Difference between revisions of "Notes:Putting National Debt Into Perspective"
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| − | Those on Medicare or food stamps may come to mind—but I ask you to think again. There is almost no limit on whom the Executor considers to be needy. Take the home mortgage crisis for example: | + | Those on Medicare or food stamps may come to mind—but I ask you to think again. There is almost no limit on whom the Executor considers to be needy. Take the home mortgage crisis for example: |
::One of the major factors in this crisis was subprime loans, and many of those went to people who, most would agree, were needy. On the other hand the Government, through Fannie Mae and Freddie Mack, implicitly backed the Option-ARM loans of those folks buying million-dollar condos in Miami. | ::One of the major factors in this crisis was subprime loans, and many of those went to people who, most would agree, were needy. On the other hand the Government, through Fannie Mae and Freddie Mack, implicitly backed the Option-ARM loans of those folks buying million-dollar condos in Miami. | ||
Revision as of 12:09, 5 June 2014
Contents
Even the national debt can be a good thing. Only once in our history—in the early 1800s—was there no national debt—and for the most part, that debt worked out well. But its increase since the mid-70s and particularly in the last three years is alarming to the utmost. It was a major reason for our recession and our weak recovery and we are now well down the road to government default similar to that of Greece—the world’s first democracy. 2014/06/05 User:Tharrisn
I want to share a little humor with you. I have a minister friend who claims to have a one-of-a-kind Bible which includes the book of Second Habakkuk. His imaginary book includes all those Scriptures that are often quoted but cannot be found in regular Bibles, such as: “God helps those who help themselves” and “Cleanliness is next to Godliness.” So, here is a parable from Second Habakkuk:
The Parable of Us
A rich old man dies and leaves a trust fund to help those of his descendants who are in need—for many generations to come.
You are the Trust Executor and you want to please the family so you can keep your job—so you are very generous in helping the “needy”—thus making lots of happy family members.
After many years the investment returns are no longer keeping up with the needs, so you decide to borrow money to meet the needs, but, to keep the investment portfolio strong, you have each of the “needy” folks cosign a note—hidden amidst all the paper work—without knowing that they’re doing so.
Things worked out for a long time because the investment portfolio was paying off the interest on the loan—plus a little. But then the stock market crashed and the total loan became greater than the value of the investments. So all those whom the Trust had “helped” now owe all that money the executive had them borrow without their knowledge—a debt that they never realized they had—and which caused them to buy things they never would have bought if they had known the truth.
Think of the Executor as the U.S. Government
Think of the Banker as China—and others
Think of the borrower as you—and others
Question: Do you think you, as the Executor, should have done a better job in using the funds to help the needy?
This parable applies to the National Debt in general and to Home Mortgage indebtedness in particular.
Now think of the needy.
Those on Medicare or food stamps may come to mind—but I ask you to think again. There is almost no limit on whom the Executor considers to be needy. Take the home mortgage crisis for example:
- One of the major factors in this crisis was subprime loans, and many of those went to people who, most would agree, were needy. On the other hand the Government, through Fannie Mae and Freddie Mack, implicitly backed the Option-ARM loans of those folks buying million-dollar condos in Miami.
- The bottom line is that our politicians, in an effort to make us happy and keep their jobs, created and backed a housing bubble that was doomed to collapse. And, all of us are paying the price in one way or the other. Many of those who have been hurt most are the very people the government claimed they were trying to help—homeowners with mortgages. Not only is this a very complex financial and regulatory issue, but it must be solved in the existing heated and divided political environment where everyone is highly incentivized to protect their own interests. To make matters worse we don’t have very long to get the job done. Our national credit rating has already been downgraded and there is no established plan to even slow the growth rate of our national debt—higher interest rates to follow!
To get at least some understanding of this as a very complex issue, the links below will help start your thinking—or, if you are like us, at least convince you that it is very complex:
<http://www.investopedia.com/articles/basics/07/subprime_basics.asp#axzz223PQu7gt>
A quote from that link:
- “The Community Reinvestment Act of 1977 and later liberalization of regulations gave lenders strong incentive to loan money to low-income borrowers. The Deregulation and Monetary Control Act of 1980 enabled lenders to charge higher interest rates to borrowers with low credit scores. Then, the Alternative Mortgage Transaction Parity Act, passed in 1982, enabled the use of variable-rate loans and balloon payments. Finally, the Tax Reform Act of 1986 eliminated the interest deduction for consumer loans, but kept the mortgage interest deduction. These acts set the onslaught of subprime lending in motion.”
Considering Indebtedness
When individuals are considering further indebtedness, there are two general considerations:
- Risk—a very complex issue in all things current and future expenses, interest rates, health risk, insurance cost than others.
- Delayed gratification which is not complex but difficult to apply.
