Thursday, October 30, 2008

I know I'm not stupid, but I need some help figuring this out...

So Exxon Mobile made a record 14.5 billion dollar profit in the 3rd quarter. So if that's pre-tax profit, they pay .43 cents on every dollar they make in taxes which is verifiably insane. That's a little over 6 billion dollars in total taxes they paid on that record profit, more if they paid taxes first then reported their after-tax profit. Joe Biden came out today and said he wanted to cut the 4 billion dollars in tax relief that these companies get. Somebody needs to explain the logic in this to me, because I still don't get it. If you cut out 4 billion in tax relief, then you reduce the amount you can tax at .43 cents on the dollar. Let's say it hit this quarter (I can only guess Biden means an extra 1 billion per quarter). You would lower their profits to 13.5 billion, and only take in 5.8 billion in taxes on their profit. So, your net gain is only about 500 million. Therefore you've just taken 1 billion away from the economy via its investors so that you could put 500 million back into the economy using taxes. How does this make sense?

Tuesday, October 7, 2008

What They Left Us...

I will be 39 years old this month. I'm right on the cusp of Generation X (b. between 1964 - 1981) and squarely a product of the Baby Boomer generation before me. In the late 1980's TIME magazine described us this way:

By and large, the 18-to-29 group scornfully rejects the habits and values of the baby boomers, viewing that group as self-centered, fickle and impractical.

I wouldn't quite go that far, but I would say that what the Boomers have left is a pretty stunning example to us (a few left-over drug addicts aside) of what not to become. As the Boomers now near or enter into retirement, I wonder how exactly they see their legacy?

First, the positives. Boomers demonstrated to us the value of questioning authority. Quis custodiet ipsos custodes? Government isn't always on the side of the people and while generations before the Boomers probably knew this to be true, they never had the stones to massively organize protests on college campuses, in town halls, or in mass groups walking hand-in-hand along the main streets of the United States. Boomers taught us that the "old time religion" our grandparents kept preaching was laced in hypocrisy, racism, and the fear of healthy change. All of us Gen X'ers owe our inquisitive spirit and pursuit of truth despite consequences to the Boomers.

Even so, in the process the Boomers managed to toss out the baby with the bathwater. In the scud of their empty tub where the stains of broken marriages, unwanted pregnancies, drug addition, and eventually corporate corruption and greed. In tossing out authority altogether, they tossed out every reason to be moral. They devalued the most fundamental stabilizing forces of any society with a "Don't Tread on Me" individualism.

Of course not all of them did this. Some of them went to the polar opposite and began insisting on inapplicable moral absolutism's and overtly harmful (and hypocritical) theological doctrines. They substituted Vietnam for a culture war of their own making, while we the children in Generation X were forced to watch the ensuing blood bath. Politics divided. Churches split. Heroes fell. It's been a war, not to end all wars, but rather to endure for generations. They inscribed lines not in the shifting sand, but in the irremovable fabric of our social, political, and religious landscape.

Busy fighting each other, government and merchants banded together to rob them blind. The great celebration of giving us the first two back-to-back elected Boomer Presidents, Bill Clinton and George Bush, epitomized the frail nature of this conflict. With these appointments they successfully offered America four terms of "new leadership" by way of a pervert and a moron respectively. Sadly, I voted for both of them at least once. Their offerings to the House and Senate haven't done much better, nor have their offerings to the American pulpit.

The political and religious authorities they spent their lives questioning and rebeling against were replaced by the most corrupt authorities in American history-- maybe in all American history combined.

I know there are exceptions, and thankfully I happen to serve under one. But by and large, what the Boomers left us was a legacy of what not to become. I suppose in that, we at least owe them our thanks.

Now that the economy is lurching backward from the compounded lack of wisdom and greed, it seems like they might at least get a little taste of the mess they've left Generation X to clean up before they "shake their white locks at the runaway sun." That little taste of what we will be required to clean up is what Gen X'ers call "just desserts." I just hope there are enough of us out from under the hypnotic power of Microsoft's "X-Box" to act.

