I read with great joy the governments idea to force down interest rates for mortgages used to purchase a home. Being in the market for a home I can not wait to take advantage of this plan and finally get a little bit of the gold being handed out by the Good King.
Despite my personal glee and anticipation of sticking it to all my fellow taxpayers by having them subsidize my new home I can't move beyond the idea that his entire plan is insanity as only Washington D.C. can do insanity.
The problem with the housing market now was rampant speculation and loose lending standards allowing folks to get into homes they couldn't afford. Now that no one is buying the prices are falling and folks find themselves owing more then they can sell the home for.
What happens with the government plan? With lower mortgage rates the theory is that people will be able to pay up yet still afford the mortgage. This is true but completely ignores the need for these borrowers to have a downpayment. If they pay up they need more cash to complete the transaction for the downpayment and increased loan fees based on loan amount. Based on this the only folks to benefit are those already sitting on cash out of proportion to what they can afford in a monthly mortgage payment, a nice problem to have and one I doubt it prevelant.
Now let's ignore this problem with the plan and assume I purchase a home under the plan. Since I have a low interest rate I was able to pay a higher purchase price then I would have. A year goes by, the low rate plan ends, everyone who could has bought their government subsidized home and I find that I need to sell for that new job I finally got after being laid off after closing on my new home. Surprise, the value of my home has just dropped because all potential buyers are now paying the higher interest rates so they have to offer less to make their monthly payments.
Let's review - If I do what the government wants and purchase a home that I can suddenly afford due to low interest rates I am handing the seller of the home a portion of my down payment as a gift because within a short period of time the home is going to be worth less.
If I plan on staying in my new home for a long time (5 years minimum I would guess, probably 10) none of this might matter which I am sure the politicians will argue but our world and lives are flexible so what if you think you will stay and you can't?
Have I adequately expressed my disdain for politicians in general? This is a plan to artificially puff up the value of homes just like the recent home valuation bubble that burst. Get folks to take on more debt then they really should by subsidizing the interest rate and then remove the subsidy bursting the new bubble.
And let's not forget that all the money the government is throwing around eventually comes out of our pockets via taxes either directly (income) or indirectly in the cost of goods and services.
I wonder how Gov. Palin's budget is doing with the price of oil blowing the bottom out of the barrel in it's rush to be cheaper then the air we breathe.
Friday, December 05, 2008
Tuesday, November 25, 2008
Govt Response to Crisis
How many of you are watching the US Govt spread money around the economy and wondering where this money is coming from? Then you realize it is coming from our pockets. Governments do not generate revenue, they tax their citizens.
Although I laud the attempts to prevent a complete financial meltdown in the end the taxpayers are going to pay for all this generosity. The problem I have with the recent attempts to 'fix' things is that the government thinks lending is the answer. How short sighted - that is what got us in this mess and the majority of folks who want to borrow money are the ones who can't pay it back now. How will lending them more money help?
I am also irritated with the mortgage alteration plans - I have a mortgage, it is small and paid on time but the rate is a bit higher then market rates today. When do I get my rate lowered?
Although I laud the attempts to prevent a complete financial meltdown in the end the taxpayers are going to pay for all this generosity. The problem I have with the recent attempts to 'fix' things is that the government thinks lending is the answer. How short sighted - that is what got us in this mess and the majority of folks who want to borrow money are the ones who can't pay it back now. How will lending them more money help?
I am also irritated with the mortgage alteration plans - I have a mortgage, it is small and paid on time but the rate is a bit higher then market rates today. When do I get my rate lowered?
US Tax Code Change - Interest Deductions
What I have been thinking about a lot in recent years and something that has taken a more cohesive form while watching the credit crisis unfold is how the tax system is used to subsidize the wealthy at the expense of the poor. More specifically, by giving deductions for mortgage interest the government is subsidizing the cost of owning a home to the detriment of those who don’t own a home. It is arguable that most families and individuals who don’t own homes can’t afford them thus those who can afford a home are being subsidized by those who can’t.
I believe that eliminating the mortgage interest deduction would be a bridge to far. A more tempered approach would be to allow the deduction for the original mortgage used to purchase a home but not for home equity lines, 2nd mortgages or refinancing. A cap on the maximum size of the loan should also be considered. I can already here the financial firms calling their lobbyists. This change would need to be phased in so that existing loans would be grandfathered or more families could find themselves in financial difficulty then already do. As a supported of this change I can’t wait to trot out sound bites such as, “Why should taxpayers be paying for someone’s Jet Ski”.
An even bigger change I suggest is to change the deductibility of interest payments for a corporation. If a company takes out a loan to finance expansion or normal operations the interest would be deductible as a cost of doing business. If debt is taken out to acquire a firm or to leverage up the balance sheet to distribute funds to shareholders then the interest should not be deductible. This law should be passed with generic intent language with the caveat that if a loan is questionable in its classification then it isn’t tax deductible.
Investment Banks, Hedge funds and buyout firms that are still in business have now redoubled their efforts to reach their lobbyists and probably started hiring a few more.
