Wednesday, October 01, 2008

Credit needs to be crunched

I saw Dave Ramsey on ABC's Good Morning America this morning. He pointed people to his website and his Three Steps to Change the Nation's Future. Number 1 is to pray--always a good first step. Number 2 is to send the following to legislators. Number 3 is to send Ramsey's information on to others.

I'm tremendously concerned about fixing the 'credit crunch'. Most of us understand that credit has been too free flowing for far too long. We're not talking about the routine credit pattern of taking out a loan to buy seed and repaying the money at harvest time which is risky enough. We're talking about credit card companies that threw applications into the consumer wind and approved just about everyone. We're talking about people buying a home with zero percent down adjustable rate mortgages that they couldn't afford when that rate changed to a reality based number. It started, not surprisingly, when folks were shut out of being able to buy a home and the government decided to step in and make things fair. Well, life isn't fair. And it's certainly not fair for ME to pay for the mistakes and greed of others.

So, frankly, welcome a bit of a credit crunch. Credit is as dangerous as a sharp kitchen knife. A useful tool on occasion but if you lose your focus for a moment--you could be severely injured. I teach my children that each dollar of credit is akin to a link on the chains that Marley is wrapped up in in "A Christmas Carol". Credit weighs you down and keeps you from being as mobile as you might need to be. Credit is cancerous and eats up income at a voracious rate if not watched like a hawk. Credit is not your friend so don't cozy up to it or depend on it as if it were. A lot of people are getting a severe wake-up call. Some folks were duped and swindled by credit sharks as evil as the local drug pusher. I'm not happy that thieves of the highest order are getting golden parachutes and Congressmen are in bed with the very folks that created this mess. It's galling that Congress is seriously considering requiring the hard working folks in this country to take on another burden they didn't create. Thankfully, American's are waking up and letting Congress know they're not happy and with elections just 34 days away...the timing couldn't be better. Considering the Dow regained much of Monday's panic...I don't see a need to rush into a solution that hasn't been closely examined by the entire nation. No dead of night votes on bills that haven't been published for less than 24 hours. The borrower is servant to the lender and I will not take lightly Congress' attempt to sell me and my children into slavery with this $700 billion bailout. They've been doing it for far too long and NOW is the time they need to stop.

So here's Dave Ramsey's proposed solution. It makes sense to me. Rep. Marsha Blackburn was suggesting some of these same things last evening on Phil Valentine's radio program.

The Common Sense Fix by Dave Ramsey

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three step Common Sense Plan.

I. INSURANCE
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 underperforming 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 stock market 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.

This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to stand up, speak out, and fix this mess.

3 comments:

Nashteach said...

Well, the first two things make a lot of sense.

I don't mean to argue against cutting or eliminating a long term capital gains tax, but I do not think it is a solution that directly addresses this crisis. To say that it will infuse needed capital into the markets is a theory, not a fact. And maybe it would, but it doesn't erase or abate the bad debt. Honestly, it seems more of a Wall Street giveaway than the bill the Senate just passed.

Also, if short term capital gains are elminated, it could actually destablize the markets. The day traders would love it; they would have that tax burden that comes from selling stocks over and over in a short period. It might discourage long term investing. Also, one of the main elements of this crisis is that home prices have been falling (and below the value of the mortgages themselves.) There is no evidence that this drop of home values is about to stop, especially if credit markets tighten- it will be harder to get a loan and sell homes. If some folks start buying homes, that helps, but if values keep declining, we could find more bad loans.

Again, not opposing long term gains cuts or elimination, but I don't think it helps this crisis.

Nashteach said...

they would have that tax burden that comes from selling stocks

I meant NOT have that tax burden that comes from selling over and over. It would discourage long term investing, which is truly more stable for the markets.

Nashteach said...

Sorry, one more thing:

Again, this [capital gains tax elimination] costs the taxpayer nothing.

Speaking of debt, has Mr. Ramsey forgotten that the Chinese and the Saudis et al are charging us interest on the money our government borrows? He knows better than this.