Our Human Nature is Beyond a Response to Stimulus
An emerging problem facing many people today is that the price of a product that is presented to the consumer does not accurately represent the consumers’ real costs. I would challenge any person to walk into any new car dealership and figure out what will be the real price to be paid or the real cost incurred based on the listed price on the sticker, the advertized price with or without rebates, unknown “APR’s”, dealer price, employee price, and whatever information you can gather from the internet. I know that agreeing on a price, weather cash or credit, can take hours. And when I am finished negotiating and driving away in my new car I wonder if what I agreed to pay was really fair or did I hurt myself by paying too much? I wish I knew!
The finance charges of buying anything using credit must be added to the initial purchase price to know its real cost. The cost of buying anything on credit is hidden or disguised from unaware or ignorant people. The price held in a person’s mind or seen on the sticker certainly does not equal the total payments made over time. It is probable that three different people with three different credit histories will all agree to purchase an identical car at the same price and all three people will incur very different real costs to their lives. Three examples of financing $20,000.00 of the purchase price of identical cars over a period of five years for our three different people of various credit histories could be:
1. Excellent credit…. $20,000.00 at 3% interest over five years is 60 payments of $359.37 totaling $21,562.46.
2. Fair credit…………..$20,000.00 at 8% interest over five years is 60 payments of $405.53 totaling $24,331.62.
3. Poor credit…………$20,000.00 at 15% interest over five years is 60 payments of $475.80 totaling $28,547.91.
These examples are not made to pass any moral judgments’ on borrower or lender. The examples exhibit the difference between the same $20,000.00 price in each person’s mind and the three different total costs of $21,562.46, $24,331.62 and $28,547.91 incurred by each individual respectively. We all know that the real cost of buying an identical car is different for different people in different circumstances. Fair or not, differing real costs for differing consumers is the reality people experience. What is problematic is that many people confuse the price they have in their mind with the total cost that is actually paid over time. The total cost paid over time is reality while the price they have in mind is not. The $20,000.00 price in mind is believed to represent each individuals’ real cost when in the real world each individual incurs, respectively, the different real costs of $21,562.46, $24,331.62 and $28,547.91. What is believed to be real (as price) is not real (as is the total cost over time); the idea that the price accurately represents the total cost when credit is used is mistaken.
Imagine being a person of fair credit, believing he is paying $20,000.00 for a car, and in reality paying $24,331.62 for that car over time. How many times can the $4331.62 mistake be repeated? I do not know. You might say that ‘people really do know how much they are paying or at least they should know’. That may be true: but, the first point is that their purchasing behavior was based on the belief that the $20,000.00 price held in mind was the real price they are paying; and, the second point is that the idea of the $24,331.62 total cost, if it came to mind at all, came to mind generally as an afterthought which had little or no influence on their purchasing behavior.
I wish to drive this point home just a bit further. Imagine being the home owner when I ask you how much you paid for your house. Will your answer be the buyer/seller negotiated price (of say $200,000.00)? Or will you answer with the total cost calculated over time (of say $20,000.00 down payment, $180,000.00 mortgage over 30 years at 4.5% with monthly payments of $912.03 for a total cost of $348,333.52)? Most people say $200,000.00. This may be self deception on a mass scale; a deception that for some people makes huge differences in their standard of living. A home buyer with less down payment or worse credit might agree to this: $0.00 down payment, $200,000.00 mortgage over 30 years at 5.5% with monthly payments of $1135.58 for a total cost of $408,806.90. While there is a $60,473.38 total cost difference facing the different buyers, I will bet, most home buyers will say and believe and behave as though they paid $200,000.00 for their house.
Reality will not be ignored long before it demands to be recognized, and in the real world price does not always equal cost. If I define price as the number that is held in one’s head it will equal the physical number printed on the products sticker or it will equal an amount negotiated (that is often to be financed) between buyer and seller. Within a cash transaction price will equal the cash exchanged for the product or service and most importantly it will accurately reflect an immediate real cost. Within a credit transaction price will not reflect a real cost and thinking that it does can be a costly mistake. Reality for the cash purchaser is different from the reality of the credit purchaser.
Real costs involving credit are the total cost calculated as price plus interest paid over time. If I define cost as what will be actually paid then that number must be calculated and kept in mind if an accurate representation of reality is to influence a purchaser’s behavior. Believing that price equals cost does not make it so. At Wall Mart or at a grocery store the cash, check, or amount debited, is equal to the price of the goods purchased. When those same goods are purchased using a credit card the price printed at the bottom of the receipt will not represent the real cost of the goods for that buyer. It is the knowing and respecting of this fact that price easily misrepresents cost that will influence behavior. Masses of people behave in a purchasing manner that suggests that they do not know or respect these truths. For many buyers using credit the purchase price held in mind never represents their real costs; their real costs are actually out of mind. What they think is the price they are paying is a fantasy held only in their imagination; reality is actually a rising total debt because real things purchased on credit have a higher real cost than at first appears.
