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.
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