Economic Recovery Without QE3 Or The Bush Tax Cuts

Economic Recovery Without QE3 Or The Bush Tax Cuts.

ZERO INFLATION TAXATION POLICY

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When inflation starts to occur in our economy, the interest deduction, and the tax on interest income must be decreased. This would cause the economy to become more efficient, create more real wealth and strengthen the American dollar in the world money markets. Paper profits will decrease. (Inflationary investments in housing, commodities etc., purchased with credit, that increases in price without making improvements or increasing supply). This change in our tax code would help the Federal Reserve System (Fed) control inflation and maintain employment. The Fed would not have to raise interest rates as high to increase the value of money. We need this tax policy change, before more and more people become government dependent.

To get our economy moving again, and prevent another housing bubble, the U.S. Congress needs to change the income tax laws, the Federal Reserve must lower interest rates, which they have done, and the financial institutions must be able to decrease long-term mortgage rates.  

There are three things that must be done to lower interest rates, and save our economy. First Congress must make a change to our income tax. Then the Federal Reserve must lower their interest rates to their member banks. They have already done this. The financial institutions then should be able to lower long-term interest rates to the public, after the income tax change is enacted. Mortgage starting interest rates should drop 2 to 3%, and stocks should go up as a result of the changes we are proposing!

The current credit crisis could have been avoided by a change in our income tax laws. We should enact what I call “THE ZERO INFLATION TAXATION POLICY”. This policy is a new way of correcting the current economic crisis, and controlling inflation and inflation psychology in our economy. To halt the fall in housing prices, save the auto industry and put people back to work, mortgage starting interest rates must come down 2 to 3% when the financial institutions restructure the mortgages, at the lower starting mortgages rates, people’s disposable income will increase. The unemployed will be employed and their incomes will increase. Consumer’s conference will rise, and they will start spending money again. Production will increase as people are put back to work. The economy will start working again without a government bailout!  

How can we make it possible for the financial institutions to be able to lower there interest rates on long term mortgages? Banks don’t hold mortgages. They sell them to government sponsored enterprises, Fannie Mae and Freddie Mac. The GSEs sell them to investors. We must induce an economic climate so investors are willing to purchase long term bonds that back mortgages, during this economic crisis, and the inflation cycle. 

 When inflation starts to occur in our economy, the interest deduction, and the tax on interest income must be decreased. This would cause the economy to become more efficient, create more real wealth and strengthen the American dollar in the world money markets. Paper profits will decrease. (Inflationary investments in housing, commodities etc., purchased with credit, that increases in price without making improvements or increasing supply). This change in our tax code would help the Federal Reserve System (Fed) control inflation and maintain employment. The Fed would not have to raise interest rates as high to increase the value of money. We need this tax policy change, before more and more people become government dependent.

I wrote a book titled INFLATION THE ECONOMY KILLER, (>Amazon.com<) which outlined this POLICY. We need a new method of dealing with economic crisis.  Our economy has become so big, and electronically sophisticated the old ways no longer work. One of the reasons inflation exist in our economy is that we have made it very profitable. Since inflationary investment income is taxed at 15%, (long-term capital gains tax rate), money investment income, which is taxed currently at up to 35%, is worth 20% less. In fact, to offset the capital gains rate on personal residences which is at 0%, and the home’s annual appreciation rate is 30%, interest rates earned on bonds and bank accounts would have to go all the way up to approx. 45% to have the same rate of return on investment. Is it any wonder that we had a housing bubble, and the Fed couldn’t do any thing about it without destroying the economy?

The Federal Reserve, in the early 1980es, tightened the money supply enough to raise interest rates to 21%. Of course this created a recession, because normal production and consumption cannot continue under these conditions. Many people were thrown into the unemployment lines. Small and large businesses went bankrupt and the government’s responsibilities increased as more people became dependent on welfare. Even though interest rates went up to 21% they were only 100% above the then current inflation rate!

The current mortgage rate as of Dec-2008 is 6%, 600% above the current inflation rate of approximately 0%.  The economy cannot work efficiently under these conditions.

