Recently in a separate blog post I suggested the following actions should be taken to help average Americans to get their financial feet back underneath them.
I think these things would help the economy more than anything that the Congress has done or is contemplating.
I’m not holding my breath because most Politicians know that if they propose any of these items, they can’t get re-elected and that is all they seem to be concerned with.
My strong opinion is none of them have any guts and won’t stand up for us anymore. I’ve been criticized because it isn’t “the American way”, to do these things. Personally I think those people do not understand the issues so I’ll attempt to explain it for them and others in a more comprehensive and functional way. I recently had two political candidates say to me that “Politics just don’t get done like this anymore , Mike.” Yes, I know and that , exactly is what the problem is. Politics is what gets done instead of representation.
Here is exactly what I said (in numbered order) , with a more complete explanation underneath each subject line. :
1. Realize that 80 % of us screwed up when we refinanced our homes and just pay down our principle on the overvalued portion of our homes or make the banks modify the loan terms and give them tax breaks to make up the difference. Don't bother giving me a tax break I can only use in April once per year. That is the ultimate in stupidity. How does it help to give me a break on next year’s taxes , when I can't afford gas for my car, my house or car payment and I don't have a job right now? How much sense does that make? Can someone please explain that to me? What if my mortgage company said to me "Beginning next month your payment goes down $500." Think that would help?
ü During the run up to the breakdown in the housing market, there was a commercial on TV every three minutes touting the benefits of refinancing your mortgage. Whole industries and new careers were created in the blink of an eye that basically created positions that only functioned as bird dogs for financial institutions in much the same way the realtor job model was created. Their job (these so called “brokers”), were to flush out new clients for mortgage companies to lend to . Their key function was to attract as many people as possible for some form of refinancing option on a home they already owned. The net effect was that every refinance loan they wrote took away equity from a homeowner. Equity equals leverage. As soon as equity$ falls below interest owed , the life of a loan is substantially increased. You will pay for the house over time and it will cost you more than you realized. They knew this, because they knew the market is always cyclical. The average person did not get it.
ü Because most of the people who opted into this system are not lawyers and probably don’t have business degrees, they were fooled into thinking that their variable rate low interest loan was a better deal than they currently had because the interest rate they were paying prior to refinancing was larger than the rate they were being offered. They didn’t understand the difference between a fixed rate loan and a interest only, variable rate or balloon payment loan. When the credit market started to dry up, and rates started to rise, payments did also and nobody was prepared for their home to cost 30 % more next month and for every credit card to increase its rates at the same time.
ü It is simple economics. I only have a fixed amount of earned income. If you increase my payments beyond my ability to pay, I don’t have the money, I lose the house, and you take a loss and it is actual money that you will pay to investors, lawyers and in your share price. If you help me to reduce my payments and educate me, I don’t make the same mistake again, I keep my house and you get a tax credit. Although you still take a loss, the loss is only based on a projected amount from the original loan value ,instead of real money and you lose much less than if I go into foreclosure.
2. Give the judge in a bankruptcy hearing the power to modify terms of a mortgage. Current laws almost make certain I lose my house if I am in bankruptcy because they cannot do this. Hell if I am in Bankruptcy and my house if my biggest expense per month, would I be bankrupt if my house was not as expensive as it is? Yeah, whomever borrowed the money is at fault. Whatever. 100 million foreclosures will make the great depression look like a lawn party, let me tell you. Put unemployment at 30 % and see how happy you are with your "Let em eat cake" attitude.
ü Many conservative pundits (like Rush Limbaugh , Shaun Hannity, and Glenn Beck etc) said essentially “Why should those people who didn’t participate in this madness pay into a system to help those people who did?”, like somehow it exists separately in a vacuum as a mutually exclusive item. The problem is that nothing is actually separate when every loan made by a financial system includes every person receiving funds. They are all connected. It is convenient to think that there are two separate groups in the mix, those who screwed up and those who didn’t, but really it is the same lifeboat with both groups in the boat , one at each end of the boat paddling in two different directions.