As simple and as obvious as this seems it is my contention is that it is the ignorance (by many people, businesses, and governments) of this real difference between that price which we picture in our mind and that total cost which we really pay over time that is at the heart our present economic crisis today.
It is often hard for many people to believe how big their debt is when they believe they didn’t really spend that much. And perhaps they didn’t spend that much, but for what they did buy they ultimately paid a high price. Most people that buy on credit behave as though the price they are paying for the good is what it costs them. In reality it costs far more. With regard to a credit purchase a person’s belief in mind could hold that the price is low enough to represent the thing as being worth buying; whereas, for the person mindful of the real cost that cost is too high to represent the thing as being worth buying. A person’s behavior is based on what they believe to be real; that is, they see reality as the sticker price that is easily held in their head or they see reality as the total cost paid over time. In the first case, when only mindful of price, the price (which does not equal real cost) appears low and they purchase immediately. In the second case, when mindful of the real cost, the real cost (which does not equal price) appears high and they put off the purchase.
Behavior based on mistaking the price for cost has profound ramifications for economic systems. Credit purchases based on this mistake will artificially stimulates a demand for the goods and services purchased because the price appears lower than its real cost. Businesses, however, will actually produce enough goods to meet this propped up demand for all the consumers that confuse or ignore the difference between the idea of a low purchase price and the real cost involving credit. Behavior of persons mindfully considering the difference between a cash price and the higher real costs incurred by using credit will adjust demand downward with regard to any good or service requiring the use of that credit.
Our present economic crisis is based in the fact that a great number of people are being forced to becoming aware of a need to consider this price/cost difference. Their behavior, which led to an over extension of debt and an overconsumption of goods, is a direct result of not considering this difference. Their changing behavior, which is now withdrawing from the use of credit, is based in having in mind the real cost of using credit. When the real cost of credit is kept in mind then demand for goods and services will no longer be artificially stimulated. Demand will come down to a level based on the real costs instead of the non-credit cash price greatly impacting businesses that use credit to help generate profits.
Businesses that generate profits by financing the purchases of their goods or services are now facing difficulties proportionate to their use of that financing for those profits. It is conceivable that some companies switched to generating their profits through financing because price competition for cash purchases drove profits very low. It then became easier to compete for profits based on financing because that financing hid the real costs from most consumers. Automobile companies, retailers such as Sears, conglomerates like GE and any kind of business that has become dependent on their own financing of purchasers to generate profits has contributed to the misleading relationship between price and cost by presenting to consumers prices that seem low when in reality the financed cost is high. When using financing to generate profit the price tag on a good or service will tend to be lower (to entice people into using credit) than what would be necessary to generate that same profit without using financing. It is probable that businesses highly dependent on profits through financing will even discourage cash purchases because selling for cash at the list price will produce little or no profit at all.
Ultimately businesses that financed the purchasing of their own products built a capacity to produce enough goods to supply a market where people behaved in a manner that mistakenly accepted the price as equivalent to the financed cost. Once consumers realize their mistake they will withdraw demand leading not only to an oversupply of goods but also to an over capacity to produce them (the basis of deflation). Thus if the use of credit decreases so will the ability to generate enough profit to stay in business. And if credit tightens an initial oversupply of goods and services will face deflationary pressures (of too many goods needing to attract fewer available dollars) leading to falling prices. Once the original oversupply is consumed the list price on goods will have to rise to a point that will make up for the loss of profit that was generated by financing purchasers if the business is to continue operating. Of course the higher list price will also discourage demand.
Retail businesses (that are not operated as finance companies) generate their profits based on what is paid for the product at the moment the transaction occurs. Whether a good is paid for using cash, check, or credit makes little difference to the retailer at the time of purchase; because, for the retailer the price on the sticker accurately represents what is received in payment. From the retailers point of view the sticker price represents the real cost to the consumer. Inventory is ordered and manufacturers produce goods for a market based on that retail price; but, that retail price that seems real to the retailer is not the same as the real cost to the buyer using credit.
The consuming of products purchased on credit has long term effects on retailers and their customers. From the point of view of the retailer corporate profits should be able to be estimated by taking the price paid by the consumer, minus the businesses costs involving the product incurred, multiplied by the number of units sold. While that will work for past purchases it will not work well for future projections. In reality, the cost of credit is incurred in the future and this has two results: first, future demand will be less than current demand; and second, the real cost to consumers is much higher than the price the retailer receives. Future profits must adjust downward with a cannibalizing of demand.