Monday, October 6, 2008

A possible solution?

We know that the $700 billion dollar bailout is going to fail because it does not address the fundamental issue affecting our economy: Debt. Debt affects borrowers and lenders alike and our country has been operating on debt for far too long. Credit has been too easy to obtain, not only for the working poor with bad credit, but also for our government which borrows an incessant amount of money to stay afloat.

One of the primary reasons that liquidity is missing in the market is the absence of capital, both for average middle class Americans and banks. The United States economy is ill-advised to continue leveraging itself and its populace with credit. The economy is sending us this message with every failing bank. I read this weekend that California and other states are now asking to further suckle under the teat of Federal credit. By making debt easier to obtain, expect things to get worse not better. We need new habits.

Absent from any talk about the economic crisis seems to be the daunting reality that Americans have no savings injected into the markets. Cumulative savings for Americans are in the red, meaning that 43% of them spend more money than they make every year. This is again due to the relative ease in obtaining credit. Banks are failing because Americans lean on credit and the bailout plan just made it all the easier to continue operating with a fundamentally flawed economic philosophy. In short, a ‘credit crunch’ is a symptom of a wound that we can ill afford to hide from. That wound is credit itself. Thankfully, our family has been able to avoid high interest credit card slavery and excessive debt, but many haven’t.

If wealth trickles down (and I believe it does), we can assume that debt trickles up. The grinding halt that our banks are experiencing are the products of ordinary Americans with a massive amount of capital tied up in credit.


I am a firm believer in the free market, but since it is apparent that the House and the Senate are not willing to allow the free market to run its course and thereby institute change, we have to err against our free market philosophies at least for a time. That’s what the bailout plan did and you’ll see that what I’m suggesting does as well.

Since the primary problem in our nation’s economy is debt, any solution we offer has to address this snare of credit. Our system milks us by habitually offering tax deductions for interest paid on debts. Many from the generation before me have spent the better part of 30 years floating home mortgages in exchange for lower taxes. Average Americans with whom I speak say similar things. They refuse to get out of debt because they falsely believe that by staying deep inside debt, they get tax relief. This poisonous thinking and it began it the tax code itself. Government is not doing itself or its people any favors by encouraging a culture of debt. At some point, in the long term these tax deductions must be eliminated to foster a culture of debt reduction.

In the short term, we have to “unfreeze” middle class capital (not corporation capital), thereby giving liquidity to the markets. That was the basis of the stimulus package passed by President Bush this year. It was flawed because it was a ‘no strings attached’ tax refund. I understand the philosophy: by flooding us with capital (Chinese money even, which makes me very angry) you potentially stimulate spending, raise the markets, and create jobs. It failed because it only addressed half the problem. It left debt alone.

The middle class is covered over in debt and most of them are so trapped by high interest rates on their credit cards and car payments that they will never come out from under it without assistance. Bank profits depend on this slavery to pay out investors who back the credit. You end up with a predatory system run by anti-patriots.

I would ask that the government consider temporarily requiring lenders to offer a flat, fixed interest rate on loans and remove competition from the banking markets for a temporary time on existing loans. Consider it a T-Bill for the middle class with a pre-determined due date, but this bond doesn’t add credit or imaginary capital to indebted markets, instead it reduces debt. We can call it an “I-Bill” for simplicity.

The “I-Bill” reduces the bank interest rate to something both manageable and meager for all Americans, but it has a series of strings attached to it (unlike the stimulus package). This I-Bill would have to temporarily allow consolidation for credit card and auto loan debts. I know it is contrary to the free market ideology to prevent banks from maxing profit via an unreasonable interest rate, but so is leveraging these banks with my taxes.

