Inside PBS Blog

What is your response to Jon Stewart's idea of the govt. sending bail out money to consumers to use for paying off credit cards and mortgages? This way the consumer get his/her debt paid, the banks get their debt paid by the consumer....even if a some consumers elect to save their "bailout money" it is better for them to have it than the banks...

Mimi Barker

There seems to be two dominant strategies to getting us out of this recession. One is heavy government spending that will improve GDP since business investment and exports seem to be waning. The other is to reduce taxes on businesses so that business costs will decrease on the tax liability side which should increase investment to create more jobs. It seems to me that the latter option is the wrong solution since business taxes are quite low going into this recession and that cutting them more would do little to spur investment considering consumer confidence is the big issue right now and business tax cuts will only help profit margins instead of create additional job growth. Granted the economic issue is much more complex than I have stated it here but what are your thoughts on these two approaches?

As we progress the first quarter of 2009, with no end in sight to the financial crisis sweeping the global economies, it is all the more prescient to ask the question; Are the public and private sectors drivers of the economy targeted to deliver the foundations of a strong sustaining economy and populace, and so mitigate periods of excessive boom and bust?
To counter the effects of the credit crisis, government around the World have resorted to stimulus packages and other measures to re-energise their economies, and no doubt this pump priming will meet with a degree of success.
How then can we build on these government initiatives, to mitigate the constant and repeated cycles of boom and bust and establish the foundations of a strong enduring economy?
This paper posits the process need commence with the reform of personal taxation, realigning tax receipts from direct to indirect tax, thereby increasing the after tax income of the low and middle classes, to obtain the necessities of life for food, clothing and shelter, and to make informed decisions as how best to use disposable income.
Enhancing the reform of tax receipts is access to low cost mortgage finance to drive home ownership, the single most important and costly asset purchase of the low and middle classes.
Finally, there must be new contract between government and business, enshrining a banking framework that restores the confidence of Americans in the operation of the financial industry; one which protects and secures the assets of individuals for the long term. To this end, the establishment of a Private Savings and Loan partnership between the federal government and the major financial institutions is addressed.

The following is a very broad overview of the processes to achieve the desired outcomes.

Personal Taxation:

• A flat tax of 20% on all income, irrespective of source; i.e. salary, capital gain etc.

• A Tax free threshold of $20k per annum per person, reducing by $0.50 for each $1.00 of income greater than $60k per annum.

• The tax free threshold replaces all deductions from income; refer Appendix "A" re share trading.

• As part of a structural reform of tax policy from direct to indirect tax, federal sales tax must be increased by up to 5% to ensure the total revenue base is not overly negatively impacted, and to counter the effects of an inflationary blowout.

To further preserve the revenue base it may be necessary to implement a surcharge of 5% on income greater than $125k per annum. That is income up to $125k per annum is taxed - subject to the application of the tax free threshold - at the fixed rate of 20%, with income greater than $125k per annum subject to the surcharge of 5%.

Mortgage and Personal Finance:

Now more ever, it is paramount that a floor is put under declining asset values, and to turn the dream of home ownership into the reality for all Americans. This proposal is therefore addressed to the method, and the mechanism to sustain low cost mortgage finance at a fixed rate of 5% over 25 years.

The ability to sustain a mortgage interest rate of 5%, and in the process increase disposable income, requires you contract to an interest rate of 2.5% on savings deposits. Reducing the cost of operations in the banking sector, by contracting to an interest rate of 2.5%, is the one financial factor each and every American has the ability to influence and determine, and so sustain for the long-term a fixed mortgage rate of 5% per annum. Whilst this may be a bitter pill to swallow in light of current events, it is in fact a win-win situation for all parties. An example of the increase in disposable income (DI) and or savings deposits is set out below.

On February 2nd, the overnight average of a 30 year fixed rate mortgage is 5.34%.This presents a once in a lifetime opportunity to take action and secure your financial future.

A review of historical data shows the average rate of a conventional 30 year mortgage, per the Governors of the Federal Reserve for the 10 years ended December 2008 is 6.53%, the previous ten years ended December 1998 the 30 year rate is 8.41%.

Loan Facility:

Combined Income: Loan: Interest: Annual:
Family of two: Principal: Rate/25 years: Repayments.

$75000 $300,000 6.53% $23156 *1

$75000 $300,000 5% $19993 *1

Savings Deposits:

Annual: Disposable: Interest: DI / Savings:
Income: Income: Rate/Savings: 10 years:

$75000 $6000 * 2 5% $77964

$75000 $9163 * 3 2.5% $104195 *3

*1: Annual repayment is calculated net of a 5% deposit on the principal.
*2: Assumes savings/disposable income (DI) net of all expenses of $6000 per annum.
*3: Savings/Disposable income increase to $US9163 on an annual basis, resulting in a net income increase to $US104195 after 10 (ten) years. This is a direct result of repaying a loan facility with an interest rate of 5% per annum, and is in spite of the fact interest on deposits is 2.5% per annum.