The lender of credit becomes the collector of the difference between the price paid to the retailer and the real cost to the consumer; the retailer collects the sticker price and the consumer pays to the lender a higher real cost over time. By extending credit for purchases today the lender enables an increased stimulation of demand for today. By collecting payments of interest and principal in the future on today’s purchases the lender will stimulate a decrease in future demand by absorbing the consumer’s future purchasing power. For the unaware retailer or consumer the lender of credit is, in reality, collecting a sacrificial cost from both the retailer (sacrificing future demand) and the consumer (sacrificing future purchasing power); and, both retailer and consumer let it happen because of either ignorance or the convenience of having one bird in the hand rather than having two birds in the bush. Both the consumer and the retailer, when dependent on credit to complete the transaction are related to the lender of credit as addicts are related to their pusher. The lender, who is extending credit to facilitate today’s exchange between buyers and sellers, when those buyers and sellers are blind to the real costs of purchasing things, is no longer profiting by performing the service of assessing practicality and risk; but, the lender is profiting from both purchaser (in lessoning future purchasing power) and seller (in lessoning future demand) by supplying the convenience of immediate gratification to anybody ignorant of real cost assessment.
Yes, I am pointing fingers at the banks issuing credit to ignorant consumers! I am pointing fingers at payday loan companies serving desperate people seeking loans at loan shark rates! I wonder, what would happen to people if banks would issue enough credit to people that they might have trouble paying it back? If I was a bank, I would like to keep borrowers just under that troubled threshold. If I was a bank I would be interested to know what profits I could generate if, as a bank, I were to raise the interest rate on my customers from 10% to 20% or even 29%. I might even justify the rate increase based on a late payment; I might even use the post office to help generate some late payments by mailing out payment notices near do dates and requiring the payment to be mailed to the opposite coast. I might even raise fees on those late payments. Another thing I might try, if I were a bank, would be to entice credit users from my competitors to transfer their loan balance to my bank by promising an absurdly low interest rate of 0%; I will bet that at the first late payment the interest rate could be raised to 25% -- 0% to 25% in a heartbeat – what a good deal for bank profitability.
Hmmm… if we, as bankers, could only keep people under that painful threshold of not being able to make their monthly payments: Hmmm… if we cannot then the huge interest rates we are charging will have to make up for the amount of people defaulting on their debt: Hmmm… if that does not work perhaps we could get congress to make it harder for people to declare bankruptcy. How profitable can we banks be and what might be the overall consequences?
Hmmm… if we could only get these people out of debt we bet they would thank us and feel relieved: Hmmm… if we could only encourage the debtors to exchange some of their short term debt (such as credit card or auto loan debt) for the equity that is in the home; in this case expensive short term debt will be exchanged for cheaper long term debt. We realize that it would be like taking out a 30 year loan on a car that may only last about 10 years and we realize it would not be a good habit to establish; but, people need relief from their pain now and they deserve a vacation from all their debt. Perhaps people will thank us bankers for bailing them out of their troubles.
What must it be like to have $10,000.00 in credit card debt? At 10% the cost of servicing that debt for one year is $1,000.00. At 20% the cost would be $2,000.00. And, at 29% the cost would be $2900.00. For those consumers habitually in $10,000.00 of debt, at 29%, it means that the goods they purchase every year for $10,000.00 really costs them $12,900.00. It also means that the $2,900.00 of interest payments goes to the provider of finance and not to the profits of retailers or producers; in fact, the $2,900.00 cannot go to purchasing any good at all. In this example, it means that $2,900.00 of the total cost of $12,900.00 goes to the production of no-thing beyond convenience. In this example, it means that $2,900.00 must be subtracted from future purchasing power. In this example, it means that the real cost of goods to consumers that are habitually in debt is very high. It also means that in saving this $2,900.00 there is real hope.
There is hope that once people become mindful of and as long as they stay mindful of the cost of credit their behavior will be modified toward less demand with regard to the real cost of things used. Our present mindfulness of the high cost of credit, whether caused by job loss, out of pocket medical expenses, a credit overextension that can no longer be refinanced, or the actual pains of bankruptcy, will encourage a behavior toward increasing savings. Increasing savings or bankruptcy are the only things that will get people out of at least short term and high cost debt. And pain is the encouraging factor in keeping people mindful of their real circumstances.
Once people are out of debt and as long as they stay mindful of the real costs of things, then the real benefits of working through the pain can materialize. Those benefits will ultimately be a real increase in disposable income of $2,900.00 for the future out of debt person in the above example. That amounts to an increase in disposable income that dwarfs any stimulus check sent to consumers by the federal government last year or coming from the government in 2009. Not only that, by saving, consumers are actually behaving in a caring manner toward themselves. And, that $2,900.00 saved may eventually go towards purchasing a future good or service instead of future interest payments. That could lead to more employment of people that actually produce things that will be used. But, please note, this real kind of recovery can only be achieved by working through the pain. Giving and taking pills to deaden the pain will keep out of mind the things needed to be held in mind if behavior is to change.