A better way to correct the current economic crisis, control inflation psychology, and maintain the value of money is by progressively reducing the interest deduction and the tax on interest income, at the same percentage rate, as inflation increases in our economy.

The balance of our economy would be maintained. Whenever the interest earned on money investments becomes 15% taxable income, money investments would be as valuable as inflationary investments. This POLICY, when used during an inflationary period, would automatically take excess demand out of the market place, slow down the economy and maintain the value of money.

When people try to protect the value of their money from inflation, by investing in inflationary investments, to receive paper profits, they create more debt (money) and more inflation. With the enactment of the “zero inflation taxation policy” normal production and consumption would continue, during the inflation cycle. Demand would be reduced from the top of the economic ladder. Demand in the economy would not be reduced by creating unemployment and bankruptcies of small businesses and the middle class. The economy would have the savings pool (money), at the lowest possible interest rate, it needs to maintain employment and raise the standard of living of all our citizens. Production would have the time it needs to balance supply with normal demand.

 The long-term capital gains tax rate would still be in effect but those people who make capital improvements and increase the real wealth of our economy would benefit from its existence. People with money stay invested in money during the inflation cycle, and  would not be making inflationary investments, because inflation would not be as profitable, or would they be making investments to protect their money from inflation. Their money would stay in the credit system of our country, supporting increases in production and normal consumption, thus maintaining low interest rates and inflation rates.

The ZERO INFLATION TAXATION POLICY would eliminate inflation psychology without raising interest rates, therefore stabilizing credit cost. This policy would not reward inflationary investment. It would encourage productive investment. It would automatically change our economy from a high credit use, and a decreased saving economy, to a system that encourages money and productive investments during the inflation cycle.

This change is exactly what our country needs right now! We need to be able to lower mortgage starting interest rates without creating another round of inflation, or a housing bubble; commodities, energy/oil bubble. We need a 2 to 3% mortgage starting interest rate drop to restructure primary home mortgages in our economy, and return purchasing power to the consumer to avoid a deep recession. 

Continue to read the comments and my replies. There are more details in the replies that you might be interested in. 

Feel free to contact me if you need additional information on the book, or for any other reason. The Book INFLATION THE ECONOMY KILLER is available at Amazon.com

Sincerely

Leonard C. Tekaat

Copyright 1992

Section One EDIT | REMOVE COMMENT # 1  Comment one smitty1:  The last thing on earth that we need is a 3% mortgage rate. Housing is a consumer good believe or not. It happens to appreciate, but the bulk of your return is being kept out of the rain. Subsidizing consumption with low interest rates has been at the root of the problem. Your assessment that capital gains derive from inflation is partially true. The rest of it is created from increasing return on fixed investments. Some of my cap gains on Microsoft are inflation; the rest is that it is a great business. Your solution has no way to distinguish between the two.Answer for Comment One happyashell: The reason that long term mortgage starting interest rates need to drop 2 to 3% is to put a floor under housing prices. This is the rate that housing becomes affordable. The inflation rate is 0%. Historically interest rates have been maintained from 20 to 100% above the inflation rate, Currently they are 600% above the inflation rate. The purpose of The Zero Polivy is to change taxation policy automatically as the economy changes from a recession to an inflation cycle, without the Fed or government intervention. As far as the capital gains are concerned, your Microsoft investment is a productive investment. The point is that when the economy enters an inflation cycle, people start making inflationary investments creating more inflation. The use of credit, to leverage these investments, decreases our savings pool for non-productive reasons.

