3. Suggestions for the Government
I’ll break my government suggestions up into two categories, Congress/President & State Governments and The Federal Reserve even though technically the Federal Reserve is not part of the government.
A. Congress & the President & State Governments
The best thing that could be done right now is to bring an emergency end to the Iraq war. The Iraq war is costing us over $2 Billion dollars a week and over $110 Billion dollars a year by conservative estimates. We cannot afford those expenditures while the economy sinks into a chasm. That money needs to be used for other things as I will explain below.
The government has to encourage people to pay off their debts and be debt free. There are several ways to do this. Provide tax relief to people who pay their credit card debts by making the money paid to those debts tax deductible for the duration of the crisis if consumers reduce their accounts to zero and close them even for those filing with a short form. This tax deductible paying of credit card debt should be extended to anyone or any family earning less than $150,000 per year. To make up for the shortfall, institute a temporary wealth tax. For the duration of the Abyssal, tax the wealthiest 5 percent of Americans one percent of their gross wealth per year. The wealthiest 5 percent are worth more than the rest of all of the 95% combined. In fact, they account for almost 60% of all wealth in the country. According to Forbes magazine, just the wealthiest 400 Americans were worth a combined $1.54 Trillion Dollars in 2007 [7] . A 1% wealth tax on just those 400 would net $15.4 Billion dollars in Tax revenue. A 1% tax on the rest of the richest 5% would almost certainly yield conservatively to another $85 Billion dollars. If we add that to pulling out of Iraq, we would ad $200 Billion dollars to the Federal budget.
Some of that money should be spent in ways that gets the economy going and helps the unemployed. The federal government should provide money to the states to build up the nation’s infrastructure. We heard after recent bridge collapses that we have a crumbling road and bridge infrastructure. These roads and bridges should be repaired. After Katrina, we learned that FEMA had a list of ten worst possible catastrophes and how they could be mitigated. We should take care of that too. We should implement high speed rail between all metropolitan areas and have mass transit rail systems available in all of the top 50 cities in the country. To make financing all of this easier and help out those who are hurting the most, the government should use unemployed workers to perform most of the labor for these efforts, a kind of revival of the New Deal’s WPA (Works Progress Administration) and CCC (Civilian Conservation Corps). These workers should be paid a premium over their normal unemployment compensation for performing this work.
The Federal Government should offer to guarantee debtor loans like they now offer to guarantee student loans. If a person or family reaches a point of crisis with debt, they could opt for this loan. It would consolidate all their non mortgage debt into a single loan with a reduced interest rate paid over a long period of time just like a student loan. The person or family would have this loan noted on their credit report (it would not be a negative listing) and during the time this loan had an outstanding balance, the family would not be allowed total debt (including mortgage/rent) to go beyond 60% of net income after taxes (the law would read that if any firm or agency issued them a loan or credit exceeding this amount, the individual or family would bear no obligation to pay it back. That would take care of enforcement). In other words, if a family’s net income was $2000 per month and their rent or mortgage PITI was $700 per month and their Guaranteed Debtor Loan was $300 per month, the maximum other loan or debt they could incur would be $200 per month. That is the maximum for an auto loan for instance. If they wanted to get a credit card, the card would have to have a maximum available balance and interest rate that would conform to this or less. If they wanted to have both an auto loan and a credit card, they would have to total a maximum potential of $200 per month of payments.
Finally, the government has to get involved to create a new and broader set of financial and banking regulations to protect the economic health of the country. Risky practices by a small segment of the financial or banking industry has the ability to severely affect everyone. The avoidable crises brought about wholly or in part by these industries are coming at a frequency of every 8-10 years. We had the Savings and Loan and Junk Bond Crises of 1986-1991 brought about by Brokered Deposits and risky loan practices. We had the tech bubble that burst in 2001 and now in 2008 we have the sub-prime mortgage disaster. All of these issues could have been avoided and each threw the entire economy into crisis. There should be firm guidelines as to how risk is determined by analysts and communicated to investors. There should be criminal liabilities for analysts, financial advisors and brokers who knowingly misstate risk to their clients or who do not do the necessary due diligence to understand the risks of financial instruments they are recommending to their clients. There should be particularly strong guidelines and regulations about any new class of financial offerings or stocks from new industries that are being promoted or sold. In the 90’s investors were sold tech stocks at a premium that had poor P/E (Price/Earning) ratios because it was assumed that the internet created a new earnings or valuation paradigm. That turned out to be a false assumption. In this decade, sub prime mortgages which carry a moderate degree of risk were bundled into bonds and other securities that were touted as having the lowest risk rating. The financial and banking sector have proven that they cannot regulate themselves and that a Laissez-Faire approach to them is not working. They need more and better regulation.
B. The Federal Reserve
Stop lowering interest rates! When inflation starts to pick up, the Fed should put an immediate stop to lowering rates as a counter cyclical measure. Inflation, at 4.1% is already at its highest point in 19 years. True, it is not 13.5% like it was in the early 1980s but I would argue it is already a problem, just ask anyone on a fixed income, like seniors. If we start acting like it is a non issue, it could get out of hand very quickly. We are in the midst of an energy and food shortage and our currency is collapsing relative to most of the other major currencies out there and we need to have a serious approach to those issues.
In fact, the correct approach might be to raise the interest rate by several basis points. If, as I suspect, we see inflation inch up another percent or two in the next few months, the Fed may need to consider raising rates.
4. Suggestions for the Banking and Lending industry
I don’t think the Banking and Lending industry needs a lot of suggestions from me. In the wake of the sub prime catastrophe, most have already taken steps to prevent this kind of problem from happening again. I have a few suggestions about issues that persist and have needed addressing for some time.
Credit card & Lending policies
Am I the only one who sees a lot of these policies and practices as counter-intuitive? Double-digit interest rates on credit cards, forcing those with less than stellar credit to pay higher rates on auto loans and other accounts resulting in much higher monthly payments. Those things work when times are good, but when they go bad, as they are now, they are going to come close to destroying the banking system.
People who have weaker credit shouldn’t have to pay higher payments. If the economy starts having problems, people with weaker credit are probably not going to be able to pay the higher payments and that is exactly what we are seeing now. Instead, whether it is a revolving credit account or an auto loan, the monthly payments should be structured so that they are the same no matter the credit rating and either a larger down payment is required to be paid, or the loan should go on for a few more months.
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