Suppose a home owner with a $100,000 mortgage at 6.9% and two credit cards maxed at 18% interest were allowed a free, one time refinance opportunity to consolidate debt into an I-Bill rate offered by their banks (just for the sake of example at 5%). This would free hundreds of dollars in middle class monthly budgets which are now frozen up in credit.

For the sake of example, suppose an average middle class family savings under an I-Bill refinance plan saved $200 in monthly payments. Create pre-conditions on the new, consolidated loan requiring participants to do something like the following with their monthly savings:

Choice A – apply 100% to Principle pay-down. Total projected savings after refinance must go toward paying down, or snow-balling credit card or mortgage debt. Credit card corporations like CitiBank or Wachovia get in an instant surge of additional “real” capital, not “interest” capital.

Choice B – apply 75% to Savings and Investment. Many mortgage companies (like Wells Fargo) offer investment opportunities to their clients. Participants must enter into an agreement to roll at least 75% of their savings after refinancing to an I-Bill over into a mutual fund, money market, bonds, or CD’s then leave that money untouched for the life of the loan. This again gives markets capital and nurtures financial freedom for the middle class. The remaining portion of the monthly savings is injected straight into the economy as a stimulus package all its own.

Choice C -- apply 50% to Charitable Giving. Upon procuring the refinance, participants must select a charitable organization which they plan to support with at least half their monthly savings. Of the three choices this would be the hardest to manage in terms of whether people followed through. But it would inject a massive amount of capital into the markets, and put at least half of that in the hands of churches, shelters, food pantries, and other helping agencies who are caring for the lowest economic tier in our country.

The benefits here seem almost too obvious. Imagine millions of Americans required by conditions of a low-interest loan to pump an extra $1000 per year into reducing their principle or into a savings account, or a charity. Banks get flooded with real equity, not credit capital. Americans save for the future. And all you did was require banks to consolidate debt at a lower interest rate with pre-conditions on how the extra money saved is to be used.

Your grandfather and mine knew and practiced three simple truths about money.

Don’t borrow unless you have to and when you do borrow, pay it off quick.
Save and invest your money at every opportunity to build wealth.
Give what you can to those less fortunate.

We are caught in a culture that has drifted away from the simple but effective truths of our grandparents. If the American people are unwilling to develop these habits and if the Federal Government is going to continue to bailout people who blatantly ignore them then we need a plan to develop these habits for ordinary Americans by rewarding good behavior.

Short-term consequences for I-Bill debt consolidation fall on bank share-holders who depend on the profitability of milking America through high interest loans. These men and women are no patriots. Thomas Jefferson warned us that “merchants have no country.” If their allegiance were truly to our country, they’d support a plan which infuses America with the capital (not the credit) it needs. They’d advocate for the habits of saving and giving that we need to survive the next 100 years economically. Even if we overturn the I-Bill opportunity when the markets calm down after being flooded with the real capital and liquidity from investing and principle pay down, we’ve still developed good habits rather than giving our bad habit of credit-dependence fresh legs on which to run.

Remember, any losses incurred are losses in interest, not necessarily lost equity, which is what we are seeing now. To offset investor losses, by all means use the $700 billion. It’s not real money anyway. It is credit and more credit is only further strangling our country.

Sunday, October 5, 2008

Why the "bailout" is likely to fail...