The important point to note here is; net financial wealth is not a product of the interest rate obtained on saving deposits. It is in fact, the product of an increase in disposable income, leading to an increase in savings deposits; an increase in discretionary spending, and or investment in carefully selected assets.

Certainly they are choices; take no action, and watch as interest rates rise in the not too distant future; or act now, make the right choice, the ‘hard choice' and secure your financial well being.

It is ironic, but nevertheless a fact, the ‘hard choice' is actually the smart choice; it is the catalyst to underwrite not only your prosperity and financial well being, but the prosperity and financial well being of all Americans.

Mortgage Financing:
Mortgages, subject to meeting the mortgage lending criteria, will be at a fixed rate of 5% over twenty five years (25), with interest on savings capped at 2.5% per annum.
A ceiling will apply to the loan principal, compulsory enforceable by the lender, ensuring the loan principal is not greater than 3.75 times an annual income of $50k, increasing to a maximum of 4.25 times an annual income of $100k.
Access to funding will be restricted to individuals/families with an income not greater than $US150k per annum.
Mortgage funding will be restricted to the purchase of owner occupied properties.
Mortgagors will require a deposit equal to 5% of the purchase price, with the federal government acting as co-depositor to the mortgagor, by underwriting 10-15% of the deposit balance on the principal borrowed.
Applicants will be required to open a savings account with the lender, and retain the account for not less than six (6) months, prior to the commencement of the mortgage application process. This will permit the lender the necessary time frame to verify income and expenditure data, and demonstrate the ability of the mortgagor to service the loan.
Personal Finance, excluding Personal Business loans:
Additionally, contracting to an interest rate of 2.5% on savings deposits, will allow the Savings and Loan partnership to provide access to personal finance at the rate of 6.5% per annum, and credit card facilities at 12% per annum.

These facilities will be subject to a maximum aggregate repayment limit the end user needs to repay in a twelfth month period. For example an individual accessing the above loan principal of $US300k will be limited to a maximum aggregate repayment liability of $US4096 per annum. Note this is not a maximum spending limit it is the maximum the end user will be required to repay in any twelve month period.

A New and secure Savings and Loan Mechanism:
As to the method of delivery, it is proposed this be facilitated via the establishment of a new and independent banking enterprise; let's call it "America Rising". The enterprise will be structured as a nationwide savings and loan private partnership between the federal government, and the major banking institutions, with the sole remit of providing banking services to individuals who meet the housing finance criteria.
In the partnership, the federal government stake is 10-15%, or the controlling interest by virtue of the fact the federal government is acting as co-depositor to the loan applicant, effectively guaranteeing 10-15% of the loan principal. The major financial institutions will hold the remaining stake of 85-90%, based on their ability to fund the capital injection required. A quick calculation shows the up front capital to fund 1 (one) million properties per annum with an average cost of $US300k, less 5% deposit to be $US285 billion.
Of far greater significance, the partnership positions the government as an income generator in its own right. Via the partnership the federal government will gain access to a continuous income stream - outside of tax receipts - to pay the cost of current and future policy decisions, and in the process dispel market and consumer concern as to federal finances.
In summary, these initiatives require the setting aside of political ideology, to the more pressing requirement of rebuilding for the long-term, the financial strength of the public purse, a requirement which must take precedence over all other business interest, and in the process the financial wealth and security of assets of all Americans, beginning first and foremost with the low and middle class, the mainstay of the American economy.
Reducing and sustaining access to a lower cost of money, - the oil of the economy - will put a floor under declining asset values, drive the demand for home ownership, and revitalise consumer spending on goods and services, the engine to accelerate the recovery process, and get America back to work.
This in turn will increase employment opportunities as companies rebuild their balance sheets and recommence hiring, and in the process work to unfreeze credit markets as competitive forces come into play, driving a decrease in interest rates and a reduction in the cost of operations in the banking sector.
To facilitate discussion; to open the door to a new perspective, and give life to your voice, kindly share this message with your friends; your work colleagues; your representative in the Congress; most importantly President Barack Obama's economic team.
This moment, right now, is your opportunity to work with your President, to take on board the message of President Barack Obama and commence the process of rebuilding a strong, enduring, inclusive America; it is your opportunity to transform words into action; to transform a rallying cry - "Change -Yes We Can" - into a reality. Will you step up to the plate? Will you seize the day?

Appendix - "A"

1): In all cases relating to the trading of financial instruments of whatsoever type - and all cost of whatsoever type associated with the trading of financial instruments - will, for the purpose of personal taxation, be calculated and determined as stand alone taxable transaction - subject to items 2,2a,2b,2c, - from all other taxable income types.

