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The Real Bailout Needed is a Consumer Bailout - Part 2

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The excellent responses, even harsh criticism from some to my first article on my proposed Consumer Bailout http://www.opednews.com/articles/The-Real-Bailout-Needed-is-by-Steven-Leser-081227-715.html helped crystallize some of the finer points of the proposal. They also made me surer than ever that the best thing to do to bring about a recovery is to address bailout efforts to the consumer.

To recap briefly before I go on, I wrote:

 ... the consumer is too deep in debt to be the engine that this country needs to drive the country out of the recession/depression. Second, without intervention, consumer debt will stifle the country's productivity and economic growth for the next 5-10 years. Third, if the consumer is the main force that drives the economy and affects whether the economy grows or contracts (recession), but the consumer cannot power the economy because they are in debt, something has to be done to fix that...

the consumers who agree to be bailed out will pay the government .125% more of their income in taxes each year for three years for every unit of debt that corresponds to one percent of their annual income up to a maximum of 12.5%. One of the more serious components of the current crisis that is just starting to become apparent is the catastrophic budget shortfalls in state and local budgets. Five to fifteen trillion dollars in additional taxable income for businesses all around the country would fix that portion of the crisis immediately as it seems to fix just about every other portion of the crisis. That is what I think is compelling about my bailout proposal. If you make a list of the problems in the economy and analyze the effect of this proposed consumer bailout, it eliminates them one by one from the bottom up...

There is another component to my proposal. The Government will pass legislation limiting the amount of credit that can be granted to consumers by percentage of annual income and type of debt so that the country will not again find itself in a position where a huge percentage of consumers are over leveraged. The government would also make it illegal to charge the kinds of percentage rates on credit cards we have seen in the past. Also, for those opting for the bailout, any negative reports on their credit ratings would be wiped clean.  

Let me address some of the more important criticisms of the proposal:

Criticism 1 – This Consumer Bailout is not Affordable

Anytime you are talking about a government program costing in the trillions of dollars it is natural to have questions about how this program would be funded so these questions and criticisms are good and to be expected. 

One thing that should be obvious is that those who would opt to have the government pay their debt would pay back on average between 20% and 30% of the money directly to the government in increased taxes over three years. That is part of the design of the bailout proposal.

 

Second, what happens with the money that is given by the government to consumer's creditors? Those creditors have to pay taxes on it. Whether the creditor is a bank, some other lending agency, Visa, or any other creditor, that business will pay taxes on that income. Let's assume a low average effective business tax rate of 25% to be conservative. Of the money lent to consumers, another 25% will be paid back to the government within one year in the form of taxes paid by creditors. Now we are up to 45%-55% of the total bailout being paid for by those who benefited most by it.

 

Third, what do the creditors do with the 75% of the money they receive that they do not have to pay in taxes? They invest it, they buy other goods and services, they pay salaries and other operating costs, pay back their own debt obligations, etc. Much of that also results in taxable income by those receiving this money. Let's assume that 2/3rds of that money, or 50% of the original outlay becomes additional taxable income. 25% of that (again, assuming an average effective business tax rate of 25% is 12.5% of the total bailout. Now we are up to 57.5% to 67.5% of the outlay by the federal government paid back to it in taxes. We can go another iteration and say that 50%-12.5% is 37.5% of the original outlay becomes taxable income for entities further down the road. We can say that 25% of that will probably end up being taxable income and results in another 6.25% of the original total outlay being paid back in taxes. Now we are up to 63.75% to 73.75% of the total bailout outlay being repaid.

  Finally, what then happens to the economy when consumers are debt free, their former creditors are awash in cash, as a result Visa and the banks and lending industry are no longer in crisis, in fact the opposite? When there is more disposable income all around, more money is invested, lent (properly this time with the additional regulations I specified in place) and spent. We call that an expanding economy. What happens in an expanding economy? Federal income tax receipts grow. Some of that is already accounted for in my above explanations, but some isn't. I don't know if we get back to 100% of the bailout being paid back directly or indirectly, but if we don't, we get close.

Criticism 2 – This Bailout Proposal Penalizes People Who Have Kept Up With Their Bills

Of all the top criticisms, this one was the most difficult for me to understand. People who have kept up with their bills are still hurting in this economy. Their investments have suffered, they are at risk just like anyone else for layoffs, if they are small business owners, they might be getting less business or the people that owe them money may be having difficulty paying their bills. All of those things mean that no matter how thrifty you are, you are probably feeling ill effects from this economy or at the very least; the current crisis makes you more at risk to be hurt.

