by Tom Wise
We often hear that America is broke, that we have to dig out of this mess, and that it’s not moral to stick our children and grandchildren with the bill for our own excesses. Most of this is true. But the solutions are not as complicated, painful or dangerous as some may think or say.
First, let’s identify the problem: (1) The government spends too much on projects, both warranted and not. There is built-in cost overrun, budget projection and COLA (cost of living adjustment). There is waste, negligence and irresponsible funding. There is fraud, theft, and embezzlement. There is nepotism, favoritism, and collusion. Well, you get the picture. It’s a mess. (2) As a people, we use credit like it’s cash. We buy houses and cars we can’t afford, put gas and food on the card, and treat many luxuries as necessities. That’s when we work. Many people either don’t work or otherwise have their hand out to the federal government for “assistance” and “benefits.” Illegal aliens show up at the social service office for their undeserved piece of the pie. It’s a cycle of class warfare, the have-nots coveting the haves, using every resource at their disposal to live large or at least as tall as the next guy.
None of this would be detrimental to our economy if we had an economy. Our manufacturing jobs have been shipped overseas, along with the machinery and fixtures necessary to make anything. Our service sector has become an ad hoc consortium of temp workers and ill-trained goofballs. Unions demand wages which were in vogue and affordable 40 years ago, while producing merchandise half as worthy. Entrepreneurs drown in a mountain of red tape from local to federal officials, then compete for a scrap once the hurdles are overcome. Meanwhile, foreign entities entice corporations overseas with cheap exploitable labor, low tax rates, easy regulation and a judicial system that protects nobody. China manipulates its currency and tariff system, OPEC manipulates energy, and our own federal agencies manipulate the American labor force.
The end result is that we’re high on the hog while earning a pittance.
Don’t get me wrong – I have nothing against the vagaries of capitalism. It’s a hell of a lot better than living under the dictatorship of the proletariat (socialism on the way to communism) or the gold dinar (Arabic sharia law) or any eco-centric utopia which never has and never will fly. However, no one is telling the American people that it’s time to pull back on the extravagance, but at the same time there is another faction screaming that compassion is being trampled by thriftiness! Capitalism can’t right itself under those circumstances, and will probably continue to drift into oligarchy as long as our elected officials are purchased through tax lobbyists rather than kept straight by informed and active citizens.
So, what’s the solution? As I see it, we need an economic reset. This has been kited a number of times but never with the vigor such a suggestion demands. In fact, most plans of this sort are mealy-mouthed paeans to the current financial apparatus while simultaneously bad sermons to impudent punks. Basically, most who approach a grand solution to our ills plead with Wall Street while preaching to Main Street. This won’t work and it won’t do. Instead, let me give to you this bold idea:
Scrap the mortgage system.
Let’s face facts: Even at 5% APR, a homeowner pays over a 30 year period about double the asking price ($386,000 for a $200,000 purchase), not counting taxes, insurance, maintenance and repairs. There are two inequities here: (a) The lending institution is making a profit by loaning money not its own. It’s bad enough that the lender is actually a passive earner, but in most cases the mortgage writer receives its infusion of capital from the Federal Reserve (the Fed), and this consortium of banks (not government agency) creates these dollars out of thin air. They don’t even truly “print” money anymore but just adds zeroes to the account of whomever is in a position to ask (not you). Thus, the homeowner must work for decades to pay off an initial liquidity position, that is, to pay off the loan. The Fed has risked nothing (except perhaps reputation and certainly the strength of our nation), and the bank little (the mortgage will soon be bundled and sold to another investor), but the homeowner is at risk every month to lose his or her home. (b) The interest paid to the lender is capital not available to the homeowner and to the nation. Assuming thrift, that interest could be placed in savings for college education, medical emergencies, starting a business, or simply retirement. But that sum will never go anywhere except to the mortgage department, where it will be used to build offices, pay employees, and entice further suckers (ahem... I mean, help generations of Americans).
Again, don’t get me wrong. Any business that offers a service has the right to expect payment for it, handsomely if they can extract it. However, there is currently a monopoly hold on the structure. The Fed controls capitalization by its Fed funds rate, the banks control the mortgage industry as a consequence of this capitalization (that is, to lend at interest is justified by borrowing at interest), and the government controls the flow by means of the “mortgage interest deduction” on income tax, a scam if ever there was one. There is a better way.
I would allow banks to charge only a service fee, not perpetuate an ongoing mortgage interest plan. If, for example, a borrower needed $200,000, a lender might charge 25% flat fee, or $50,000. This could be financed by amortization, without interest. The key is the Federal Reserve. Banks must be capitalized, but if they are charged interest it is unfair to ask them not to pass on that cost; and since rates bounce around, it’s only natural a bank’s APR change day by day. But what if the Fed charged not interest but also a fee? Is that so insane? It’s not like the Fed borrows the money, they simply “invent” it.