As human beings we do not respond to stimuli in the same manner as plants or animals. All organic life responds in a manner of moving toward or away from stimuli. Human beings do not have to respond in the same way as organic beings because we can respond through knowledge of the thing that is stimulating us. It is through thinking and feeling things that are outside us that we get to know them and our place in the world. Things that are outside of us stimulate us into thinking and feeling about them. It is for this reason that what we think and feel about any thing always has to be checked out in the real world. Are we thinking correctly about things? Are we feeling appropriately? Answers to these questions are revealed only through activities we undertake. If we do not get the results we expected by our activities then our thoughts about how something could be accomplished are wrong or our motive to act in the direction we felt to be right is wrong or both our thinking and feeling are wrong. In any case we had better stop what we are doing and reflect. Was what we were thinking and feeling about things accurately telling us something about the real world outside of us or was it really telling us about something inside ourselves? Knowing the difference is what allows us to act as human beings and not just respond to stimuli like plants and animals. Getting to know the world outsides us and responding to it as it really is distinguishes us as human beings. Generally, in getting to know the real world we will sometimes experience pain. Pain is often a sign that we have been moving in the wrong direction. Pain generally stimulates people to wake up and reconsider their relations to the world. Pain says pay attention. Anesthesia for the pain is no cure.
Even the granting of easy credit to help sell the initial over supply of goods left in the marketplace will not place the now known high cost of credit back in the bottle. People are now leery of using credit because of the pain they are feeling; for, it is this pain that is keeping credit’s real cost in mind. Since the real cost of credit is better understood by the consumer the businesses that have supplied the goods and services based on the use of that credit will have to scale back production and they will also have to figure out how to generate profits on goods that are purchased at or near a cash price because those goods that need financing will be purchased by pained consumers more fully aware of the real higher cost of using credit.
Credit has no need to disappear. Goods will come to an end of their useful life and need to be replaced. Big ticket items will still need to be financed. And people will be educated by pain as to what they have been doing to themselves by ignoring reality. Like it or not, many people’s idea of how they would like reality to be is not mirroring how reality actually is. A necessary process of disillusionment is affecting everyday life. It is part of a process of getting healthy. What people are coming to terms with is that our present standard of living is being borrowed from our future standard of living. The consumer, in withdrawing from overdependence on credit, is showing a mindfulness of the problem. To believe that the consumer should do more of what is causing them pain by encouraging the further use of credit (by making it cheaper to borrow) is insanity. Saving is an act directed toward the future. It is and act directed at taking care of ourselves over time. And it is about time that the idea of participating in our own care better take root in our minds if it is to have any hope in changing our behavior in our future.
Businesses and governments do not know how to respond to the consumer’s new mind. Businesses and government officials are crying for more stimuli, either through greater government spending (most Democrats) or through decreases in taxes (most Republicans). In begging for the reestablishment of old and blind habits businesses and government desire the dissociation of price in mind from real cost because it is the traditional way things have been done. If they could only eliminate the pain then the consumer’s mind would seem at peace yet stay asleep to reality. But the consumer is awakening to the real problems of the cost of doing things in our habitual manner. And reality is forcing us to stop and reflect on how we are doing things. Reality will painfully stand in our way when we are doing things wrong. Hopefully we can get to know things as they really are and behave accordingly as the human beings we really are.
Maury Garvey, 2/25/09.
The Freedom Recovery Plan: How to solve the housing crisis?
The basics of the plan and more were posted on the Obama blogs over one week ago on Oct. 14th, 2008.
http://my.barackobama.com/page/community/post/mauricegarvey/gGgHsh
It finally started to make TV on CNBC Tuesday Night and prior to that in the New York Times on Oct 17th. http://www.nytimes.com/2008/10/18/business/18nocera.html?_r=1&oref=slogin and http://executivesuite.blogs.nytimes.com/2008/10/19/the-freedom-recovery-plan-daniel-alpert-responds/
A little late to the game but finally a rational plan is forming.
This is good to see.
Maury
Mr. McCain, we must remember that a root of our housing crisis is twofold. First, some people cannot make their mortgage payments. Second, banks no longer receiving those payments must cover those losses with money that cannot be loaned to other borrowers. These two facts have revealed a sick and broken relationship between borrowers and lenders by causing a spiral of declining home values and a credit contraction (an inability to get loans) that is affecting the average person’s sense of security for family, retirement, and working life.
It is true that some people’s dreams were certainly larger than the reality of their pocket books. It is true that some banks made risky loans beyond many borrowers ability to repay. It is true that our present crisis is revealing that enticements such as no money down, no fees, no income verification, and high debt to equity ratios were evidence of a system breaking down. These borrower/lender problems, masked by years of quickly rising housing prices, could be ignored only as long as the house could be sold at ever increasing prices. The real cause of the crisis is the acceptance of ‘poor equity and high risk’ by both sides of the borrower/lender relationship. Equity is the tangible evidence of the borrower’s real interest in the present property. Put simply, equity is what the borrower really puts into the property. Poor equity reveals that, at present, there is little or no real interest in the property and that any real interest in the present property is only imagined as equity projected into the future as something the owner might have later.
