Dave Ramsey's solution for the financial crisis

I printed a link to this in a post below, but I think it deserves a post of it's own.

The Common Sense Fix

Years of bad decisions and stupid mistakes have created an economic nightmare in this country, but $700 billion in new debt is not the answer. As a tax-paying American citizen, I will not support any congressperson who votes to implement such a policy. Instead, I submit the following three-step Common Sense Plan.

I. INSURANCE

a. Insure the sub-prime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

b. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps under-performing executives from being paid when they don’t do their jobs.

c. This backstop will cost less than $50 billion—a small fraction of the current proposal

II. MARK TO MARKET

a. Remove mark to market accounting rules for two years on only sub-prime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

b. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX

a. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

b. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down.

This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to stand up, speak out, and fix this mess.

Source URL:
www.daveramsey.com/media/pdf/the_common_sense_fix.pdf".
     

Bailout Plan and Partisan Politics

From economist Thomas Sowell:

Bailout Politics

Nothing could more painfully demonstrate what is wrong with Congress than the current financial crisis.

Among the Congressional "leaders" invited to the White House to devise a bailout "solution" are the very people who have for years created the risks that have now come home to roost.

[...]

The roots of this problem go back many years, but since the crisis to which all this led happened on George W. Bush's watch, that is enough for those who think in terms of talking points, without wanting to be confused by the facts.

In reality, President Bush tried unsuccessfully, years ago, to get Congress to create some regulatory agency to oversee Fannie Mae and Freddie Mac. [...]

Indeed. Many Republican's did. The proceedings were videotaped, it's a fact of public record, no matter how much Nancy Pelosi and others insist on lying about it.

Sowell connects the dots, but also knows that some sort of plan will have to be implemented to prevent worse consequences. But it's clear that many DID see this crisis coming:

[...] Alan Greenspan, then head of the Federal Reserve System, made the same point in testifying before Congress in February 2004. He said: "The Federal Reserve is concerned" that Fannie Mae and Freddie Mac were using this implicit reliance on a government bailout in a crisis to take more risks, in order to "multiply the profitability of subsidized debt."

Chairman Greenspan added his voice to those urging Congress to create a "regulator with authority on a par with that of banking regulators" to reduce the riskiness of Fannie Mae and Freddie Mac, a riskiness ultimately borne by the taxpayers.

Fannie Mae and Freddie Mac do not deserve to be bailed out, but neither do workers, families and businesses deserve to be put through the economic wringer by a collapse of credit markets, such as occurred during the Great Depression of the 1930s.

Neither do the voters deserve to be deceived on the eve of an election by the notion that this is a failure of free markets that should be replaced by political micro-managing.

If Fannie Mae and Freddie Mac were free market institutions they could not have gotten away with their risky financial practices because no one would have bought their securities without the implicit assumption that the politicians would bail them out.

It would be better if no such government-supported enterprises had been created in the first place and mortgages were in fact left to the free market. This bailout creates the expectation of future bailouts.

Phasing out Fannie Mae and Freddie Mac would make much more sense than letting politicians play politics with them again, with the risk and expense being again loaded onto the taxpayers.

(bold emphasis mine) As usual Sowell gets to the point without wasting words, I recommend reading the whole thing.

This crisis was created and perpetuated by Democrats. While some sort of plan or loan to prevent the worsening of the crisis may be necessary, it's vital that we see and understand WHY it happened, who was responsible for allowing it, and prevent it from happening again.


Related Links:

"Bankruptcy, not bailout, is the right answer"

'Congress Lives Up To Its 10% Approval Rating'

Our Democrat-Created Crisis: They blocked a Reform bill co-sponsored by John McCain
     

Financial Crisis: a free-market solution?

Government has a role in "steering" the economy, but when it interferes directly it often causes more problems than it solves. A trillion dollar bailout is wrong in so many ways. So what, if anything, should the government do? Here is some ideas from Edwin Feulner at RealClearPolitics.com:

A Free-Market Fix

[...] Let’s begin by noting that there is a legitimate federal role in extraordinary circumstances. There are things Washington needs to do to keep our economy functioning. For example, it was a smart move for the Federal Reserve to pour $150 billion into the system. The Fed exists, after all, to make sure money keeps moving and credit remains available.

