A Radical Fix For Housing And The Economy

 

It is time to go further than the current discussion and programs to help America's home owners in a meaningful way. Here is one idea, which would cost the public nothing, and put money into people's pockets for years to come.

We need federal legislation to reset every primary home mortgage in the country to a 4 1/2 % interest rate for the balance of the loans.

This would apply to current long-term mortgages, and convert every adjustable rate mortgage to a 30-year term fixed rate. Lenders would have to redo the mortgage papers at no cost to the borrowers.

In addition, no new adjustable rate mortgages would be allowed, and all new mortgages for the next two years, at least, would be at the same 4 1/2 % 30 year interest rate.

Thus, the industry which created the mess would have to absorb some losses of income, but the home owners would have lower monthly payments, and a better chance of staying in their homes. Foreclosures would be much less likely. The housing sector would be stabilized, at last.

 

Tuesday, December 30, 2008

​

Starting From The Bottom

 

The right way to begin to deal with the Wall Street financial crisis is from the bottom: protecting the people who took out those adjustable mortgages and complex products which offered no interest loans, and other "free lunch" incentives.

The first step should be a nationwide freeze on foreclosures and interest rate "resets." People who could make mortgage payments at low interest rates could keep on making their payments. This freeze should be indefinite, while we sort out the complexities of the global situation. The at-risk mortgages would hold their value, rather than turn into foreclosure liabilities.

The second step is to resist the call to bail out the Wall Street firms who took unnecessary risks. If public funds are to help stabilize Wall Street, then the government should take over entire companies, restructure them, then resell them, rather than buying only their bad debts.

This is a beginning: the principle is people first, not the companies who brought about the crisis.

 

Monday, September 22, 2008

​

Globalization And My Discontents

 

The destructive effects of globalization have been described as “the race to the bottom.” Free market advocates have disparaged this slogan, arguing that free global markets keep prices low, and spread wealth to poorer nations. But is globalization really a good idea?

Globalization is about profit. Expanding markets, access to resources, and new labor pools all contribute to this end. If both developing and developed nations benefit, why should anyone object? In one word, exploitation.

Globalization is about making the world safe for business, but this is not quite the same as making the world safe for people. While many in the business community argue for a international level playing field, they mean the least restrictive regulatory systems for products, workers and the environment, not the most protective systems.

Low wages. Manufacturing and service jobs have been moved to countries where wages are very low, undercutting workers in developed nations. Recent declines in U.S wages in union contracts, for example, indicate the power of out-sourcing to drive down wages in the developed world. People whose monthly incomes are only a few tens or hundreds of dollars obviously will be willing to work for wages considered unacceptable in developed countries. Moreover, underdeveloped nations have been forced to compete for the most lax regulatory and wage environments, to get and keep businesses. The logical conclusion of this trend is the constant migration of jobs to the lowest-wage countries.

Environmental destruction. Environmental protection requirements are a means to both protect the natural world, and include the true costs of production in the prices of goods. For example, strip mining and clear-cutting of forests are cheaper than careful resource extraction, but the cost in lost species, polluted rivers, cleanup of wastes, and human/natural habitat rarely is paid by those who create the problems.

While the European Union and the U.S, and a few other developed countries, have well-developed, science-based, environmental protection programs in place, most of the developing world is not capable or willing to restrict poor environmental practices. How many Fortune 500 companies voluntarily meet EU/US environmental standards in their overseas operations? Is a river in South America or Africa somehow better able to absorb pollution than a river in Germany? Not likely, and not scientifically. 

Worker safety and standards. The developed world takes for granted reasonable working hours, some measure of benefits, such as health and retirement benefits, and a safe working environment for its workers. In much of the developing world, however, these concepts are but a distant dream. In such situations, workers may work very long hours, in hazardous or unsafe environments, and have no means to protest their conditions without being fired.
The overall impact is that keeping costs low in the developing world involves exporting pollution, wages, worker exploitation, and resource destruction to the underdeveloped world. The field is not level. 

What would a long-term and sustainable business environment look like? 