What is revealing itself right now is that the financial crisis has infected more than just the housing markets: it is probably in all sectors of the economy to varying degrees. It is signaling that the world wide system of money circulation is damaged. While we in the United States have overextended ourselves as borrowers by importing vast amounts of the world’s goods it could not have happened so easily without others financing our debt by loaning us the money to buy their exports. Money, at home and around the world, is no longer flowing so freely from one place, or person, to another because lenders are simply afraid that they have a smaller chance of being paid back tomorrow on money they could loan today. No matter a person’s, or a country’s, credit score or down payment, it is getting harder to find money to borrow to get a car, a student loan, or a house. The credit score needed, the collateral needed and/or the interest cost of borrowing money may need to go very high during the process of reestablishing a healthy relationship between lenders and borrowers.
We must remember that the real cause of the financial crisis is the acceptance of ‘poor equity and high risk’ by both sides of the borrower/lender relationship. Before spreading, this crisis first showed its ugly head in the housing markets here at home. To begin solving our problems we must first work at restoring a healthy borrower/lender relationship that begins with housing. This is not an easy thing when it is hard to judge the real value of a house in an unstable real estate market. The problem is in finding a way to stabilize declining house values. During the time that takes, more people could lose their homes through foreclosure. Vacant homes depress prices further as they continue adding to the supply of available homes on the market. Rising interest rates would also depress home prices as the cost of borrowing increases. Additionally, there is a growing percentage of borrowers that have a great negative equity in their home; and, if or when it becomes evident that the home will not regain its former value it will make financial sense for many of these borrowers to abandon their property by leaving it to the lenders.
The revolting aspect of just buying these bad loans to take them off the balance sheets of banks is that it does nothing for the troubled borrower or for any other person experiencing their housing value decline. Interest only loans in the hope that housing prices will again increase makes no sense except as a crap shoot. A person owning a house that they cannot afford to live in because of a high debt to equity ratio makes no sense. Continuing mortgage payments on a house that was grossly overvalued makes little sense in the long run. A borrower who has no ability to increase equity in the property has no reason to keep it up. Keeping people in a home in which they have an established and growing equity is the only way to begin to reestablish the healthy relationship between lender and borrower. It must be in the interest, as well as the ability, of the borrower to keep making payments that grow equity; and, it must be in the interest of the lender that the borrower be interested in growing property equity so that the lender has the long term ability to recycle the money loaned.
One way (and it is vital that we come up with other ways) for lenders to encourage troubled borrowers to stay in homes declining in value is to set up a five year program where the lender offers a ‘rent to own’ alternative. Market rents for any neighborhood are still relatively stable and easy to determine. Instead of conventional mortgage payments, offer payments of market rent plus ten percent; of which, that ten percent is to be held in an ‘equity down payment’ escrow account for the borrower. This ‘equity down payment’ account will begin working on the borrowers equity side of the problem and by encouraging people to stay in their homes the lenders assets begin performing again. At any time after participating in the program for at least one year, and prior to the ending of the program in five years, the borrower may repurchase the home at a new fair market price by adding to the ‘equity down payment’ escrow an amount of money at least equal to ten percent of that new market price. During this program, if the borrower wishes to move then the ‘equity down payment’ money moves with them and can be used for the purchase of any other home. With both borrower and lender participation in this program we can: first, begin using rental income as a basis for stabilizing housing values for lenders by keeping their assets performing; second, begin growing equity as a real foundation supporting housing values for borrowers; and third, in conjunction with one and two, the real problem of cultivating healthy relationships between borrowers and lenders is begun. The program is simply encouraging the development of a qualified borrower for a serviceable loan from a lender. Is this simply too good to be true? Not at all! In fact it is the only sane way to do it. Right now, we are coping with the aftermath of our insane lending and borrowing practices. Until we begin to change our poor habits, which are grounded in our unhealthy expectations, money will not flow properly or efficiently; thus, we will continue insanely repeating the same mistakes over and over again.
Having the down payment to establish home equity will not in itself reestablish the healthy lender/borrower relationship. The lender/borrower needs a realistic debt to equity ratio for the relationship to succeed. Unfortunately this debt/equity ratio reveals a problem we have barely begun to talk about; which is, that the overall debt of many consumers is too high to be serviced. Evidence of this growing problem can be seen by comparing the flood of credit card offers mailed in our recent past to the present mailing of credit card offers which is now approaching zero. The serviceability problems of auto loans and student loans is also growing and indicating the severity of the problem posed by high debt/equity ratios. Servicing this total debt/equity is a great problem facing us today. Mortgage payments are just the largest part of the debt side of the equation for most homeowners and future home buyers. Actual declining house values are a symptom of this greater problem. The solution to the real economic problem can only be achieved by establishing a workable, sustainable, debt/equity balance: that is the only thing that can create a tangible confidence in the markets and the restoration of a healthy relationship between lenders and borrowers. Right now we have a great debt to equity imbalance and we do not know what the proper balance should be.