But as lawmakers debate buying up hundreds of billions in assets, they should realize that the government’s aggressive meddling in financial decision-making is what got our economy into this mess in the first place. The long-term answer isn’t more federal control, it’s a return to free-market principles.

One way to do so is to make sure that any bailouts are as limited as possible. If a private firm is so integral to the financial operations of the economy that it requires assistance, so be it. But in that case, the taxpayers’ should be investing as little as possible, and company employees and stockholders should suffer the consequences of their bad investments.

Also, lawmakers should avoid turning the rescue package into a Christmas tree, loaded up with goodies for special interests. One proposal in a Senate bill would require 20 percent of any profitable transaction to be deposited into a special fund that pays for low-income housing. That’s a silly idea that would, in the long run, only serve to make things worse. [...]

(bold emphasis mine) It goes on to demonstrate some "silly ideas" and shenanigans that have gotten us to this point, and allowed this to happen. If the government has a role to play at all, it should be watching out for the interests of taxpayers, not saving corrupt institutions at taxpayers expense.

We keep hearing about the projected costs of a bailout. What about the projected cost of no bailout? How can you make a rational judgement about the answer to the one question without also knowing the answer to the other?

What about a third option; a limited bail-out, that does some damage control, but does not protect the unscrupulous? We have more options than just a choice between a trillion dollar bailout, or nothing.
     

The roots of the financial crisis

The short answer, from Neal Boortz:
DEMOCRATS NOT TO BLAME? NONSENSE

About Nancy Pelosi. She says the Democrats share absolutely none of the blame for the current financial goings-on. She's wrong. In fact, she's lying because she knows here statement to be untrue. I'm going to unload on this when I get back, but here's your primer:

1. Almost all of the financial problems we see today are based on bad mortgage lending. That would be lending money to people to buy homes who didn't qualify for a loan.

2. The Democrats, under Clinton, strengthened a government-created monster called the "Community Reinvestment Act." This law was then used by "activists" and "community organizers" (like Obama?) to coerce lending institutions to make these bad loans ... millions of them.

3. Now we see what happens when political "wisdom" supplants good loan underwriting. When private financial institutions are virtually forced to make loans to people with a bad credit and job history .. this is what you get. Enjoy it.

The Democrats have offered us a candidate who is very anti-private sector. Obama believes that America is great because of government and those who, like him, deride the profit motive. If Americans are stupid enough to believe his socialist drivel and put him in office .. .then we will get just what we so richly deserve. This week is just a preview.

The Democrat's chickens have come home to roost. The Republicans aren't completely blameless, as they also played their part, insofar as they supported it, enabled it to proceed. Not to mention the reckless spending of the past two Bush terms.

It's worth noting that John McCain warned about this years ago. And just as he was right in pushing for the Surge in troops years earlier, he was also right about this. He is not part of this problem, but he is part of the solution.


UPDATE:Neal Boortz used to be a real estate attorney as well as a radio host, and was closing loans for some of the very institutions that are in trouble today. With that insight Neal goes into more detail about how this crisis came about in his article at Real Clear Politics:

The Rest of the Meltdown Story

[...] OK .. so we all know that a lot of really bad real estate loans were made. The political class would sure love for us to believe that the blame here rests squarely on "greedy" (try to define that word) mortgage brokers and lenders. The truth is that most of the blame rests on political meddling in the credit decisions of these mortgage lenders.

Twenty years ago the buzz-word in the media was "redlining." Newspapers across the country were filled with hard-hitting investigative reports about evil and racist mortgage lenders refusing to make real estate loans to various minorities and to applicants who lived in lower-income neighborhoods. There I was closing these loans in the afternoons, and in the mornings offering a counter-argument on the radio to these absurd "redlining" claims. Frankly, the claims that evil mortgage lenders were systematically denying loans to blacks and other minorities were a lot sexier on the radio than my claims that when credit histories, job stability, loan-to-value ratios and income levels were considered there was no evident racial discrimination.