All of the people would benefit greatly from an economy that gets moving again. Those who do not request a bailout would not be financing those who do. This bailout is self-financing as I illustrated above.

Criticism 3 – This Bailout Encourages Bad Behavior

It definitely would encourage bad behavior if we don't include the additional legislation that I propose that specifies how much credit can be lent to a consumer based on his income. These limits are different depending on the type of debt that would be incurred. I'm guessing that total non-auto and non-mortgage credit would be such that the monthly payments could not exceed around 10% of monthly income of a household and total outstanding non-auto and non-mortgage debt could not exceed 5% of yearly household income. The legislation would also prevent lenders from charging exorbitant interest rates.

Criticism 4 – The New Legislation you propose that would Limit Creditors in How Much they can lend to Consumers is Unworkable

For people who earn almost all of their income from a straight salary, these limits are straightforward. For those whose income is commission based or dividend based or whose income is otherwise variable, or for those who have high net worth, there needs to be another section to the legislation that better deals with their circumstance. My suggestion would be that for people who have a net worth over $250K, they could have consumer debt up to 1/3rd of their net worth.

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A political blogger for the International Business Times, Steve Leser is a hot national political pundit. He has appeared on MSNBC's Coundown with Keith Olbermann, Comedy Central's Daily Show with Jon Stewart and Russia Today's (RT) Crosstalk with (more...)
 