- General National Debt considerations for elected politicians are a little different. When they vote they have different incentives. Put yourself in their shoes:
- Your greatest risk is losing your job
- Delayed gratification becomes:
- Keeping your job by doing what your constituency and major contributors want you to do or at least saying what they want to hear
- Getting elected to a better job building up your retirement fund by being reelected for many years
- Build up your investment portfolio by being re-elected and by taking advantage of “Wall-Street” investment perks offered by those seeking your vote
Thus, you tend to do and say what it takes to be reelected by your constituency and major contributors. No wonder that it’s hard to get at the truth.
- “Between January 1996 and June 2008, Countrywide Financial, the scrapped mortgage arm of Bank of America, exercised its influence by handing out hundreds of discounted VIP loans to key Congressional members, White House employees, Fannie Mae executives, and other high-ranking government officials and staffers.”
This article also provides an example of subtle bias in reporting. In listing the congressmen it gave party affiliation for all except former Senate Banking Committee Chairman Christopher Dodd, Senate Budget Committee Chairman Kent Conrad, Both of whom are Democrats and had the most power to exercise on behalf of countrywide.
National debt, your worst nightmare?
Even the national debt can be a good thing. Only once in our history—in the early 1800s—was there no national debt—and for the most part, that debt worked out well. But its increase since the mid-70s and particularly in the last three years is alarming to the utmost. It was a major reason for our recession and our weak recovery and we are now well down the road to government default similar to that of Greece—the world’s first democracy.
Here are a few measures Greece has already taken in an effort to avoid default:
- “Austerity measures implemented to combat the debt crisis last year included pension cuts; a sales tax boost; excise taxes on fuel, cigarettes, alcohol and luxury goods; tougher eligibility for disability benefits; and a hike in the retirement age to 65 from as low as 61.”
Are the problems in Greece a warning to the US?
Our Debt Crisis
There is no immediate solution for the national debt crisis, yet it remains a primary area of contention among leaders of both political parties. President Obama and most Democrat-legislators believe that the best method for tackling the debt crisis lies in raising tax rates for some and borrowing money—money which will be spent on government jobs and contracts. Conversely, Governor Romney and most Republican-legislators believe in cutting tax rates and regulations as well as cutting spending in an effort to improve the economy through expanding the private sector. Thus, providing more jobs and higher tax revenues even with some lower tax rates.
An insightful and interesting historical overview of our national debt is provided in:
http://professional.wsj.com/article/SB123491373049303821.html?mg=reno64-wsj
While it is not a serious analysis, the following is an excerpt from a rather cynical and somewhat biased analysis of the situation. It serves to show you the difficulty that our government is going to have in solving this problem and to emphasize the need for leadership in that regard. Excerpt from the introduction:
- “This year’s crop of Republican presidential candidates is offering a set of economic policy proposals that is remarkable for its failure to address real economic problems (even problems that the candidates themselves identify) and its weak economic foundations. Of course it’s unreasonable to expect Nobel prize worthy analysis from any politician, but this year’s offerings are particularly weak…”
President Obama appointed a bipartisan committee to develop a plan for economic recovery and it was completed and submitted to the president in the late 2010. The president never and/or state yet—although he frequently uses and references selected words from it to make his political case. The democratically controlled Congress never brought it to a vote. A brief summary can be seen at:
An excerpt from that summary:
- The White House’s fiscal commission’s co-chairs, Erskine Bowles and former-Senator Alan Simpson today released their draft recommendations on how to reduce the country’s budget deficit. But while the deficit, writ large, proved a potent political issue during the election season, the tough medicine recommended by Bowles and Simpson is likely to be met with more than a few raised eyebrows.
- “Their recommendations are more or less a list of the third-rail issues of American politics, including cuts in the number of federal workers; increasing the costs of participating in veterans and military health care systems; increasing the age of Social Security eligibility; and major cuts in defense and foreign policy spending. They also encompass a range of tax system reforms that have been floated by many in Washington for years to little effect, including funding tax rates reductions by eliminating many beloved credits and deductions.”
Congressman Paul Ryan, Republican chairman of the House budget committee used the basic Bowles Simpson approach to develop a pretty well-defined—although not highly detailed—plan that was passed by an overwhelming vote in the Republican-controlled House of Representatives. The Democrat controlled Senate first wouldn’t even let it come to the floor and, when forced to, voted it down—along with two other plans proposed by the Republicans—including President Obama’s budget—which was voted down 97 to nothing.
The entire Ryan plan, along with other Ryan initiatives, can be seen at: http://roadmap.republicans.budget.house.gov/
Other than the Bowles/Simpson Commission report, the cursory Google search yielded nothing equivalent for the Democratic position, but there were two discussions that give some dimension:
- An overview of the 2009 Obama plan:
- A recent description of where the candidates stand—in political language of course—can be seen at:
