Instead of trying to bail out the suppliers, I have a few recommendations that will instead retrain the consumers. Here is another economic relief plan that helps the consumer, and doesn’t deny money already promised to financial companies. It addresses the irresponsible credit card usage of the American public and allows for future considerations.
Offer anybody who want to get out of debt the ability to stop all interest from being tacked on. Effective from the moment the law is signed, anybody who calls their credit card company and cancels their card would stop getting charged interest immediately. The credit company would be allowed to register a ding on the credit to anybody who canceled with more then a $200 debt. (This is to insure that a ding wasn’t registered because of some crossing of payment.) If you pay the card down and then cancel it, then no negative rating could be assessed. The same goes if you choose to keep paying interest after it is canceled. This is the free market approach to the problem.
A example would be a guy who owes $10,000 on a credit card that is charging 23%. Every month he is paying about $200 a month in interest. The new regulation would allow him to call his credit card company and cancel the card and the interest rate. He would start to work his way out of debt. Other credit agencies would be able to see that he did it, and decide if they wanted offer the guy credit.
The more socialist option of the plan, of course, comes with the requirement for the petitioner to give up some rights. Anybody, with any amount of credit card debt can have it the debt consolidates and interest suspended by the government. The government could offer extended terms. This would reduce the monthly payment and free up capital to pay other bills like the house, education, or auto loans. If the person looses their job, the lean is suspended until work is found again. However, (and this is the big “however”) the applicant for this program would have to agree to give up all of their rights to credit for as long as there is an outstanding balance. No new credit cards, no refinances, not even a loan from your brother would be legal. Debt current at the time of signing up for this program would be the only thing allowed.
Back to our example. The guy owing $10,000 gets a monthly bill for every month for $400 minimal payment towards his credit debt. He signs up for this program and the government agrees to a term of 5 years. They buy the debt off of the credit card company. The creditor now has capital to do whatever they would like with it. Hopefully they would choose a better debtor next time. The guy who used to have an obligation of $400 a month now has an obligation of $170 a month. But should his car break down, he had better bicycle, walk, car pool, or take public transportation until he can afford to pay for the repair in cash. All credit cards will be immediately canceled. Like I said, getting a loan from his brother would be technically illegal. The government debt would not be susceptible to bankruptcy. If the debtor should go bankrupt and the government is owed money, the taxpayers would get paid first. A little punishment for the creditors giving credit to somebody who was obviously irresponsible.
Now this proposal will have to be coupled with job recovery policies. The one thing this will not do is create jobs. As more people are forced to live with the money they bring home every week, they will reduce their expenditures. That means they will be buying less stuff. If some people are not buying stuff, other people are not being paid to manufacture it, grow it, pick it, or shake their buns around a shiny pole for it. Personally I would recommend that Obama assume a more isolationist approach. I would not stop until it is cheaper to produce every big screen TV and circuit board in the US is produced in the local economy. But that is just me. I have this crazy notion that one day I would like to walk through my house and pick up at least 50% of the products in it and find a “Made In USA” tag on it.
over whether tax cuts or bigger government are the answer to our economic problems is like listening to the captain and the first mate of the Titanic argue over whether more and smaller buckets or less and bigger buckets are the answer to their situation.
You know what would be to impressive and a confidence builder? If Obama came out and said, “I am not sure how to fix the economy just yet, but we have determined what the problem is. While I can not assure you that I can keep any of you in your homes or keep you from falling into poverty, but I can promise that your kids won’t be in the same situation.” That would signify to me that he actually understands the cause of our current situation.
Throwing money at the big banks and the irresponsible housing lenders and borrower is about as impressive to me as George Jr. bombing camels to protect America from guys with butter knives from taken over airplanes. Neither are actually going to keep the condition from being repeated. At least when it comes to guys with butter knives on a plane, I can trust Americans will rise up and fight off the offending situation. I am not sure that I can count on Americans to stop agreeing to terms they don’t understand, and borrowing more money then they can afford to.
When everybody involved realizes that taxes and incentives are red herrings and economically unsound ways to influence circulation. Lowering taxes on the wealthy doesn’t cause them to start businesses. Lowering taxes on businesses doesn’t cause them to hire more people. By the same token charging hire taxes and redistributing the money to the poor doesn’t make them any less poor. The government creating temporary jobs only gives people false security and unpredictable income.
If the administration could put somebody to work following the money once it reaches the market, I would feel much more comfortable. So you send a stimulus check out. Where does the (in the last case) $1500 go when you send it to them. Obviously they were paying their bills, or maybe they weren’t and for that month they do. If they buy merchandise, how much of it is retained here in the US and how much is spent on places outside the economy.
If Obama announces he has put somebody in charge of following money as it enters and leaves our economy, I will feel much more comfortable with the faith everybody is putting in him.
I keep seeing people posting to this forum begging Obama to “force banks to give credit.” Things like “I can’t get a 30 year loan to buy a house.” Or “My credit card company keeps reducing my credit.” When I hear these complaints I am reminded of a crack addict’s pleas that they use the drug “responsibly”. They all feel that if they could just get a little more they would be fine.
The reality is that use of a credit card has a much more profound and expansive impact on those around you then using crack does. Use crack, live 10 blocks over, and I will probably never know or feel the result. However, if you use credit to buy your groceries that you otherwise wouldn’t have been able to afford, you have increased the market value of groceries.
Basic economics most people have at least heard of tells us that “a market price is set by the highest value at which people are ‘willing AND able’ to buy the product. Credit cards have allowed people who normally wouldn’t have the resources to compete in the market against me to have access to those resources.
Let us say you are browsing the fine objects available for sale at an auction. You spy a great cigar store Indian in the middle of all the other stuff that you feel you must have. When the auctioneer get around to tapping his cane on the Indian you feel that little jilt of excitement that you are about to become the owner of that which you desire. Much to your delight he starts the bidding off at just $10. You raise your hand high. But just like that you notice another bidder raise the hand. Back and forth you go. 15 becomes 20. 20 50, at about $75 you wish the other party would run out of money. Now on it goes until you bid $150. You are starting to feel the excitement of the win when you hear the other bidder’s friend say “OK” to the request to loan out $50. You are not to be outdone, so eventually you win the bid at $210. You think to yourself, “I wish that yutz hadn’t offered her that extra 50 bucks or I would have only paid $150 for this treasure.” Well that is how I feel when I walk into a grocery store or an electronics store to buy a product with cash. I wish credit card companies hadn’t offered so many yahoos credit to buy these products. They would be priced more realistically. That is the way I feel when I look at the going rate for college when trying to save up for my children’s future. I think, “I wish somebody would make it illegal to offer loans for college educations. Schools would have to charge a more realistic price if they actually wanted students to show up. Now you might think, “but they have to charge enough to pay for their teachers”. But can you imagine how much less a teacher would have to ask for as a salary if they could get a big screen TV band new for $200. It is a classic “chicken or the egg” scenario. Do people need paid more because credit has allowed market prices to be bid up or is it the fact that market prices are so high, that people need credit to pay for them and thus need paid more. For some reason bread only used to be 10 cents.
What happened in the housing market is that banks started offering longer and longer terms in order to get more people the ability to afford to “buy” them. A win/ win/ win for financing organizations. They get more buyer, buying at hire sale prices (which they are getting a percentage of), and earning more in interest over the long term. Interest that they charge you up front. The same thing happens with everyday stuff as banks offer credit cards into the market. Credit companies get paid form the vendors and the consumers. (The funniest thing I have ever seen was an annual fee. I have to pay you money for the honor of paying you money? This is worse economics then a strip club.)
So it is the people who are going through “credit withdraws” and are trying to convince the world that “then need it to survive” that are threatening to unravel any chance we have at a wholesome economic recover. So stop it. Your credit card reduced your limit? Good, you will thank them when you loose your job. A mortgage company won’t let you finance a 30 year loan on a $150,000 house that ends up costing you $350,000 with interest? Write them a thank you letter for not letting you make a mistake that will not only damage you but the entire economy for the rest of us who were also promised our government would give us the opportunity to be alive, free, and happy. None of these thing can you be if you are in debt and working 60 hours a week just to make the minimums. And I can’t be if I have to compete in a market were you are capable of doing that.
Here is a better way to address the failing housing market. The government opens up a new hosing department. One that is understood to have a hopefully temporary life span. This new agency will negotiate a new value for the home. The new housing authority will then buy the house from the bank for whatever “payoff” is. They get their money back. If they had planned on that interest coming in, they are no different then the home buyer who though he would be employed and healthy for 30 yrs. “You guessed wrong. Here is your consolation prize, your money back.”
