The Answer to Financial Problems, the Banks, and Everything
Thanks to U.S. Citizens speaking out against the purposed 700 Billion dollar bailout for banks stuck with bad mortgages, at the cost of the tax payers, the bill has failed. Unfortunately, Congress is at it again thanks to the fear and hast that some in the financial world are trying to poor out into the minds our representatives and leaders. Congress is now trying for a 850 Billion dollar bill full of pork belly spending and once again making the taxpayers reasonable for all the risky mortgages that banks were all but forced into, thanks to bad laws.
Is a 700 or 850 Billion in new liabilities to the already trillions of dollars in U.S. taxpayer liabilities really the answer?
That is basically the equivalent of around $6,000 dollars per U.S. income-tax payer.
I think I have a better answer. One that will cost the U.S. tax payer a lot less, directly help every U.S. tax-payer, and give the people who are hurting the most the most help. Not to mention this is a simple four point plan with no pork, nor complex long term obligations requiring a new bureaucratic entity to manage it for us.
1. U.S. treasury to send out tax vouchers to every U.S. taxpayer according to 2007 tax returns. These vouchers would not be directly redeemable by the tax payers them selves, but would essentially be a blank check with a maximum value of $6,000 payable to their mortgage lender. If the tax payer has not mortgage, they can get some benefit from it as described in section 4.
2. The Voucher would be filled out by the person it was issued to (non-transferable) for an amount of either:
a) 1 months mortgage payment for one mortgage (most likely their highest monthly payment),
b) if they are two or more months behind on their payments, for the amount required to become current on their mortgage payments (up to $6,000).
c) Those with adjustable rate mortgages can use it towards the cost of refinancing to a fixed rate mortgage (up to $6,000).
3. These vouchers would be required to be accepted by their mortgage lenders as payment towards the respective mortgage, as described in section 2. The payee would then attach these vouchers to supporting documentation that proves the amount the voucher was filled out for is accurate, or showing why it is not accurate and what the correct amount should be.
4. The vouchers and the supporting documents would then be filed as an addendum to the mortgage lenders 2008 tax returns, and counted towards an equal amount in tax credits; up to an amount not exceeding their total tax liability. If Voucher was not eligible to be given to a mortgage lender, it could instead be used by the tax-payer as an addendum to their 2008 tax returns for a tax credit of $300 per person listed on the tax return (i.e. dependants or married persons filing jointly).
This plan would help lenders get payment for mortgages that are behind, allow those who are behind on their mortgages to catch up, and free up some spending money for everyone else to help boost the economy. The poorly managed mortgage companies who truly deserve to go under still would because of liquidity problems (but the Federal Reserve could certainly provide them with short term low interest loans to cover them until they file their tax returns), as this is not an instant fix (any more so than the 850 billion dollar bailout). It however would bring some added relief to the concerns of many big bankers who have tightened up on lending thus allowing the money to start flowing once again between banks and financial institutions.
To follow up on this, congress would also have to cut back on spending, and get rid of a lot of non-critical programs so they can balance the budget and make up for the loss in tax revenues that would inevitably follow. As I tried to point out in my last post, a balanced budget, for the federal government, state government, local governments, and personal households, is essential to a fighting inflation and stabilizing the economy.
Congress also needs to re-instate the regulations that had been in place since the passage of the Banking Act of 1933; as they were undone with the financial reformation law in 1999 (no thanks to Clinton and the members of congress that passed the bill). We also need to rethink the “Community Reinvestment Act” (passed in 1977 and revised in 1995, and 2005) as it promotes risky lending practices.
I also received an e-mail from a relative of mine with another interesting solution to the financial problems that really doesn’t require much of a bailout at all, and has some good ideas in it; however, but I am a little skeptical of the math and some of the claims presented with this idea:
a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.
b. In order for a company to accept the government-backed insurance, they must do two things:
1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.
b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.
2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps under performing executives from being paid when they don’t do their jobs.
c. This backstop will cost less than $50 billion—a small fraction of the current proposal.
II. MARK TO MARKET
a. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.
b. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.
III. CAPITAL GAINS TAX
a. Remove the capital gains tax completely. Investors will flood the real estate and stockmarket in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.
b. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down.
I have a few problems with this plan, but I also like a few things about it:
1. Government backed insurance would most likely cost less then a full on bailout, then but it’s also part of the problem that created this whole mess, and insurance companies (like AIG) are hurting too. On the other hand, if this doesn’t help, the insurance could end up costing even more then the bailout would, with no assets to recover any of the cost.
2. I agree with the two points that mortgage companies need to do. I would hope they would do them without any government incentives, as they would help these company avoid a lot of losses through foreclosures and high payrolls for employees that aren’t giving much back in return.
4. Removing the capital gains tax completely would save some tax payer some money, but it would reduce the income tax revenue, making it harder for congress to balance the budget, especially if they have to come up with $50 to $850 Billion to insure bad loans. What we really need are better and simpler regulations on wall street to better insure that company stocks are actually worth something, and not just another way of creating funny money for companies that don’t really produce anything worthwhile.
“True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late.”
— Ludwig von Mises (HT: Matt Kibbe)
Right after the bailout passed, they finally told the truth about it…
Hold on to your wallets folks, inflation is on it’s way up again, maybe not today, but certainly sometime soon in the future.