Section Two EDIT | REMOVE COMMENT # 2 COMMENT TWO Smitty1: Lower interest rates… See Japan circa 1990. We need to (a) increase national productivity, wages (b) increase the return on capital, wealth (c) increase the productivity of housing. Lowering interest rates does nothing other than forces lenders to subsidize people living beyond their means. This isn’t part of the solution. It is the problem. Your solution doesn’t fix housing; it simply lets it deflate more slowly.ANSWER to TWO happyashell: the banks under my proposal do not subsidize The 3% mortgage starting interest rate. The Fed is loaning money to the banks at .25%. If the banks hold on to the mortgage they are marking up their product 12 times cost. That means the banks would be making a 1200% short-term profit with a 3% mortgage rate. As the interest rate go up each year the market value of the mortgage goes up, and the banks will make a profit when they sell it. The 3% rate would increase the number of buyers interested in purchasing a house. The foreclosure inventory would be quickly absorbed. The loan would be a 30yr fixed rate after the first 7 years. (In the 50s we had 4-5% mortgage rates). It would be the banks responsibility to make sure the new buyer could afford the loan. The problem of the excess supply of houses would be solved without a taxpayer bailout. It would not be beneficial at this time to increase the production of housing since we have excess supply, and to little demand. There are two things that can happen to increase demand in an excessive supply situation. Number one; let the price fall until the property becomes affordable or number two; you can lower interest rates until it becomes affordable and then refinance, as much as possible, the entire economy, at a lower rate, to release more purchasing power to increase demand. Continuing to allow the price of housing to fall would cause a complete re-valuation of the economy. Meaning state, county, and cities would lose their tax base. They would have to raise taxes on everybody left standing, borrow money and create civil projects to put money (demand) back into the economy, or layoff thousands of employees, making a recession into a depression. The last four letters in American is I CAN! ….WE CAN DO THIS TOGETHER or as a Nation. When you take out the fear factor and the inflation premium out of interest rates, they will come down. The Zero Inflation Taxation Policy takes care of both of these problems. A great president once said, “The only thing we have to fear, is fear its self.” Smitty, When I say a possible 4% mortgage interest rate, this would be the ideal rate. The markets would have to determine how low the rate could go. I just wanted to point out that the banks would be making a profit based on that source of funds. A lot of money could enter the market place, based on the trillions of dollars of value that have been lost, before inflation would be a problem any time soon.