1. First, workers rights need to be protected everywhere. This means reasonable hours, living conditions, on-the-job safety provisions, health care, whistle-blower protections, retirement benefits, and a living wage.

2. Businesses operating anywhere in the world should have to meet minimum common environmental standards, based upon the EU/US systems. Exceptions could be made only with approval by an international science-based regulatory body.

3. Compensation for injuries, or for health impacts from their work, should be paid to the workers or their heirs.

4. The cost of cleanup of past environmental degradation or habitat destruction should be borne by those who created the problem.

5. Some part of the difference between developed nation wages and developing nation wages should be paid back to the developed nation, to compensate workers displaced by globalization.

6. Businesses not complying with these conditions should be barred from operating in, selling products to or providing services to the developed nations. 

7. Verification of compliance needs to be conducted by impartial international bodies.

This framework is a tentative beginning toward a sustainable and fair level playing field in the global arena. The obvious implication for businesses in developing countries is that if they are unable or unwilling to comply with these principles, then they will be barred from commerce with the developed world. 

This probably would create a transitional two-tiered trading system, with underdeveloped countries trading with each other, rather than with the developed world. With assistance from the developed countries, the underdeveloped world could move toward greater technical expertise, regulatory integrity, worker benefits and protections, and product safety, without major global resource and environmental impact. Whether this approach is practicable and beneficial remains to be seen, but I think it is worth the try.

​

Sunday, June 15, 2008

 

Saving On Gas, For Patriots

 

Not long ago, I noticed that the mileage on my 15 year old Toyota Corolla had slipped, from its usual 24-25 mpg to 20-21 mpg. Several checks at the repair shop showed only that the car was in fine shape. Most of my driving was short trips around town, usually three to ten miles at a time, the worst driving for good mileage.

Theory: perhaps my driving style had changed?

Experiment: try to get the best mileage possible from the car.

Result: my mileage improved to 27-28 mpg! So, how did I do it? Slow driving…

1. Shift to neutral at red lights.

2. Coast as much as possible. I often started coasting one to two blocks from a red light or a stop sign. It is amazing how far one can coast with little loss of speed, in today’s cars. Coasting downhill is easy, of course, but coasting uphill also works better than you think.

3. Accelerate slowly. Listen to the engine, and have a light foot on the accelerator. You can tell when gas is wasted from the engine’s sound. This means 0-60 in much more time. Who needs to be an Indy driver?

4. Brake slowly, starting earlier than usual. If you think of coasting to a stop, you will brake more lightly.

5. Stay within the speed limits, or at most five miles over the limit. We know that most cars on the road routinely are going 10-15 miles over the limit. We also know that the faster you drive, the worse the mileage. Moral: take your time!

What does all this mean? You can cut the cost of gas by 10%, 20%, or more immediately, just by changing your driving style. Not a bad investment! Longer term, you can lower the cost of gas by reducing your demand: the market will respond. You will keep more money in your pocket, and at home, rather than sending it to the oil companies and the oil producers abroad.

Conclusion: join the slow drive movement, and be a slow driver – It’s the patriotic thing to do.

​

Monday, June 2, 2008

​

Abolish The Property Tax!

 

Once upon a time, the property tax made some sense as a way to raise governmental revenue. Most property was agricultural, and generated wealth, in terms of animals, crops and cash. But that was long ago. Now, agricultural land is a tiny fraction of our economy, and wealth is more properly measured in cash income. The ability to pay taxes depends upon one’s income, not upon one’s holdings. That is why income tax is paid on stocks when sold, not on their value when held, for example.

It is important to distinguish between the need to raise governmental income, and the means to that end. In this, the property tax no longer makes much sense, and continues to produce many pernicious and unintended consequences.

The elderly, on fixed incomes, see their assessments and taxes rise, based upon the value of neighboring homes, which are sold. Their ability to pay typically does not increase, as they get no income from their home, and their demand upon services does not increase either. Why then, accept continued property tax increases, which force people with fixed incomes to sell their homes?