2): Additionally, only realised outcomes as per clause 1, 2a, 2b, 2c, and 2d, whether gains, losses, brokerage, interest charges or any other type of realised gain or realised loss associated with the trading of financial instruments of whatsoever type may be brought to account in the relevant tax year.

2a): Realised losses from share trading, and the cost of borrowing, including any interest component associated with the cost of borrowing, may be offset against gains from share trading, but only to the extent the realised loss, or the cost of borrowing including the interest component associated with the cost of borrowing, does not exceed the gain from share trading.

2b): In the event the realised loss from share trading or the cost of borrowing including the interest component exceeds the gain from share trading, there will be no carry forward to future years of the excess of the loss position's value.

2c): In circumstances where there is only a net realised loss position, or cost associated with borrowings including an interest component in a specific tax year, and no gain from share trading in the same tax year, the net loss will stand to the detriment of the investor.

2d): Under no circumstance may realised losses from the trading of financial instruments,
- or the cost of borrowing, including any interest component associated with the cost of borrowing, to invest in the commercial marketplace - be offset as a deduction against salary or wages income, or any other form of personal income.

Therefore, subsequent to determining the net position of all activity as detailed in clauses 1 and 2 and sub-sections 2a, 2b, 2c, 2d, the net realised gain will be added to income from all other sources, and taxed in accordance with the published tax tables.

How does our economy being more globally interconnected today alter the effectiveness of strategies we used in the 1930s?

Or if that is too general:

In the 1930s we funded public works and fed families. Today bailing out a smart company might mean enabling them to outsource employees or retool to downsize. Should that be part of the political discussion?

The founders understood that a middle class is the safegaurd against tyranny of the ruling elite. History showed them that every world power's demise came about because too much wealth and power was concentrated in too few hands. Eventually people rise up and overthrow tyrannical rulers. Are we at such a point in this countrys' history today?

No one will argue that the middle class has been shrinking over the past 20-30 years. Lets take a look at why this is so. The exporting of manufacturing jobs to lower the cost of production has been the major reason. If you agree that manufacturing was the catalyst for the rise of the middle class, then the loss of those jobs explains the dimunition of it today.

These jobs required little or no education. Access to the middle class was not difficult in that sense. The same cannot be said today. In fact an education is not a gaurentee of a middle class life. It should be the number one priority of our government and buissness leaders to come up with a master plan to regrow the middle class. How to do this is very difficult to answer.

What kind of jobs will be widley available with or without education? Manufacturing used to be very labor intensive and required many workers. What industry will provide opportunities for Americans in the future?

One thing is for sure, history tells us that the powers that be better figure this out, or they will not be. We are pumping billions and billions into the banking industry to save them from some very poor choices. In the mean time we are letting the middle class get weaker and weaker by the week. Tens of thousands of us find ourselves out of work seemingly everyday. Our money goes into bounuses for wall street "workers" because they might go elsewhere if not compensated properly. I say let thier companies fail and tell them to go find work elsewhere if they can. Maybe they'd like to join the rest of us on our search for middle class opportunities yet to be defined. Or join us on our way to overthrow the Wizzard. Those in Oz better wake up. They might be smart to placate the masses enacting Jon Stewarts idea while they figure out how to regrow their insurance policy.

Since we started giving the banks money we have seen them say thank you by raising usery rates to 20%+. What if the Congress stated that now the U.S. citizens are part owners we want a cap on usery rates to allow Americans to pay down their debt.Because at 20%+ we are going to see the next bubble burst of Americans going into default, while Citigroup and others buy jets, go on luxury weekends, and hand out bonuses. I know that I do not want to charge myself 20% and I wonder if you think this would make a dent in the problem?

I see little coverage in the mainstream media of the role that small businesses can play in restoring the economy.

This dearth of discussion contrasts markedly with the intense effort, optimism, and commitment to helping the economy and helping others (not just to helping themselves) that is growing in the entrepreneurial circles I run in.

I'm a former VP at a national entrepreneurship center, and an entrepreneurship coach. With the decline of large company employment, small companies, freelancers, and entrepreneurs will provide the next "job" for a growing share of the workforce.

And young people are talking about how little faith they have in the economy, and are increasingly interested in how to take charge of their own future through entrepreneurship.

While this will not solve the macroeconomic ills that dampen all economic activity -- the growth of the entrepreneurial sector is a bright spot in an otherwise bleak situation.

Susan Kuhn Frost

I heard over the weekend, in the news programs, that banks were not lending because of some regulatory mechanism that makes them lose money everytime they do it. Can you tell me what is that mechanism and why is in place? That comment, of course, came from a banker, so I would like to understand the contex of it. Thanks.

What is the government going to do to help us in need. Are there programs for prolonged unemployment?