Since the bailout bill passed, authorizing 700 billion dollars worth of taxpayer backed funds, my team has come up with one principle step to productively use that money. We are proposing that, on a conditional basis, we immediately freeze home foreclosures and end evictions for the next five years. The borrowers conditions are; first, that the borrower be living in the home; and, second that the borrower agrees to provide equity for a future loan. The lenders condition is that the lender work with the borrower on an appropriate debt/equity ratio that includes realistic mortgage payments, credit card payments, car payments, school loan payments, and any other payments such as medical, utilities, phone, etc. which should have been considered within the terms of the original loan. The meeting of both lender and borrower conditions has the potential to properly restructure a future loan that may be adjusted to future market rates of both principal and interest within the five year period. We understand that people who are in over their heads will be unable to qualify for the new loans as things stand. That is why it will be important for the lender to take guidance of the whole debt/equity reality that the borrower is in and that is why the ‘rent to own with a down payment escrow account’ is the other half of this proposal. It is certainly probable that loans beside the mortgages will have to be renegotiated too. To have the mortgage lender be the only responsible party to the resolution of this debt to equity imbalance is ridiculous, especially when the credit card and student loan companies extended seemingly unlimited amounts of completely unsecured debt to borrowers often only in pursuit of short term corporate profits.
The science of economics was in its infancy during the great depression of the 1930’s. We are probably experiencing the wild and frantic teenage years of capitalism today. Today’s science of economics has matured between the great depression and now and what economics now knows must be taken into account. The current bailout proposal, as it is being talked about, seems to take considerable care of Wall Street lenders and it seems to give only lip service to caring for the borrowers. Based on certain conditions as already discussed the freeze on foreclosures and the possibility of converting the property to ‘rent to own’, is the only proposal now up for consideration that will help create a supporting floor under the housing market based on the rental income of that housing capital. It will also help give us at least one year of time needed for economic scientists to experiment with ways to address the proper balancing of debt to equity.
The economic realities which we are experiencing today will force us to reeducate ourselves regarding the economic values of money, work and property. Our economic institutions as they stood yesterday, the regulations or the lack of regulations set up by congress, and poor or greedy personal habits have all combined with other external events such as war and volatile energy prices to create what seems to be the perfect financial storm. New thinking that will address both sides of the debt/equity balance is demanded in these times. The old thinking will take care of the institutions because it does not know any way to include the borrowing people: the people it makes money from and the people it uses to make that money.
The old thinking cannot measure the pain of the people as individuals or as a community, but it can measure its own pain symbolized by going out of business. That pain of dying as an institution is unacceptable to those in positions of power and they do not like feeling pain. To some extent, the dying of the institutions is unacceptable; but, their painful experience is absolutely necessary and death must be a real possibility. Our institutions are our means of organizing our productive resources. Without them in some form, which may be a new form that is not yet evident, nothing will get accomplished on the scale that will be needed. We have seen in Iraq that wiping out existing institutions and creating new ones from the ground up, with no historical traditions to provide a base from which to do work, simply does not work. Saving evolving institutions is necessary to some degree but not to the exclusion of the people they are here to serve. It is these new economic realities that are forcing a great institutional change in how business will be done in the future across the world. It is the new thinking that is brought into the world by the inheriting generation that must solve these problems. The younger generations must respectfully take responsibility for the living it will be creating for itself from what the older generations are leaving.
Jim Cramer, on his show Mad Money, Friday night, suggested a meeting between Paulson, the Fed, and the major surviving banks in which it would be agreed between parties that all problem loans would be taken care of and that each bank would be given 100 billion dollars to loan out on an immediate basis. In principal that is a fine idea but it only addresses half the problem. If there is no equitable reason to give out the loans then we will just compound the problem by just wishing that equity will be created. Do I suppose that we should just trust the bankers to do what is right for all of us? Not on our life! Never again! We need to stop and take a breath even if only for a day.
Mr. Cramer also addressed the need to go after the powerful people that should be taking greater responsibility for this mess. And that is very, very, necessary; but, recognize that it is a second concern to the overall restoration of the economy. He also spoke about greed and the hundreds of millions of dollars stolen with careless disregard for the consequences. With regard to that greed, I was reminded of Khruschev’s assertion that ‘capitalism is based on greed’. I believe that is completely untrue. Capitalism, as well as any other form of economic system, cannot possibly survive based on greed. Any system that survives survives only as a sustainable system of working relationships based on honesty, openness, equality, and transparency: greed as well as dishonesty, close-mindedness, inequality and opacity ultimately destroy all relationships. Honesty, openness, equality, and transparency foster all relationships including capitalistic ones.