Section Three EDIT | REMOVE COMMENT # 3 Comment Three: Smitty1and Bosterd, What is your ideal rate to fix the auto industry? We have lots of unsold cars. Your entire theory is what Allan Greenspan did, and it is the cause of what we are suffering. Lowering interest rates on a consumer good is inflationary. You can call this idea zero inflation just as you can call a boat a banana. This is a subsidy. Subsidies do not create demand, they shift existing demand around. So you will have people in $700,000 houses that can’t afford a cot. Is this really a good idea? On your comment “It would take an additional 50% further drop in housing prices to bring down the 6% monthly payment to equal the 3% monthly payment.” Are you really trying to imply that interest rates are dollar for dollar the same as principal amounts? In your assumption, banks borrow 100% of mortgage funds from the Fed to lock in their interest rate spread of 200%…how do you account for a bank’s oppty cost of being able to invest in anything they want that has a much better return than 3%…. could probably lock in bond values with much better returns and less default risk…. to Smitty’s point, when Greenspan finally steps up and admits that he held interest too low for too long…. how can the assumption be made that it would be good to lower interest rates even further. Inflation isn’t good for the economy, but it is Risk that is the killer. Capitalism as a pet likes to be fed stability and confidence. Risk is sand in the machine. In a micro sense, my lawn guy first got killed by rising oil prices, and now is getting killed by lower oil prices because he can’t adjust his pricing quickly. He can’t reprice down because he knows that oil may rise quickly again. That is a micro. But look at GM; oil prices rise so they shutter an entire plant making SUVs. They retool a plant for high MPG cars, and now Americans don’t want them either.  ANSWER to Three happyashell: 6% X $200,000.00=$12,000.00 divided by 12 mo.=1,000.00 mo. Int. payment. 3% X $200,000.00=$6,000.00 divided by 12 mo.=$500.00 mo. Int. payment. $100,000.00 X 6% = $6,000.00 divided by 12 mo =$500.00. Each monthly principle amount is the same, on either monthly payment, to payoff a 30yr fixed rate loan, so that amount would be added to the monthly payment to pay off the loan in 30yrs. On a 30yr loan the first monthly principle amount, subtracted from the balance due, starts out small and increases as the unpaid principle amount decreases and the interest amount decreases. By refinancing the economy at the lower mortgage starting interest rate, consumer’s purchasing power will increase and the economy will start working again. The consumer is a major part of economic activity in the economy. As for the banks seeking higher rates of return; a profit is a profit is a profit. As far as Greenspan’s statement, he was correct in saying he was wrong. He was the Chairman of the Fed and did not realize how important it was that Congress had changed the income tax laws by allowing the capital gains exclusion of $500,000.00 on personal residences. There was no way, unless he had done it in the very beginning of the housing bubble, he could have raised interest rates to overcome the paper profits that the home buyer could make. They were willing to pay ever-higher prices for homes. Even though the investor did not have this exclusion they were making a very good return on their investment. Some of them even lied on their credit applications to obtain the capital gains exclusion. I believe the capital gains rate should apply to all personal residences, to correct this imbalance.                                                                                                                            The ZERO POLICY would help control the excessive use of credit and low savings rate that occurred now and in the 70es, before the exclusion was enacted. The Fed uses a sledgehammer approach to drive in a tack. The setting of interest rates is not an exact science. Many times the Fed is wrong and the economy (people) is hurt by it. The ZERO POLICY works with the Fed to make the process more accurate.In the 50es the economy was working on a lower interest rate structure.Interest rates were not being subsidized. When President Kennedy was elected he applied Keynesian Economics principles to the economy to end the recession. The Federal Government has continued to do this every time there was a recession. John Maynard Keynes gave us a theory that worked to get the economy back up on its feet, but did not leave a handbook on how to correctly slow down the economy’s boom period, without causing a recession. The ZERO INFLATION TAXATION POLICY offsets all of the stimuli that the Congress has enacted, without their intervention, to bring the economy out of recession, much more smoothly than the Feds high interest policies. High interest policies go to far, causing another recession. The automobile industry will recover as the economy recovers. With interest rates lower, and as people regain their disposable income, they will buy more automobiles. The automobile industry has many new products, they will come out with in the coming years that will change the way we transport ourselves. Out with the old, in with the new!

Section Four EDIT | REMOVE COMMENT #4 COMMENT Four: Smitty: First, oil price swung because our govt is run by idiots who let it run. Supply and demand works great for widgets. Price rises and demand falls. In the case of necessities, price rises from scarcity create demand. It also shrinks supply. The result is an unstable economic model in which prices rise rapidly, and then collapse. What we saw on oil is called hording, where all of the speculators go to one side of the trade. We don’t agree on what the last 20 years were. It was a liquidity bubble, which you would like to re-create. Liquidity first went into stocks particularly technology, then into housing, then into everything from art to bonds to commodities. You still didn’t answer my question. What is the appropriate interest rate to fix the auto industry? Once you figure that out, you can tell us what the correct interest rate is for retailers – who are in a mess as well. And you aren’t fixing housing, other than by creating a bigger mess in the autos, retailers, and every other sector of the economy that depends upon credit.ANSWER To Four happyashell: I agree with you it was a liquidity bubble that has caused the current economic crisis. I agree with you that Greenspan maintained interest rates to low for to long. I agree that a lot of people bought houses that they couldn’t afford. The current system failed us all. I do not want another liquidity bubble to form. You are not considering what the effect will be with the change in the income tax I am purposing. What I also don’t agree with is how government uses the income tax to facilitate an economic recovery and then leaves the peddle to the metal, creating inflation. The main thing I am trying to do is change the way the credit bubble is controlled, before it becomes a bubble. The Fed doesn’t have all the tools it needs to control inflation and maintain employment. It needs the income tax to change as inflation begins to be created. We have gone through the cycles of recession and inflation over and over again. Only a crazy person does the same thing over and over again, if something doesn’t work. If interest rates come down so be it. It is not the main reason I wrote the book and developed the Zero Policy. We have to stop tearing our economy apart and rebuilding it again, over and over again. The currant policies are not efficient. It creates more and more people that are government dependent. The automotive industry is hurting because people have the fear of losing their job and a lack of disposable income. Maintaining a roof over their head is more important than owning a new car. It is not interest rates. The auto dealers have all kinds of low interest rate and rebate programs, yet new cars and trucks are not selling. You are right, high gas prices didn’t help, although lower gas prices haven’t improved things either. On your comment on oil prices; Normal consumption does not cause wide swings in prices as we have seen in the last year, unless you have a major disruption in supply and demand stays the same. This has not happened, only rumors. I think the price of oil is changing so quickly because there is too much money moving in and out of the market. Some of it is caused by the fear, of the devaluation of people’s store of wealth. Leveraged opportunity investors join the fear investors, and then the retail investors join in. Which creates abnormal demand. This is why I support a policy that states if a person wants to invest in commodities they should pay the total amount of the contract with cash, not 5% down and the rest financed. The economy has turned into a game of Musical Chairs. Who is going to end up holding the worthless debt (money)? It is all made up of promises, be it dollars or promissory debt. This is why it is important to keep the economy working, so everyone can keep his or her promises. Investors start the bubble and then every one else joins in to make the paper profits. Every recession since World War Two has been caused by excessive credit use. The Fed does not raise interest rates because of an excessive supply and excessive competition; it raises interest rates to reduce demand. They reduce demand too much, which causes another recession.