People who sign onto these programs are relinquishing the ownership of the house. The difference between the payoff value and the newly negotiated market price becomes a debt to the participant. Strict limits would be placed on their ability to hold credit. The ex-homeowner has proven by their situation that they do not grasp the risk of credit. A 5% increase in their taxes will be asses in order to pay off the remaining balance.
We have a saying that I am sure most of you know that starts out, “if you believe that, I have a bridge to sell you.” It is a cliché used to point out the most preposterous assumptions by the most naïve people. It usually gets rolled out when only the slightest amount of thought renders an ideal illogical.
So when the pimply faced ex-pizza delivery guy (because I am sure you checked out the credentials of this perfect stranger that all of the sudden had your best interest in his heart.) who turned into a loan agent told you this did you have him explain how? Did he explain that over the next 30 years, at your 7% rate, on a $100,000 loan you would pay $250,000 plus property tax, insurance, and maintenance costs? This was supposed to be an “investment”? How many times your net (bring home) yearly salary is that? When you finally paid it off, it might be worth $200,000, although historically it would be more like $150,000 and that wouldn’t even take into the rise in cost of living over the past 30 years. So how was this a “responsible decision”? Boy, wait till you get a grasp of how a credit card works.
An investment people should A) never cost more then the purchase price you paid for it. B) Should never be worth less then the price you paid for it. C) Should have the ability to cash out (with maybe some minor penalties) and get your “initial investment” back plus whatever you have earned off of it. And D) If you loose your job, it should be a source of last resort to provide food shelter or clothing for you and your family. You should not be in jeopardy of loosing it because you lost your income. The only thing way a house might be considered an “investment” is if you are planning on leaving the paid off asset to one or all of your kids.
I suppose that you believed him when he said, “borrow to the max now, everybody’s income eventually grows” as well? So you bought shares of a bridge, and now I have to pay for it. Exactly how is the free, fair and just? The biggest problem facing this country is not its economic woes. It is that a large enough portion of our community are not able to make rational responsible decision and are not able to accept blame. I hate GWB and believe he may have doomed this country to a bitter end. But I could never bring myself to believe he was responsible for a hurricane. Now, Cheney? He may have had that kind of influence, being the Anti-Christ and all.
On CNN as earlier today I heard the statement that I have heard commonly since the bankruptcy and mortgage default trend has been deemed a “crisis”. It goes something like this, “I am not asking the for a hand out. I am not asking for the government to bail me out. I am asking for the government to make the banks responsible for what they have done to me.”
There are so many ways that “renegotiating loans” hurts the entire population. Here is the thing, the homeowner has promised to pay back “the bank”. The bank is made up of stockholders. In many cases the government also has a direct interest these banks. If you do not pay back the money you signed and agreed to, then the stocks drop. Many people retirement savings are tied up in stocks. T-bills are investments sold to people so the government can offer liquid cash to the banks to be used for making these loans. IF you do not pay the bank back the amount you agreed upon, they can not pay back the money they owe to the government. The government either has to default on the Treasury Bills or print paper. The later actually cause the value of the dollar to drop and affects every single member of the economy.
Asking the government to do anything besides taking your house and/ or requiring that you pay your debt is asking for a “handout”. You are asking people who did not make the ignorant and naïve mistakes that the foreclosing homeowner.
One more thing. I live in kind of a crumby neighborhood anyway. Not despicable, but certainly not posh McMansion filled resort city living. The school district sticks, the parks are all nasty. I have a really decent house and for the area a pretty OK neighborhood street. This what the price I paid for refusing to pay way too much for a house I couldn't afford. Houses that really were not worth the price they were going for. However, the market was driven up by people financing 30 years of their future to get them. The point is this, I do not care if my property value drops. Great I will pay less taxes. My property value is of no concern to me until I go to sell my house. When I do I will again make a wise decision about the affects on my future. In a few years I should be able to get one of your 1/4 million dollar houses for the $75,000 I paid for mine.
This post cold easily be title “just how screwed we are.” But know that I have a suggestion that would get us out of this mess. IT will have to come in a latter post, but if I can figure it out, the people on the hill are much smarter then me will. Right?
One of my favorite and most quoted cliché’s is, "common sense is often common, but rarely makes sense." This is true when listening to people make wild thoughtless suggestions on how to fix the economy. The phrases that send off my B.S. detectors are things like, "It's economics 101" or "it's about supply and demand" or "you are over complicating". First there are very few "or's" in economics and accounting. Capital generally follows the laws of conservation. For every action there is an equal and opposite reaction.