The benefits of this change are similar in nature to changing the mortgage deduction yet support within the electorate should be overwhelming. Why should individuals or firms be allowed to purchase companies employing hard-working Americans by loading them up with questionable levels of debt and then laying of workers to pay for it. Then as an additional slap in the face they drastically reduce their corporate taxes due to the interest on this debt. Currently the Anhueser Busch acquisition is a wonderful example although it does lack the LBO firm involvement. Various news services have speculated that part of the financial justification for the acquisition by InBev is the ability to pile debt onto the US firm and drastically reduce it’s annual tax bill to the tune of $800 million by some estimates.
Throw in a few examples of the LBO Chiefs accumulating personal wealth in the billions of dollars and state that it came out of the hide of the taxpayer and politicians wouldn’t be able to support the change fast enough.
I am sure that the impact of these changes would be widespread and that I have not considered a large number of them. In the short term it couldlead to a slow down in growth but given the current situation the impact might be fairly minimal. I would argue that much of our past growth wasn’t natural and only occurred as a result of debt juicing the system to the point where we are now so it is a cost we much bear.
I would see this change reducing the leverage of most companies providing for the cushion they require when times get tough like they are now. Many want to blame Wall Street and the Bankers for getting us into our current predicament, especially the politicians, I believe the government is largely to blame, their scapegoats simply used the system put in place by the politicians as any rational human being will try to do. If I had the ability to borrow a few billion dollars and take a firm private and then borrow even more to give myself a large dividend reducing my risk to zero I would do it in a heartbeat. I believe that option should still be available, I just don’t believe the US Taxpayer should be shouldering the cost as they do today.
I believe that eliminating the mortgage interest deduction would be a bridge to far. A more tempered approach would be to allow the deduction for the original mortgage used to purchase a home but not for home equity lines, 2nd mortgages or refinancing. A cap on the maximum size of the loan should also be considered. I can already here the financial firms calling their lobbyists. This change would need to be phased in so that existing loans would be grandfathered or more families could find themselves in financial difficulty then already do. As a supported of this change I can’t wait to trot out sound bites such as, “Why should taxpayers be paying for someone’s Jet Ski”.
An even bigger change I suggest is to change the deductibility of interest payments for a corporation. If a company takes out a loan to finance expansion or normal operations the interest would be deductible as a cost of doing business. If debt is taken out to acquire a firm or to leverage up the balance sheet to distribute funds to shareholders then the interest should not be deductible. This law should be passed with generic intent language with the caveat that if a loan is questionable in its classification then it isn’t tax deductible.
Investment Banks, Hedge funds and buyout firms that are still in business have now redoubled their efforts to reach their lobbyists and probably started hiring a few more.
The benefits of this change are similar in nature to changing the mortgage deduction yet support within the electorate should be overwhelming. Why should individuals or firms be allowed to purchase companies employing hard-working Americans by loading them up with questionable levels of debt and then laying of workers to pay for it. Then as an additional slap in the face they drastically reduce their corporate taxes due to the interest on this debt. Currently the Anhueser Busch acquisition is a wonderful example although it does lack the LBO firm involvement. Various news services have speculated that part of the financial justification for the acquisition by InBev is the ability to pile debt onto the US firm and drastically reduce it’s annual tax bill to the tune of $800 million by some estimates.
Throw in a few examples of the LBO Chiefs accumulating personal wealth in the billions of dollars and state that it came out of the hide of the taxpayer and politicians wouldn’t be able to support the change fast enough.
I am sure that the impact of these changes would be widespread and that I have not considered a large number of them. In the short term it couldlead to a slow down in growth but given the current situation the impact might be fairly minimal. I would argue that much of our past growth wasn’t natural and only occurred as a result of debt juicing the system to the point where we are now so it is a cost we much bear.
I would see this change reducing the leverage of most companies providing for the cushion they require when times get tough like they are now. Many want to blame Wall Street and the Bankers for getting us into our current predicament, especially the politicians, I believe the government is largely to blame, their scapegoats simply used the system put in place by the politicians as any rational human being will try to do. If I had the ability to borrow a few billion dollars and take a firm private and then borrow even more to give myself a large dividend reducing my risk to zero I would do it in a heartbeat. I believe that option should still be available, I just don’t believe the US Taxpayer should be shouldering the cost as they do today.
The World Economic Disaster - US Auto Industry
Imagine my surprise to see the WSJ publish editorials stating that the US Auto Manufacturers were bankrupt and should admit it. I have been stating that idea for a long time now while receiving indifference at best in return.
Fortunately the US Congress has recognized that simply throwing money at them is not the answer and has asked for a plan to show how additional investments will be used to return the firms to profitability. Since this is not possible it will be interesting to see what the politocos do next.
I have stated that Unions have a valuable place in our economy but like most other establishments they can exceed their usefulness and value. Auto workers unions have done this in conjunction with weak management and weaker politicians. The Unions last reduction in benefits is laughable and the entire auto industry needs to be rebuilt from the ground up which can only occur via bankruptcy.
Fortunately the US Congress has recognized that simply throwing money at them is not the answer and has asked for a plan to show how additional investments will be used to return the firms to profitability. Since this is not possible it will be interesting to see what the politocos do next.
I have stated that Unions have a valuable place in our economy but like most other establishments they can exceed their usefulness and value. Auto workers unions have done this in conjunction with weak management and weaker politicians. The Unions last reduction in benefits is laughable and the entire auto industry needs to be rebuilt from the ground up which can only occur via bankruptcy.
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