Section Five EDIT | REMOVE COMMENT #5 COMMENT Five Smitty: You have two different ideas here. The Zero Inflation control is theoretical. It assumes that you know what the inflation rate is. Congress tinkers with the rate to an extent that no one really knows what it is. If you had used house prices instead of rental property as a proxy for CPI, the CPI would have been in the double digits rather than the benign rate that has been reported. The real problem that this society has is that we give tax breaks to people who borrow money for business. If you pay a dividend you get zero tax breaks where as if you pay interest it is a deduction. Is it any wonder that we have private equity paying 15 times cash flow entirely paid for with debt? Your solution assumes that you have an almighty person who knows what interest rates should be. It assumes that you know which industries are worth saving and which ones aren’t. For example, a car might be considered as important as the roof when that car gets you to a job that keeps the roof over your head. Whether you start with a genius or not, all systems need to be designed to be run by an idiot because at some point they will be.ANSWER to Five happyashell:  Smitty: Were getting close to an understanding between us. Currently the income tax rewards people to do the wrong things at the wrong time in the economic cycle. This is why the Policy automatically changes the income tax as economic conditions change. You are right; the government has tampered with the CPI. It was done when President Regan was in office. They did it so it did not show the real rises in the cost of living. This way, the government programs that are tied to the CPI would not have to increase their benefit payments and the employees could not ask to be paid higher wage, based on the CPI. Just because the government has changed the way it figures the Consumer Price Index, by removing housing and energy cost, does not mean that HIGH INFLATION has not occurred in our economy, in the last 25 years. Marc Faver, the noted author of GLOOM, BOOM and DOOM Financial News Letter, and I agree that the US government does a lot, sometimes to much, to prevent a recession, but very little to control a boom. A boom is more profitable for governments, but it leads to a recession. When the Fed steps in with their HIGH INTEREST RATE POLICY, too late or for too long, THE ECONOMY GOES BUST AGAIN, and thousands of small and large businesses go bankrupt. People lose their jobs, their homes and their hope of a better future. Believe me when I say,” The Fed knows exactly what the inflation rate is”. They even know what it is in each of its twelve districts.