Farmers see their property taxes increase, not because of anything they do, but because assessments often are based upon the possibility of a more valuable use, eg, converting the farm into a subdivision.

Landlords experience the perverse result of increased property taxes, if they invest in property improvements.

These are extreme examples, perhaps, but everyone has felt the pinch of rising property taxes as unfair, as they are asked to pay more on an assessment of expected value, rather than upon real income.

The property tax is an unfair means to raise governmental income: abolish the property tax, and base state and local revenues upon the income tax, which most fairly tracks the ability to pay.
 

Sunday, March 16, 2008

​

Corporate Accountability (2) Who Benefits From Bankruptcy?

 

Corporations essentially are creations of the state, by charter. It is an odd approach when the law currently provides for a corporation to be shielded from its creditors, in a bankruptcy. This places the interests of current executives and directors over those of their creditors, which is precisely what should not be allowed if they have failed in their fiduciary duties to the business. Those who go into bankruptcy should not be allowed to continue managing or profiting from the situation.

As such, corporate charters should be subject to revocation, in extreme cases, such as bankruptcy or gross violations of the law. Rather than close a business, however, states should be able to “condemn” such businesses, assume ownership, and auction them off to new owners and management. This would protect workers from the follies of executives, and provide income for the state.
 

Saturday, March 15, 2008

​

Corporate Accountability (1) Limited Liability

 

An interesting thing about the corporate shield of limited liability: it could be viewed as one of the first “family friendly” policies. Prior to the invention of the corporation, investors had unlimited liability. That is, all their wealth, including their homes and personal assets, were liable to seizure to pay their debts. Many women and children found themselves in the poorhouse as a result of such bankruptcies.

The invention of the corporation limited investor liability to the monies invested, shielding families from such catastrophic losses. In this sense, not a bad idea. However, since its start, corporations have lobbied continually to extend the concept of limited liability far beyond this modest beginning.

Today, corporate boards and officers claim free speech protections for their advertising, file slander suits for “product disparagement,” seek to minimize their personal responsibility for environmental and social damage caused by their operations, and otherwise hide behind the corporate shield. We have come a long way from limited financial liability, to minimal personal responsibility.

Restoring the original concept of limited financial liability would mean that if the corporation were judged guilty of violations of the law, then the directors and officers would be subject as individuals to appropriate civil or criminal punishment. This would provide an immediate and lasting incentive for compliance with worker safety, environmental, anti-discrimination and many other laws and regulations intended for society’s benefit.
 

Saturday, March 15, 2008

​

Restoring Fairness And Progressivity To The Income Tax

 

Progressivity: Once upon a time, Americans accepted a progressive income tax, in part because of an understanding that the wealthy benefited from our democratic institutions and capitalist system. The wealthy therefore owed a fair share of their income to the people as a whole, and they could pay proportionately more because they simply could afford it, without compromising their quality of life. In recent years, this principle has been under attack, and it is time to reaffirm the responsibility of the wealthy to contribute to society as a whole.

Fairness and the Alternative Minimum Tax: The core of our income tax system is an overall belief that on the whole, it is fair. Unfortunately, decades of huge numbers of special interest provisions and tax breaks, and recent tax cuts for the wealthy have undermined this belief. It is not enough to fight each provision one at a time. The way to restore fairness is to cut through the complexity of the tax code, and focus on key principles.

One option is to ensure that the principle of the Alternative Minimum Tax is a reality. For example, the following table shows how we could maintain a progressive and fair tax system, through the Alternative Minimum Tax.

Adjusted Gross Income (AGI) Minimum Tax (% x AGI)

Under $100,000 None
$100-200,000 15%
$200-300,000 20%
$300-400,000 25%
$400-500,000 30%
Over $500,000 35%

Basing the AMT only on the Adjusted Gross Income means that tax shelters, tax breaks, and tax credits, no matter how inventive, could not reduce taxes below this minimum level. This would be fair to all.