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Wall street and the banking industry are greedy cr... by Simple Truth on Sunday, Jan 4, 2009 at 10:56:19 AM
     I applaud your valued eff... by mikel paul on Sunday, Jan 4, 2009 at 11:21:51 AM
... that the powers that be have no interest in he... by Steven Leser on Sunday, Jan 4, 2009 at 9:46:14 PM
 all money is in fact debt; this is inherent ... by William Whitten on Monday, Jan 5, 2009 at 2:17:24 PM
You wrote: "For people who earn almost all of thei... by Laisseraller Laisseraller on Sunday, Jan 4, 2009 at 2:14:19 PM
suggesting. Eventually, commission, dividends and ... by Steven Leser on Sunday, Jan 4, 2009 at 9:48:26 PM
I would suggest that Mr. Leser read some history t... by William Whitten on Sunday, Jan 4, 2009 at 2:55:40 PM
A solution has to be geared towards the actual fac... by William Whitten on Sunday, Jan 4, 2009 at 4:04:21 PM
Getting rid of the Fed tomorrow would not get peop... by Steven Leser on Sunday, Jan 4, 2009 at 9:51:41 PM
"I got that the Fed was your whipping boy the... by William Whitten on Sunday, Jan 4, 2009 at 10:44:29 PM
a worthless response.... by Steven Leser on Monday, Jan 5, 2009 at 4:55:13 PM
Until you comprehend that "The Current Crisis... by William Whitten on Monday, Jan 5, 2009 at 7:03:20 PM
Until you comprehend that "The Current Crisis... by William Whitten on Monday, Jan 5, 2009 at 7:03:50 PM
it still needs to be addressed in the short term. ... by Steven Leser on Tuesday, Jan 6, 2009 at 7:14:55 AM
Your idea dovetails very well with an article I re... by Mary Bell Lockhart on Sunday, Jan 4, 2009 at 4:06:15 PM
"Whitten also chewed me out.  So not to ... by William Whitten on Sunday, Jan 4, 2009 at 5:17:27 PM
http://www.sott.net/articles/show/156763-Connectin... by William Whitten on Sunday, Jan 4, 2009 at 5:44:03 PM
that cannot get past his ideological hatred of the... by Steven Leser on Sunday, Jan 4, 2009 at 9:52:46 PM
"Yes, Whitten really has a narrow and clueles... by William Whitten on Sunday, Jan 4, 2009 at 10:56:28 PM
to the current crisis.... by Steven Leser on Monday, Jan 5, 2009 at 4:56:07 PM
Leser, how can you sit there and say that the Cons... by William Whitten on Monday, Jan 5, 2009 at 7:08:28 PM
It has no bearing on the short term issues that ne... by Steven Leser on Tuesday, Jan 6, 2009 at 7:22:52 AM
And the root cause is CENTRAL BANKING which allows... by sharon kayser on Sunday, Jan 4, 2009 at 5:38:57 PM
black ink on a dark blue background...  but i... by August Adams on Sunday, Jan 4, 2009 at 8:57:12 PM
Mr. Leser needs to zoom out a couple of orders of ... by Jim Eldon on Sunday, Jan 4, 2009 at 9:00:28 PM
... it still leaves the fact that we could do ever... by Steven Leser on Sunday, Jan 4, 2009 at 9:56:44 PM
"Forgetting the fact that I disagree with you... by William Whitten on Sunday, Jan 4, 2009 at 11:04:47 PM
Mr. Leser, which premise do you disagree with? Tha... by Jim Eldon on Sunday, Jan 4, 2009 at 11:35:55 PM
do not solve the current crisis. Those are fine to... by Steven Leser on Monday, Jan 5, 2009 at 4:59:13 PM
this. This bailout proposal does not create m... by Steven Leser on Sunday, Jan 4, 2009 at 9:54:26 PM
read your article past the first few sentences?You... by William Whitten on Sunday, Jan 4, 2009 at 11:14:18 PM
here is an analogy. We have a youth holding a gun ... by Steven Leser on Monday, Jan 5, 2009 at 5:05:11 PM
"here is an analogy. We have a youth holding ... by William Whitten on Monday, Jan 5, 2009 at 6:50:10 PM
and it isnt.Paying off the debts of consumers and ... by Steven Leser on Tuesday, Jan 6, 2009 at 7:17:32 AM
Addressing root cause or major structural issues b... by Steven Leser on Monday, Jan 5, 2009 at 5:00:30 PM
Sorry Steve, my position is: No bailout necessary.... by TomK on Sunday, Jan 4, 2009 at 8:51:33 PM
#1 - You have no suggestion that addresses the imm... by Steven Leser on Sunday, Jan 4, 2009 at 10:00:49 PM
"Sorry, your response is worthless for a numb... by William Whitten on Sunday, Jan 4, 2009 at 11:18:03 PM
William, and pardon me Mr. Lesser for talking abou... by Mr M on Monday, Jan 5, 2009 at 12:39:44 AM
"#1 - You have no suggestion that addresses t... by TomK on Monday, Jan 5, 2009 at 2:11:24 AM
As I said to William, it does not make sense to de... by Steven Leser on Monday, Jan 5, 2009 at 5:06:25 PM
A little late but not never. A consumer bailout of... by TomK on Thursday, Jan 8, 2009 at 1:48:51 AM
Mr. Leser,Instead of stagnating in this vicious &q... by Jade P. on Monday, Jan 5, 2009 at 12:31:31 AM
I think I have made that clear. Nor is that what t... by Steven Leser on Monday, Jan 5, 2009 at 5:15:48 PM
Still grasping at straws.  Don't you real... by jersey girl on Monday, Jan 5, 2009 at 3:27:10 AM
You dont get a single thing I wrote about.... by Steven Leser on Monday, Jan 5, 2009 at 5:07:56 PM
Still grasping at straws.  Don't you real... by jersey girl on Monday, Jan 5, 2009 at 3:29:37 AM
very few people have ever lived in a third world c... by Ernest on Monday, Jan 5, 2009 at 5:05:51 AM
Recent events have proven that capitalism doesn... by Perry Logan on Monday, Jan 5, 2009 at 5:08:45 AM
"But the free market, not government, has jus... by William Whitten on Monday, Jan 5, 2009 at 1:36:00 PM
this bailout is not about addressing structural ch... by Steven Leser on Monday, Jan 5, 2009 at 5:09:53 PM
"this bailout is not about addressing structu... by William Whitten on Monday, Jan 5, 2009 at 7:17:18 PM
as has been my point in response to you all along.... by Steven Leser on Tuesday, Jan 6, 2009 at 7:33:23 AM
magine what we would all be saying if the governme... by jersey girl on Monday, Jan 5, 2009 at 6:57:31 AM
article. As I said to you above, you dont understa... by Steven Leser on Monday, Jan 5, 2009 at 5:11:07 PM
You had a nice dream and wrote your little plan.&n... by jersey girl on Monday, Jan 5, 2009 at 8:42:37 PM
my article. You might want to pay attention to wha... by Steven Leser on Tuesday, Jan 6, 2009 at 7:19:39 AM
The relevancy I am trying to point out, and Mr M I... by jersey girl on Tuesday, Jan 6, 2009 at 10:43:20 AM
It just struck me Leser! You got us all!! After al... by William Whitten on Monday, Jan 5, 2009 at 7:32:08 PM

 

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