The recent 700 billion dollar bailout, coupled now with a plethora of earmarks, still fails to address the fundamental problem with our economy. That fundamental problem isn't corportation greed, although greed certainly is a problem.
The problem is pretty solidly revealed in the attached chart. It's credit. For all the talk of a "credit crunch" and the "freezing up" of credit, it doesn't appear that too many people are concerned that we already lend four times more money than we deposit.
You can see that American lending is pretty much off the chart when compared to other countries. Americans are living on borrowed money and because of that, our government is too. Maybe a freeze on credit was exactly what the doctor ordered. Making credit easier to obtain only prolongs the misery. It's like giving a drug addict an advance on his drug.
When the Feds lowered the interest rate to a remarkable level, we the people decided it was better to float our debt than to pay it off. President Bush's answer to a struggling economy was "take a vacation." The economic stimulus package he passed was an attempt to get Americans out there spending more money, buying things we don't need to impress people we don't even like.
A genuine stimulus package would have been one that reduced American debt, curbed spending at all levels, and encouraged personal savings. It's obvious when looking at the chart that America has a vastly different economic philosophy than the rest of the world. That philosophy is going to bankrupt us, because debt trickles up just as easily as it trickles down.
I've spent three weeks thinking about it, like most Americans. I've spent enough time I think to agree with most Americans that we just gone through the worst four years of Federal leadership in the history of our country. I can complain about that until I'm blue in the face. But unless I can offer another alternative, I'm part of the problem and not the solution.
Here goes.
First, allow the natural consequences to show themselves. Second, apply mercy to those consequences. If you apply mercy before you even know there is a consequence, you're not bailing anything out. You're reinforcing bad behavior. We wouldn't do that with our own children, so why would run government that way? Granted, if the situation was a dire as the pundits make it sound, we had to do something.
First, put all debt, national and personal mortgage into a level playing field with regard to interest rates. Make that interest rate be set at something insanely reasonable, but keep it at least a half point higher than the rate at which we have borrowed from the reserve (or from China). Apply the rate to mortgages, credit cards, and all forms of debt.
Under a nationwide refinance policy, instiute by law that all Americans who now have money at a lower rate and are thereby paying lower monthlies on all their debt must do one of three things with at least 75% of that money saved.
1. Save/Invest. If the lower payment on a Wachovia loan refinanced at a lower interest rate, nets a consumer an extra $100 per month, then a minimum of 75% of that money saved must be placed in a Wachovia trust fund and remain untouched for the life of the loan. The consumer receives standard interest on money saved, minus 1% which goes to Wachovia for profit.
Advantage: Benefits both the consumer and the lender. Establishes wealth and enables a mandatory retirement savings, mildly enhances consumer spending.
2. Reduction in Principle. If the lower payment on a Wells Fargo mortgage refinanced to a lower interest rate, nets a consumer an extra $200 / month in savings, then a minimum of 50% of that saved money must be applied back toward the loan's outstanding principle.
Advantage: Benefits the consumer, builds American equity, encourages home ownership, signficantly enchances consumer spending.
3. Giving. If a Citibank Visa card reduces interest rates which nets a person in debt an extra $50 per month, then a minimum of 50% of the money saved must appear on an annual charitable giving form at the end of the year.
Advantage: Benefits the consumer, encourages charitable giving, enhances consumer spending.
So any of these three habits can be used by consumers: saving/investing, principle payoff, and giving. You done nothing with real money, except potential short-changed investors in banking companies. That short-change will be short lived. To offset, use the $700 billion dollars to gradually accomdate for money lost by banks from being required to lend money at a lower rate. Do this for five years: $300 billion in year one, $200 billion in year two, $100 billion in year three, and $50 billion in years four and five.
Punishment for failing to save/invest, pay down principle, or give is also staged in increments. In year one, add 1 percentage point to every loan that does not follow the law. Year two, add 2 percentage points. Year three, add 3 percentage points. Should foreclosure ensue at any time in the three years, by the third year there should be enough capital freed up in the market to garner a really good deal on defaulted properties (from consumer spending and giving), or there will be enough real capital in the banks (from saving and investing, and principle paydown requirements) so as not to overtly effect the markets.
At the end of five years, eliminate tax reduction for interest paid. With a lower rate in the table already, the amount of pain most Americans will feel will be lessened. The government in turn gets well over $200 billion in additional tax revenue. Americans will stop floating debt to avoid taxation and that will encourage quicker reductions in debt principle. With the additional revenue the governement has from eliminating the tax deduction on interest, it can begin eliminating its own debt, while encouraging Americans to do the same.