Rogoff:
"...Large public debt overhangs do not unwind quickly, and seldom painlessly... The debt-reduction process goes on for an average of about seven years."

#2: "Beranke Offers No New Steps But Leans On Congress" by AP Economics writers Martin Crutsinger & Paul Wiseman. Relevant quotes: "The economy is still hobbled by a depressed housing market ..." and "They say the main problem is that consumer spending remains too weak. So businesses feel little incentive to hire, expand and invest."

#3: "Recovering From a Balance-Sheet Recession" by Laura D'Andrea Tyson. While I have issues with some of the article, she does point out: "To develop cures to ease the jobs crisis, its causes must be diagnosed correctly. The fundamental cause is the drastic breakdown in private-sector demand ...". "In the United States, where mortgages account for most of the private debt overhang, the federal government should enact stronger measures to reduce principal balances on troubled mortgages and to make refinancing easier. These measures would help stabalize the housing market, would prevent future defaults and would free money for borrowers to use to pay down their debt or increase their spending." Although she definitely grasps the big picture, I disagree with 'reducing principal balances' for two reasons. 1) I don't think that it's necessary. If you reduce the cost of home ownership by lowering interest rates, the market turns around and home values increase, so the principal comes back. 2) Reducing principal hurts the holders of the all the toxic paper out there, and it is substantial. Since home values will come back once the market turns around, just lower the interest rates as I propose and pay off as many of the bad loans as possible at face value.

Tuesday, June 28, 2011

A Different Direction

I've pretty much spelled out my plan for reducing people's debt so that they can become consumers again, thus creating jobs and reviving our economy. Short of any outside comments or disagreements which can be addressed, there's not much more that I can add at this time.

However, I run across articles concerning our economy almost daily. When I feel that they are relevent to my posts, I will reference them in a new post here, post comments, and provide the link to the article so that all concerned citizens can stay informed.

Tuesday, June 21, 2011

Our Currency and Lending

Theoretically, our economic system can operate on the fiat currency we now use. But the world runs on reality, not theory. Once we began debasing our currency in 1965, it was just a matter of time before we arrived at where we are today. Our elected officials will always find ways to spend more than they take in. Unless we get people back to work and our economy running at 100%, we may as well cap the government debt ceiling even if it means defaulting on what we owe. There is no way that we will ever be able to repay our debts except with worthless currency.

And deficit spending with a fiat currency puts us right where we are today. Long term fixed interest rates for home loans were below 5% back in the 1950's. But money had a fixed value then. Here in the US, you could redeem silver certificates for a silver dollar containing about .75 ounce of silver. Internationally, other countries could exchange the dollars they held for gold. But as the value of the dollar eroded during the 60's and 70's, long term interest rates rose until going over 10% in the late 70's. Home building and sales stopped until ARM's and interest rates lowered in the 80's. The only reason that 30 year fixed home loan interest rates are below 5% today is because any new loan or refinance at those rates are immediately being sold to Fannie Mae or Freddie Mac. NO PRIVATE INSTITUTION IS GOING TO LEND MONEY LONG TERM AT LOW INTEREST RATES NOT KNOWING THE VALUE OF THE MONEY WHICH WILL BE REPAID.

Ultimately, every aspect of our economy and welfare would improve with stable money. But it would probably be more difficult (until we get a handle on the deficits that we are running) to go back to a stable currency than it was detaching the dollar from gold and silver. Our immediate concern should be to get people back to work and stop the flow of red ink, then try to figure out how to stabalize the dollar and reduce the national debt.

We already know that getting people back to work requires getting people out of debt and making them customers. And significantly lowering people's debt levels can be achieved by lowering their biggest expense (housing). And lowering the expense of housing can be achieved by lowering interest rates. And interest rates can easily be lowered by TAKING THE RISK (of unstable money) OUT OF LENDING by allowing banks and other mortgage lenders to borrow the money that they are lending for the same length of time that they are lending it.

Sunday, June 19, 2011

Getting People Out of Debt

So, if low interest rates and tax cuts aren't getting the job done, what will? The article referenced in my previous post, "Could Private Debt Lead To Our Own 'Lost Decade'?", spells out the problem, despite being three years too late (I had at least one economic advisor warn me of the personal debt problem three years ago - it's why I began thinking about the problem and why I started this blog). In the last paragraph, however, the author gives up with "Because getting out of debt tends to be a gradual process, there's no obvious quick fix.". Yes, even with a very good paying job, it took my wife over two years to shed about $40,000- of credit card debt. And I can guarantee that most people don't have the income she has that will get them out of debt that quickly.

But there's another way to increase your disposable income other than a pay raise. If an expense goes away, suddenly you have more disposable income. Suppose that you financed a car over a five year period and the payments were $255-/month. Once that car is paid off, you suddenly have $255-/month more disposable income that could be used to reduce other debts. Not only that, but that $255-/month wouldn't be taxed like a $255-/month pay raise would - you'll benefit from the whole $255-.

Likewise, a significant lowering of house payments (say $600-) month after month would do a lot more to reduce personal debt than the tax cuts eneacted over the last two years. I contend that significantly lowering house payments would also lower rental costs too, as more people could afford to buy homes and take pressure off of the rental markets.

Unless they are living in a fully paid off home or out on the street, everyone's single biggest expense is what they pay month after month just for a place to live. The biggest expense provides the biggest savings potential. And as I will show in my next blog, bringing down that expense would be easy, and easily justified.

Wednesday, June 15, 2011

What's Wrong With Traditional Solutions

Actually, the government has taken some significant steps to stimulate the economy. Traditionally, if you want to stimulate the economy, you lower interest rates and/or taxes. Unfortunately, lowering interest rates only applies to new borrowing and there's not a whole lot of that right now. When you're tapped out, you're tapped out. You can't take on any new debt no matter how low the interest rate. So how about those tax cuts? Well, there's been a 2% cut in payroll taxes this year, and for the past two years we've had the 'Making Work Pay Credit' on our federal income tax. If our economy was humming along like it was in the late 90's, these tax cuts would probably have caused some significant stimulation, not that we needed any back then. But our debt levels are way too high now. See

As large as these tax cuts have been (taken as a whole), they are only a drop in the bucket for an individual trying to reduce tens of thousands of dollars of credit card debt. So rather than provide stimulus to our economy, all these tax cuts have done is increase our national debt at a time when that is the last thing we need to do.