Two prevailing suggestions I have seen posted in the last week or so to "help the ailing housing market" and help out home owners are about the same. One is to lower everybody who needs it to 4% mortgage rate. The second one it to extend the mortgage out to 40 years? Neither of these things make economical sense, and/ or follows the free capital everybody is treated equally spirit of the country.
When you are sinking in quicksand the natural reaction is to kick your feet and struggle. The problem is that kicking only causes you to sink faster. I know this is going to come as a blow to those who are trying to say, “The government should help us because we can’t pay for our house”, but you are mistaken. I am sorry. The only thing that this home rescue plan is going to do is cause the rest of us to go down with you. Not to mention your attempted salvation will result in the prices remaining artificially high.
I am going to piss off a lot of people, but I don’t care. It is kind of the same response you get when you tell an addict that they have made bad choices. “but everybody around me were making the same choice.” If you are in a mortgage you can’t afford, it is because you were irresponsible. That is not a disputable fact. However, everybody wants to make “responsibility” a relative figure. It is not. If I should go belly up and be unable to afford my mortgage, well then in the end I was irresponsible. In nature they call that “dead”. In the US we call them “victims”
Here is an idea that will work right now. It has to be acknowledged that when we draw ourselves out of this mess we are going to change the way we functioned before or we will end up in the same place all over again. (As it is many of our “stimulation techniques” remind me of the pirates from a few months back that drowned trying to swim to shore with all of their ransom money. Sometimes you got to let go of those things that you hold dear to survive.) One major change that could be enacted right now and have an immediate impact is wage reform.
By wage reform I don’t mean those old worn out ideals of “fair wage” or “living wages”. Those all have the same problem that our current minimum wages does, no relative direct connection between the top and the bottom. What I would propose is that (here come the cheers from the right) we completely get rid of minimum wage. But hold on, (now to re-anger them and confuse everybody else) We should replace it with a “minimum percentage”. What that simply means is that the lowest paid, toilet scraping janitor on your company payroll or any other direct employee would have to get at least X% of the highest paid, probably the CEO, employee on the books.
Credit In The Simplest Terms Possible. I Think
Let me ask a few questions. You can think to yourself or shout the answers out loud. Do you have a credit card debt? Do you know anybody who doesn’t have a credit card debt? You know, you are out at the bar or to eat with them do they always pay in cash? Do you know anybody over 20 that has none of the following. Home loan, car loan, school loan, or credit debt? Do you know people who work hard, make a decent wage, do the right things financially, but are still struggling? Do you have a years worth of savings accumulated in case joblessness or illness occurs? So how can it be that so many of us are working our butts off, making an alright living, not living lavish lives, and still could not make it a year with out income. Now, under that guise let us talk about the affect of credit on the US economy.
Let us look at these things logically. I like logic. It is as good a place to start as any. When conducting an investigation in theory, one starts with what one knows, and applies facts from the best predictor of the future, “history”. One also applies rational assertions that are open to debate from anybody who comes up with another more rational assertion. This technique can be applied even when dealing with irrational subjects, because even they have to yield to the laws of nature, science, and the trends of sociology.
So with that in mind. Here is the question that I would like to explore. What was it that al Qaeda wanted to accomplish by the actions of 9-11? Of course as a follow up, how successful was it?
What Obama and this country’s financial leaders of this country don’t seem to understand is that simply bailing it out doesn’t fix the hole. How does giving a few people temporary jobs help solve the problem? By temporary I mean that hopefully it will not require 30 years to fix and build all of the infrastructure we need.
But let us say that some how, I don’t know where, the government comes up with money to pay for all of these projects. The money is sent to the state. The states allot the required amounts to the contractors. This goes into the payroll of the various businesses. The question they have to ask is, “then where does it go?” A good guess would be to look at who make up the top retailers in the country. Wal-Mart, Home Depot, CVS, Kroger, Costco, Target, Walgreen, Sears/ K-mart, Lowe’s, and Super Value make up the top 10. Next quantify what percentage of their gross income ends up being sent outside of the economy. How much of that local income is spent on paying low wages to people that are forced to shop at these chains and deliver even more money outside of the economy. What you see is that in very few turns of the original capital, almost all of the invested money is no longer circulating through the US economy. That leads us right back to where we are today.
How are any of these suggestions going to stop capital from going outside the economy. We are drowning in debt. That is a fact that is true from the individual family, through all branches of business and government, and ends on the capital steps. Is there anybody in Washington that really understands how we ended up here?