Section Six EDIT | REMOVE COMMENT #6 COMMENT Six Smitty: I love Marc, and his ponytail. He is the one person most singularly responsible for me staying at arms reach of this mess. While I will agree with what you are saying, I continue to believe that your idea is a theory that can’t be put into practice. Until you have a measure for CPI, you can’t adjust your taxes. I do not agree however that your theory is sound because it fails to promote stability, which is the cornerstone of capital creation. People need to know what their taxes will be for a year. We should remove the incentives for stupidity in the first place rather than adjust them year in and year out.ANSWER To Six happyashell: I believe that we will always have the business cycle. The government uses the income tax to soften the recession. It can also be used to prevent the boom from getting out of hand. The information the Fed receives about the economy is what they now use to set interest rates. It can be used to figure the CPI. The CPI should be as accurate as humanly possible, helped by technology. The number isn’t as important as how it will change the income tax and inflation psychology. As far as a yearly tax is concerned, the adjustment would take place at the end of the year. Based on the inflation rate, the person holding the debt (money) would pay a little less tax, and the person holding the hard capital asset would pay a little more tax. The first having lost value and second having gained valued. In this way the economy would stay in balance.

Section Seven EDIT | REMOVE COMMENT #7 COMMENT Seven Smitty1: The essence of our difference is that you believe that the government is able to manage interest rates. I don’t. I don’t think it justifies the instability that you will introduce by changing tax rates/deductions. People want to know what taxes are/will be before they are willing to invest. The variable component to your idea will hurt the economy more than the management will help. Mind you, like The Glass Stegall Act, your idea will be repealed once it gets in the way of the boom.ANSWER To Seven happyashell:  Stable interest rates are more important to the economy than a static income tax system. The Zero Policy will stabilize the long term bond market, which creates a  market for home mortgages, On the Federal Reserve Notes it written, “ IN GOD WE TRUST “, it should say, “ IN THE FED WE TRUST”. Yes I believe the Central Banks have the power of life or death over the economies of the world. When a person is earning 4% interest and the Fed raises interest rates 1% the holder of the bond loses up to 25% of its value depending on its maturity date. If the Fed makes a mistake the economy gets into big trouble, as we have now. If the Zero Inflation Taxation Policy is enacted. Investors in long-term bonds and saving accounts will be assured that the interest rates will continue to be low, and the value of their investments will be maintained. The economy will continue to work efficiently. Economic opportunities will continue to be available to everyone. In this way people will be able to provide for themselves and continue their pursuit of happiness.  The Zero Policy would only change the income tax after the economy is unbalanced, for whatever reason. The effect on normal production and consumption would be minimal. It is the excesses that I am trying to contain without causing a recession. I am also making Zero Policy automatic, so it takes action before the Fed takes action with higher interest rates. Congress can’t take action fast enough, because it is a politically divided, over 545 member committee. In the beginning of any economic cycle it would take much less action to rebalance the economy, unlike what we have to deal with now. People will still make productive investments. The long-term capital gains tax rate will still be in the income tax code. The only thing I am trying to influence is the people’s attitude toward credit use, money investment and the saving rate when the inflation cycle is starting. Someone has to be willing to hold the debt (money) to finance the increases in production to rebalance supply & demand. We shouldn’t be increasing the money supply at that point in the inflation cycle. Unlike the Fed’s high interest rate policy, the excess demand would be taken out from the top of the economic ladder. People holding money, as their store of wealth, would be more willing to hold onto it and invest in it, because of the changing income tax. This change in the code would help finance the increases in production to rebalance supply and demand. High interest rates take demand out of the economy, from the bottom of the economic ladder, causing all kinds of misery. When more people want to make money investments, and credit demand is down, interest rates come down. The economy would refinance at a lower rate of interest. This is how we can obtain the lowest possible mortgage rate. The market will provide it, if the Fed will let it. We don’t need to “share the wealth,” nor do we need anything to “ trickle down to any able body person,” We need to create people with the ability and maintain the economic opportunities, so people can climb up to what ever level of wealth they can obtain and are comfortable with. If The Zero Inflation Taxation Policy is enacted investors in bonds and saving accounts will be assured that interest rates will continue to be low, and the value of their investments will be maintained.  The economy will continue to work efficiently and opportunities will continue to be available for everyone. Copyright for all the replies by happyashell, by Leonard C. Tekaat  Dec, 2008 Go to: www.foreclosurecrisissolved.wordpress.com/ for The Middle Class‘s Rebuttal Speech To President Obama’s State Of The Union Address and The letter to The Federal Reserve, How The Fed Can Do More Harm To The Economy. The People’s Economic Recovery Plan is at www.recoverygovforthepeople.wordpress.com/ At www.economysflaw.wordpress/ you will find over 25 articles, including Zero Inflation Taxation Policy. Is President Obama Making A Mistake, The Means of Exchange, Repeating the Mistakes of The Great Depression. You will find a more detailed copy of the article that appeared in the Bakersfield Californian on Feb. 14, 2011, “Solution To Foreclosures Will Decrease Unemployment And Government Deficit” at www.foreclosuresolution.wordpress.com/ or www.foreclosurecrisissolved.wordpress.com Thank you for visiting. Please click the Like button, leave a comment, and subscribe so that I can send you new posting, and keep you up to date. Thanks again. Leonard C. Tekaat If you are unemployed, your home is being foreclosed upon, or are just sick and tired of getting the “shaft“(tax bill to clean up the mess the “big boys” make), join a growing number of people that want to change the guiding polices of our economy to increase opportunities so they can provide for themselves and their families, and provide America a better financial, and societal future. The middle class does not want to become government dependent. We have worked hard to be self-sufficient. If the Financial Institutions and government continue on the path we are on, it will mean the demise of small businesses, and the middle class. We need people that are not afraid to stand up to be heard. To take a proactive position about their future, and the future of their nation. Join the R.E.B.E.L.S. it is free. Please get involved for your children, and their posterity’s future. There is a better way to improve our economy than to put them into debt to the Federal Government, which will ruin their chance at the American Dream of a better future for their posterity. Our e-mail is economysflaw@yahoo.com Connect on www.facebook.com/leonard.c.tekaat/ Our Tweet handle is: “recessionkiller”, join the conversation. Solution to; Credit Crisis, Housing Bubble, Foreclosures, Recession /Inflation To my fellow Americans: Will you support the change to the income tax law contained in The ZERO INFLATION TAXATION POLICY, that will benefit the economy, our nation, and you financially. It will increase the opportunities for you to provide for yourself, and your family. Please send a copy to President Bush, President Elect Obama, your Representatives in Congress and all your friends and anybody else that can help get the word out.