How high can the bank fee fly? That is negotiable, but certainly even asking 50% from a potential borrower is not out of the question. At that rate, a $200,000 loan would cost $300,000, much less than the $386,000 due at 5% over 30 years. Good old competition and economic conditions can keep fees manageable, and a bit of federal regulation should be put into place to keep collusion out of the system.
Now, it gets better. Without mortgage interest, there is no necessity for a mortgage interest deduction. Without that linchpin, one which most Americans expect, the entire tax code may be overhauled. The mortgage interest deduction is in reality only a way to keep borrowers hooked to an archaic system of home ownership. The ability to lower one’s tax burden is enticing but is valueless if one is able to save and grow without it. This teat can and should be removed from the mouth. Instead, a flat tax or Fair tax (national sales tax without income tax) can replace the behemoth in place. The federal government should not cry foul either, since it is this deduction which permits nearly 43% of the population from “paying their fair share.” And, with a flattened tax rate, no one is mortally wounded.
The borrower would be greatly empowered. All things (wages, inflation) being equal, extra liquidity (cash) would grow the American economy in a dynamic and diverse manner. Allowing for creativity and freedom to profit, there is no reason many craftsmen and industrialists shouldn’t invest in their own future. The more, the merrier. If the market should demand fruit vendors, the capital would be there. If a small appliance found favor, its production even in limited numbers should be possible. Such a service, agricultural or manufacturing base may seem small, but multiply this by thousands and soon America would be supported by its own might rather than by chintzy foreign goods foisted by soulless multinational corporations. Not that such mega-entities should perish but their power should and must be diminished, for the good of all.
The Federal Reserve would also be muzzled. Since there would be no necessity for an institutional lending rate, the Fed would not be able to manipulate markets by monkeying with interest rates, keeping them artificially low to attract capitalization or high to bring in bond buyers. The market can and should set the levels at which money is available. The interest rates on other than mortgages is in any event better set by local lenders who understand the community. As for money supply, there is no one alive who would argue that this is overinflated to the point of absurdity. A system such as I have described would at least bring the “printing presses” to a manageable speed, if not a halt. The resulting burst of certain bubbles is nevertheless a necessary consequence in allowing free markets to determine value by putting a stop to bailouts. This applies doubly to business failures, even at the highest levels. If such entities have some intrinsic value, and the Fed (in its infinite wisdom) decides to lend out funds, let it be at reasonable service fee rates, not manipulated interest rates which give strength to weak currency and weakness to actual commodities. The machinations here are complex but the solution is simple, if extreme.
It should be mentioned that I am not advocating for loose lending. In no case should any potential borrower be permitted to evade a qualification procedure of good repute and just fairness. Special favors should be reserved to those who can afford to take chances, who have collateral. This is just good sense, not class warfare. If any proof is necessary to the danger of imprudent lending, the decades 1990-2010 ought to suffice.
Finally, the national debt. If the power over interest rates is removed from the Federal Reserve, the Congress of the United States would not be able to count on unreal funding. The Fed with only the power to charge fees might still apply minimal credit standards for Congress but that’s OK as long as things like “long-term interest rates” are abrogated from that body. Now, if the Fed is prohibited from that practice, the Treasury would be likewise bound. Therefore, T-Bonds would be sold as promissory notes rather than indenturing instruments. The national debt would instantly be paid by these notes, and the amount would be forwarded to a settlement date. Thus, the $300 billion in interest payment currently due might become bundled as a balloon payment later. Such a move would put the United States in a greater position to pay its international and national debts, keeps its current promises re entitlements (they still need major overhaul), and restructure still more systems. The revamped tax code would likely bring an increase in revenue, making this payback accelerated.
There is still the issue with politics, but this is a project for another day. In short, however, it rests with the people. Even such a drastic change as the dismantling of the mortgage system will not save the nation if citizens do no actively and en masse decide that corruption cannot claim the day. The people must elect representatives and other officials who will adhere to strict Constitutional ground. This includes slimmer government, fewer entitlements, fair taxation, correct regulation, protection for the Bill of Rights, and defense of our borders and necessary friends. It means putting many federal workers into the private sector, ceasing mismanaged retirement and health care schemes, allowing entrepreneurs and inventors the ability and protection they need to succeed against the rapacious Chinese, keeping vigilant over the tyranny of the Executive branch, and keeping our hemisphere friendly and helpful.
Thank you. Come again.