Even though these ideas are very simple and fraught with unanswered questions regarding monetary losses for borrowers, lenders, and society as a whole they will provide a measured step in stopping the bleeding so we can begin the process of recovery. Wasting time playing the blame game just increases the costs and the severity of the injury. Restoring the healthy relationship between borrowers and lenders must start from where we are today accepting that vast sums of money disappeared. So far, all I have heard pundits talk about is restoring the ability for institutions to borrow and lend to each other hoping that some form of healthy borrowing/lending will trickle down to the average consumer once the ability to lend money is restored. We must remember that it is just as important to restore the personal interest for acquiring the property in the first place: that takes equity – for equity is the present measure of economic value personal interest places in the property itself.
Now I would like to see what kind of new thinking would come about with regard to the credit card and student loan industries if they were to be reregulated. They might even be encouraged to come up with some realistic proposals on their own if we consider easing bankruptcy restrictions. Imagine if the right to first payment on various held credit cards was actually based on which card has been held the longest and/or on which card has the lowest interest rate. Imagine that the longest held credit card had a credit rating based on the first ten percent of after tax income and the second longest held card had a rating based on the second ten percent of after tax income. Let us just see which banks want to be third or fourth in line to extend the credit that will be treated as though it were a third or fourth mortgage.
With regard to student loans it might be a good idea if lenders tied loan amounts to a figure based on average pay over five years for someone graduating with a particular major: say a $40,000.00 salary per year. That would require both lenders and students to consider the potential return on the education for that major. The money borrowed ($40,000.00) could also be amortized over ten years insuring that payment would be roughly ten percent of yearly pay ($4,000.00). This would encourage students to carefully consider the relationship between education, work, and wage. This would also begin to reorient colleges toward more productive educations. It would also take away a fixed upper limit loan amount that it can get from students no matter how well or for what employment they are taught. I would bet that if the government guaranteed that any student could get $100,000.00 in student loans for any four year degree every college would quickly find a way to increase costs to around that $100,000.00 limit. Might this actually lower college tuition costs? It might!
By just suggesting regulations such as these, I think we can spur new thoughts as to how to do things differently in Washington in a way which will make a real difference for the average person’s sense of security regarding their family, their retirement and their whole working life.
Thank you,
From the imagine of
Mauruy
Barak Obama’s policy response to John McCain’s housing plan.
He could have said,
***** *****
in my imagination
Mr. McCain, I hope people listening to this debate are recording it. People at home, if you are not recording this debate, please push that record button now. (Pause)
OK…… Mr. McCain, your favorite words from the last debate seemed to be ‘Mr. Obama just does not understand.’ Now that simply is not true. I do understand. In fact, it is the point of these debates to show how differently we understand what is happening to Americans as well as all other people on Earth. Mr. McCain, it is precisely our differences in understanding that will inform the political activities that one of us will undertake as President.
Now, I understand that our country was ruthlessly attacked seven years ago on 9/11. We have since gone after Al-Qaida and our continuing pursuit of Bin Laden and terrorists should be our highest war priority. I understand that we feel less secure in our country now than we felt before the attacks of 9/11. I understand that right now it appears as though our list of enemies has steadily grown these last several years as our allies and our enemies are less confident of our strengths. I understand that much of our moral authority has slipped away because of what has happened at Abu Ghraib and Guantanamo. Yet, even knowing that this is the world we are facing as Americans I understand that we must not retreat behind our borders. I understand that we must work to both rekindle our friendships and come to know our enemies.
As Americans we have a great deal to offer the people of the world but we must not force it down their throats. Believing that we could simply win a military victory in Iraq, install a democratic government, and lead an Iraqi people out of their dark ages and into our light was not realistic. I understand that we are in Iraq today and we will not cut and run and abandon the Iraqi people; but, a time table for troop withdrawal will continue to encourage the Iraqi government to keep moving in the direction of taking what matters to them into their own hands. I know the Iraqi people do not really want us as their big brother telling them what to do. As difficult as it will be I believe that the Iraqi people want to be a self governing and independent nation serving its just place on the world stage. We have removed a brutal man from power and the Iraqi people must be free to make their own way. Giving the Iraqi people the freedom that we talk about and fight for is real victory and it is a great and honorable thing for us to do even if the Iraqis choose development in ways differing from our ideas of how things could be.
We have a long tradition of democratic government in this country and part of that history included practicing slavery in a nation ‘dedicated to the proposition that all men are created equal.’ It is estimated that over six hundred thousand brothers killed each other in our Civil War keeping us together to work on practicing what we preach. I understand that our history is one of taking steps in time to make civil rights a reality. As our understanding of how the world works has changed women and minorities realized their rights to own property and to vote and working people realized their rights to organize and collectively bargain for higher wages, worker safety, health insurance and pensions. As our understanding of how the world works changed Social Security, Medicare, the GI bill and genuine attempts at equality of education released millions of people from poverty.