Political correctness won the day. Washington made it clear to banks and other lending institutions that if they did not do something .. and fast .. to bring more minorities and low-income Americans into the world of home ownership there would be a heavy price to pay. Congress set up processes (Research the Community Redevelopment Act) whereby community activist groups and organizers could effectively stop a bank's efforts to grow if that bank didn't make loans to unqualified borrowers. Enter, stage left, the "subprime" mortgage. These lenders knew that a very high percentage of these loans would turn to garbage - but it was a price that had to be paid if the bank was to expand and grow. We should note that among the community groups browbeating banks into making these bad loans was an outfit called ACORN. There is one certain presidential candidate that did a lot of community organizing for ACORN. I won't mention his name so as to avoid politicizing this column.

These garbage loans to unqualified borrowers were then bundled up and sold. The expectation was that the loans would be eventually paid off when rising home values led some borrowers to access their equity through re-financing and others to sell and move on up the ladder. Oops.

Right now this crisis is being sold to the American public by the left as evidence the failure of the free market and capitalism. Not so. What we're seeing is the inevitable result of political interference in free market economics. Acme bank didn't want to loan money to Joe Homebuyer because Joe had a spotty job history, owed too much money on his credit cards, and wasn't all that good at making payments on time. The politicians told Acme Bank to figure out a way to make that loan, because, after all, Joe is a bona-fide minority-American, or forget about opening that new branch office on the Southside. The loan was made under politicial pressure; the loan, with millions like it, failed - and now we are left to enjoy today's headlines.

So ... why aren't you reading the whole story in the mainstream media? Come on, are you kidding me? [...]

I wish he was kidding.


Related Links:

Mac on Obama and Fannie and Freddie

Guess which monkeys had their grubby little fists in the cookie jar

The economic mess: Mac is right - we need more oversight
     

The Mortgage Crisis Bailout: a Necessary Evil?

I've posted plenty about my opposition to the mortgage crisis bailout. But could it be unavoidable, because letting Fannie and Freddie fail could cause damage to stock markets world-wide, and push us all into a full-blown global recession? And will US taxpayers benefit, more than they would if the bailout did not occur? John McCain addressed this recently.

McCain: Aides may work for $1 a year
Never mind the headline (you can read the rest for that), but it was this particular part that was interesting to me:

[...] Schieffer also asked McCain about the administration’s plan for a takeover of the mortgage giants Fannie Mae and Freddie Mac, to be announced Sunday afternoon.

“I think it has to be done, Bob,” McCain replied. “I think that we’ve got to keep people in their homes. There’s got to be restructuring, there’s got to be reorganization, and there’s got to be some confidence that we’ve stopped this downward spiral. It’s hard, it’s tough, but it’s also the classic example of why we need change in Washington. It’s an example of cronyism, special interest, lobbyists, a quasi-governmental organization where the executives were making hundreds of — some, [a] billion dollars a year while things were going downhill, going to hell in a handbasket.

“This is the kind of cronyism, corruption, that‘s made people so justifiably angry. I did have a long conversation with [Treasury] Secretary [Henry] Paulson — a man I admire and respect — and he did say that when the housing market starts back up, and it will, it will in America — then the taxpayers are going to be the first to be paid off. They’re the ones that are going to be reimbursed when the values of their homes start, hit bottom and start back up, and they start getting more money back in. And that has to be in it, a vital part of it. And again, this is a system that cries out for reform.”

Of course, Fannie and Freddie are government entities that should never have been created in the first place. But the Democrats insisted on giving loans to people who were not qualified. Now we HAVE TO clean up their mess, the problem they created, to keep things from getting worse. Government should not be in the mortgage business. Why? Follow this link:

Fred Thompson on Freddie Mac and Fannie Mae

Pat gives us the most relevant quotes in the above link. I agree with Pat: Let's hope Mac has plans for Fred in his cabinet - as well as Phil Gramm.