ü Whom do the conservatives think is more affected by 4 empty foreclosed home in a 10 house neighborhood ? The individual people who lost their homes or those (the group of folks) whose home values (read equity versus home value) are directly affected by the sudden appearance of 4 empty houses now owned by a bank , which are going to be sold for pennies on the dollar ? You cannot convince me that it wouldn’t be better for the homeowner and for the bank and for the neighborhood for those folks about to lose their homes to be able to stay in them. Somehow. The bank would continue to get paid (although less money) , home values would not drop because comparative values would not change, and foreclosures would be reduced to almost zero. If equity doesn’t disappear, then there is no housing bubble is there?
ü If a judge in a bankruptcy hearing could examine the facts and say “Lower the loan 30 % and move the rate to 6% from say 10.50 %”, it would do two things. One , it would keep a homeowner in his house and not affect the values of the homes around his house because it would not be sold at foreclosure. Two it would offer the bank a way to lower its taxes due by allowing them to claim the reductions in the loan value as an operating loss. If we didn’t manage companies based upon the share price today, that wouldn’t matter either. It is not that radical of an idea to help the American public when times are tough and the economy is reeling from a wall street meltdown. FDR figured it out, Reagan figured it out, and Obama could too if he had any vision at all.
ü The so called “Tea parties” vision that this is a perfect time to start bashing the other side in an attempt to win votes is actually a good short term strategy. The problem is that even if they are successful in ousting every Democratic incumbent and succeed in defeating Obama in the next election, the day they take office all of the issues that exist today, still exist and you haven’t helped me in the mean time one little bit by executing this strategy. Even if you win, I still lose because you will take another 5-8 years to do anything at all and we cannot wait that long.
3. Don't barely lower taxes. It doesn't help at all. Forget adjusting the tax rate. Don’t bother giving me a tax break. Most of us would be hard pressed to see much of a difference in teeny tiny tax numbers anyway. I know you (the politician) can stand around at big fancy dinner parties and talk about the 40 billion dollar tax cut you got passed for low income workers, but that extra $4 dollars on my individual paycheck doesn't mean squat. Eliminate taxes on people who make less than 25,000 dollars per year. Eliminate loopholes on people who make more than 250,000 dollars per year. Problem solved.
ü The idea of a tax break is pretty popular with politicians, because it allows them to talk about huge numbers when annualized for an entire population or a set of people. The problem is no matter how you think or talk about it on an annual basis, it doesn’t actually happen that way. Lets demonstrate this with a simple example.
ü Let’s say I qualify for a $2500 tax break and take full advantage of the break. Who – hoo I get $2500 right ? Wrong, usually. Usually, what I actually get is a $2500 deduction to earned income, which in theory reduces my taxes by adjusting my earned income, which in some cases reduces my taxes owed by shifting my income to a lower tax bracket. Even if a get a direct payment (like the Earned Income Credit), it really isn’t $2500, it is a reduction in the tax rate applied that equals to $2500 for the average wage earner, with a maximum cap of $2500.
ü Most will get a whole lot less, some will get none at all because the qualifications always contain an earnings limit which prevents payment if you make too much money. For the typical earner it may equal $2500 at the end of the year, which if you look at how most people get paid, equals to about $1 per hour worked (or so).
ü So a politician can truthfully yet disingenuously say “My bill provides 125 Million dollars in tax relief for the American taxpayer”, and at the same time it equal out to about $1 an hour worked for the average American worker and they can be telling the “truth” and it is still hogwash because you don’t get paid by the year, you get paid by the week or bi-weekly.
ü It also would not sound very much like an accomplishment to say “I saved BigMike enough money last payday to go the movies one time with his wife” or “My bill saved BigMike enough money last week with my tax bill, to dine out one time and buy a half of a tank of gas”. It just doesn’t have enough impact to do any freaking good.
I realize that I probably do not have a majority view on this subject, because the majority view is to only suggest those things that can be passed, not to act on those things that actually will make a difference. This is what pisses me off.
