A Few Pre-election Thoughts

For starters, President Obama was on The Tonight Show on Oct. 24. You can still see the episode by going to the Tonight Show website. The interview is broken up into five segments, and I'll quote from the end of segment 2 and the start of segment 3: Obama: "The biggest thing that we can do right now for the housing market though is to help more people refinance their homes." Leno: "Right." Obama: "And it actually could save the average family about 3,000 bucks, but a lot of homes are still under water. If congress passes legislation that we've already put before them, then we could actually see millions of families essentially get a $3,000 tax cut ..." Leno: "Right." Obama: "... and that means that the've got more money in their pockets. They're spending it, uh, at stores or they're putting it back in to equity in their own home. The whole economy could be stronger, so, uh, everybody who's listening, uh, regardless of party, tell congress when they get back to work, uh, to go ahead and get this thing done. It would be a great Christmas present for the U.S. economy." Has the president been peeking at my blog? How long has he been sitting on this? Why has he never brought it up before? When he says "3,000 bucks", it might have been better if he'd said '3,000 bucks per year'. But my real issue is: if he knows how effective this would be, and obviously he does, why doesn't he show a little leadership? Why leave it up to congress? By the time they get done with it, who knows how bad it will be (if it isn't already screwed up). If it involves spending, it's just plain WRONG. If it doesn't, just pull the trigger on an executive order. If we don't change the LENDING, it's not going to solve the problem with housing. In my opinion, neither Obama nor Romney deserve to win this election. If I saw this solution four years ago, the presidential candidates should have also. Obama should have been ready to run with this the day he took office. If he had, we would be much better off today and no opposing candidate would have stood a chance in the upcoming election. Since he didn't, he left the door wide open for a challenger, even one with as much baggage as Romney. How could the Republicans have selected such a terrible candidate? The democrats have had a field day with their attack ads, which is why I expect Obama to be re-elected. Even for all of his baggage, Romney could have ensured a victory if he'd simply selected this (fixing the housing problem) as a platform and shown how effective that it would be in creating jobs and turning the economy around. After the election, I'll change the focus of this blog from the housing solution to why this country is, without a doubt, facing an economic day of reckoning.

Two More Articles and an Added Solution

It's been a while, but there are two articles on Yahoo Finance this morning worth reading. The first is "We Are Living in a Modern Day Depression" by David Rosenberg. To access this article, go to the Yahoo finance home page and click on 'THE DAILY TICKER' and page down until you reach the 6/25/2012 article. The second is "Don't Count on Consumers to Save the Struggling Recovery: Economist" by Matt Nesto. To access, again, go to the Yahoo Finance home page and click on BREAKOUT (right above THE DAILY TICKER. Again, page down until you reach the 6/25 article. Excellent article summed up by "You could call it a vicious cycle, or a high stakes version of chicken or egg, but the fact remains that unless and until we are able to create new paychecks, this recovery is going nowhere fast." I would also like to publish a comment to another Yahoo - CNBC article titled "A Global Recession? The Warning Signs Are Everywhere" dated 6/16/2012. Rich from New York, New York posted: "The FRB and the government are letting the banks pay near zero interests to bank depositors, but they are not forcing the banks to pass on the low interest rates to the consumers on Main Street. The oil-pump is hogging the lubricant, and the engine grinds to stop for the lack of plentiful lubricant. Like in the movie On the Waterfront and Rocky, the folks being ripped-off by the loan sharks, and the usury of the banks have a hard time getting out of their monetary fixes. Forgotten are the zillions of students and consumers of Main Street, who are the 99%. The Federal Reserve Bank lowered depositor interest rates, and T-Bill interest rates to near zero to benefit the banks, to benefit the government, and to benefit the 1%. Students and the consumers did not get that near zero percent interest rates, and the students and the consumers are forgotten. That's 99% of the people being ignored and forgotten. The banks, and the Government are not passing through this near zero interest rate reduction to the borrowers like student loans borrowers, mortgage borrowers, credit cards borrowers, and consumer loans. The banks and the Government are keeping the reductions all to themselves to further fatten excessively their selfish profits. The banks and the Government are screwing both the bank depositors, and the bank borrowers. The banks and the Government are ripping-off Main Street to enrich the greedy on Wall Street. Is it a wonder Main Street is hurting, when the banks, and the Government are shafting them from both ends of the street? It should not be any mystery what is happening. Right now, banks and the Government are paying bank depositors, and T-Bill buyers less than a quarter percent, while charging credit card borrowers from more than 10% to 25% or more. This is over 40 to 100 times over what the banks pay the depositors (ie. 4,000% to 10,000% markup.) If that is not usury, what is? If that is not usury, why banks have to move their credit card operations to the Dakota? Mortgage rates were traditionally less than 2 times depositor rates, and now they are over 10 times. Student loan rates are more than 10 times the depositor and T-Bill rates, and now the banks and the Government want to increase that to more than 25 times the quarter percent depositor and T-Bill rates. Mortgage rates should be limited to no more than 2 to 3 times depositor rates of half to three-quarter percent. Student loan rates should be less than 4 times depositor rates of less than 1%. Credit card rates should be less than 20 times depositor rates of less than 5 percent. And so forth. Pumping the same super low interest rates which the banks are receiving from the FRB to the consumers will get the other 99% of the economic sector on Main Street moving, in addition to the 1% of the financiers on Wall Street. It does not take 10 minutes to sign a law requiring the banks to automatically reducing borrower interest rates to much lower levels in line with reduced depositor-rates. The 99% will get a lot more money back to spend and stimulate the economy. Why continue to "bail out" and fatten the less than 1% banksters at the expense of the 99% on Main Street? Stop the loan sharking." While the issue with student loans and credit cards is considerably different than what I have proposed regarding mortgages, at least Rich sees that lower interest rates get people out of debt quicker, and that is the the key to a quicker recovery. If something could be done along those lines, it would certainly be beneficial.

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.

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.

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.

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.

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

http://news.yahoo.com/s/yblog_theoutlook/20110608/us_yblog_theoutlook/could-private-debt-lead-to-our-own-lost-decade

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.