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.
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