Our understanding of how things are in the world must begin with how things are today, right now, at this moment. And what I see is many of our people struggling with making their rent and mortgage payments, credit card debt at usury rates greater than 25 percent, medical bills from hospitals that charge the uninsured two or three times the price for care that an insurance company would pay, medical insurance premiums and their deductibles skyrocketing, people losing their freedom to move to a different or better job because they are locked into insurance at their present place of employment do to preexisting conditions, and even businesses collapsing and finding themselves unable to compete on the world market with companies that have no need to provide health care for their employees. I understand that there is something drastically wrong when over 40 million of our people have either no, or poor, health care coverage. No coverage, or poor coverage, ultimately leads to the sick people getting sicker. The sick getting sicker leads to lower productivity at work which ultimately leads to less wages earned for the society as a whole.
President Bush tells us that if we do not grant the FED 700 billion dollars immediately (that is $2333.00 per man, woman, and child in this country) bank lending will halt, housing prices will fall further, retirement savings and investments will evaporate, and more workers will become unemployed as the economy further slows. All of that seems really possible; however, I want to note that he left something out. He forgot to say that he was optimistic that the plan would work. I might have felt reassured if I knew his optimism would change reality; but, alas, optimism cannot see reality through its rose colored glasses. During President Bushes’ ten minute speech he looked pessimistic to me; but pessimism will not view the world as it really is either. I understand that what we need to do is act not from a basis of fear but from positions of reason.
I understand that these are difficult times. We could easily witness some kind of financial crisis coming for a long time had we not behaved as a frightened ostrich believing that the fundamentals of the economy were just fine. All we had to do was listen to what average people have been saying. As I pay attention to the fears and concerns that people are expressing I understand that it is not just the economy that is in trouble; it is really the average Jack and Jill that is troubled. They are falling down a monstrous hill that was not entirely of their own making.
I understand that the economy is not just some idea imagined and managed by economists. The economy is the people, the Jack’s and Jill’s who are working with each other and keeping things going. We are being told that this is the greatest crisis since the great depression. That is probably so, but we have economic tools and knowledge that was not available in the 1930s. I understand that we should not sugar coat our problems. Even when we put up the money that is being requested this recovery will not be painless. If it were painless we would learn nothing. If it were painless I am sure that what we would do would be the wrong thing to do.
I understand that we will do some form of this bailout and I understand that some of the things President Bush expressed fears about could still happen. So it is important to be ready with plans to reinvigorate the working life of American workers as needed. Our country faces great infrastructure needs that could provide very meaningful work. We face tremendous energy technology and conservation technology challenges that I see as long term opportunities and short term problems. Drilling for more oil while immediately necessary will produce no long term benefit for people. Wind, solar and conservation will provide the greatest long term known benefit. Natural gas, cleaner coal, some nuclear and perhaps growing something to turn into fuel may help us bridge the time needed to develop an energy technology we have yet to conceive of.
Mr. McCain, I further understand that these problems are not just facing the American people they are faced by all the people of the world as it develops. The costs for oil, food, health care, development and maintenance of infrastructure, environmental restoration and perseveration and the costs of education are rising across the world. In fact these problems, which we must meet head on, are products of people just being in the world. We should be leading the world in the discovery of and implementation of solutions to these common problems. In the city of Chicago you can still go into some large, old, apartment buildings or homes and find evidence of heating systems that first burned dirty coal, switched to burning dirty oil, and now produce heat using natural gas. Different times and different places under different economic conditions developed different sources of energy and that is the way the world will continue to work.
Mr. McCain, I must stress again, it is not just us facing these problems in the world. There is not an unlimited supply of oil or natural gas or any other commodity in the ground. Even the sun will burn out in some 5 billion years. As Americans we are in the best position to shape our own future by honestly acknowledging what is facing us both as a country and as people populating our planet Earth. We must not be led by fear mongers. We must be led by reasonable people who do not have their heads either in the clouds or buried in the sand. We must be willing to engage people and other countries respectfully recognizing that they have vastly different concerns, needs and desires from our own. At the same time we must not forget that there are very real threats from criminals and their organizations, terrorists, some states and from nations that lend support to such groups.
Mr. McCain, in the first debate you repeated like a propaganda machine that I ‘simply did not understand.’ Repeating it over and over again does not make it true. It is really false. I understand things differently than you do. That we understand things differently does not automatically mean that one of us must be wrong and the other right, as you seem to allude; it could just as well signal that we could both be wrong. What is important, here and now, is that our citizens carefully listen to what is being said by each of us. It is the differences in how Mr. McCain and I understand the world and our place in it that will inform every action we take as President of the people of the United States of America. Rewind this recording as many times as it takes. Talk amongst yourselves as friends with differences of opinion and then, in a few short weeks, go into the voting booth and make your informed and responsible choice.
Thank You!
Maurice Garvey
Villa Park, IL.