A comparable table needs to be developed for corporate taxation. For example:

Corporate AGI Minimum Tax (% x AGI)

Under $5 million None
$5-25 million 15%
$25-100 million 20%
$100-500 million 25%
$500 million - $2.5 billion 30%
Over $2.5 billion 35%

*Note that corporate AGI needs to be defined as net of reasonable business expenses, before shelters, breaks, and other creative accounting methods are applied.

This simplified application of the Alternative Minimum Tax would go a long way toward restoring fairness to the income tax.
 

Saturday, March 15, 2008

​

Cutting The Military Budget: A Posture For Peace

 

The U.S. spends vastly more on its military than the rest of the world, combined. We have the most advanced and best trained military forces. Anyone who claims that we are weak, is living in another world. However, it must be remembered that overspending on the military was a major factor in the economic collapse of the Soviet Union. The U.S. needs to learn from that example.

Serious questions must be asked about our military posture and strategy. What is the purpose of each of the hundreds of bases we have around the world? A global map of our bases vs those of any other country suggests that we want power and influence everywhere, but this is not the same as “providing for the common defense.” 

Many have warned against trying to be the policeman of the world, but this is a mild analogy. A policeman is a neutral person, charged with enforcing the law. Our military is hardly neutral in its actions.

Do we need tens of thousands of soldiers in Europe, for example? What are they defending the U.S. against there? Why do we need bases in Latin America? Asia? Is any country there a threat to the U.S.? This is not a call for isolationism, as we can legitimately cooperate with other countries for common interests. However, our vast military commitments can safely be scaled back.

If we cannot justify our military presence in the eyes of host and neighboring countries, then perhaps it is time to reduce our commitments. Many bases in other countries should be closed, and our soldiers brought home. This would substantially reduce our military budget, and the risk to our soldiers. It also would send a message to the world that we are more interested in peace than in war.

​

Saturday, March 15, 2008

​

Fixing The Housing/Credit Crisis

 

The financial markets have been in turmoil over the unexpectedly high risks of complex bundles of mortgages. The Federal Reserve has lowered interest rates, and intervened to back the industry with guarantees and cash to help promote new loans. Many plans have been presented to resolve this crisis, but one aspect has not received enough attention. Here are some ideas to stabilize the credit markets, keep people in their homes, ease the pain to the lending institutions, and protect people and lenders from such future problems.

The Adjustable Rate Mortgage was invented by the financial industry as a way to extend housing credit to more people. The obvious goal was to make more money by making more loans, even if many of these loans were to speculators and to people who were stretching their budgets to the limit. For many years housing prices went up, and, most people did well, based upon two assumptions: (1) their incomes would increase enough to cover possible increases in their interest rates; and/or (2) they could sell their homes at a profit, if they could not make their increased payments. 

We now have seen what happens when both assumptions turn out to be false. Many people are missing their mortgage payments, homes are going into foreclosure, and the lenders are posting multi-billion dollar losses. 

Since the lenders encouraged many people to take ARM’s, they should absorb the pain rather than the homeowners or the government. On the other hand, lenders should be helped and not allowed to fail. The basic problem is the ARM, itself. Here is what we could do right now to stabilize the market and help people stay in their homes.

1. Limit any ARM interest rate adjustments to ¼ % per year, with a maximum interest rate no higher than conventional 30 year rates, when the adjustment reaches that level.

2. Once the ARM reaches the 30 year rate, provide no-cost conversions to a conventional loan, for the remaining life of the loan.

3. Roll back all ARM adjustments for the past year, which is when those adjustments began to outstrip people’s ability to pay their mortgages.

4. Either prohibit new ARM’s completely, or require borrowers to qualify at the highest interest rate specified in the loan.

5. Limit the highest interest rate specified in new ARM’s to current 30 year rates, plus no more than 2%.

These measures would lower the number of foreclosures substantially, enabling the market to better price loan instruments. Mortgage lenders would be able to lower their “risk premiums,” freeing up cash for the credit market. ARM’s would unwind over a long period, reducing the costs to lenders. Borrowers would have an easier time obtaining credit, and staying in their homes. All involved would benefit.

Something to think about.

​

Saturday, March 15, 2008