SEND A MESSAGE TO THE PRESIDENT AND CONGRESS LOAD AND CLEAR

You Can Help Our Nation’s Economy Recover, Send A Message To The President And Congress 

To send the President and Congress a message loud and clear: 

E-mail www.WhiteHouse.gov/ or call the WH comment line 1-202-456-1111, and say some thing like this: 

“I have read an alternative economic recovery plan that will work better to decrease unemployment and stop the rising number of foreclosures than the current policies. The Plan does not rely on increases or decreases in taxes, more deficit spending, or the Federal Reserve’s  use of quantitative easing. I want the economic policies outlined on www.recoverygovforthepeople.wordpress.com/   , enacted before our economy gets any worse. I do not want the Federal Reserve to create inflation with quantitative easing. It will make Americans poorer and cause the government to have more dependent people. More government dependent people will cause our taxes to go up, or the deficit to get larger!

I want the government to listen to the people, not the special interest lobbyist, that only have their financial betterment in mind; not what is best for our economy and our great nation.”

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If You Are Disatisfied With Obamanomics, Read This

Is The Sun Setting On Our Economy?… Not If We Join Together And Change The Future!

Two Questions Need To Be Answered To Solve The Unemployment and Foreclosure Crisis.

What and who really started the primary home price bubble?  How can we stabilize home prices, and help prevent more foreclosures, and improve the unemployment rate without a tax reduction, a tax increase, or by increasing the federal deficit? 

The reason that the economy is not responding very well to the deficit spending stimulus recovery plan is because we continue to use the same Keynesian policies that we have used in past recessions. The Great Recession of 2008 is not the same as previous recessions. It was not caused by lack of demand, or over-supply.

The Great Recession of 2008 is similar to the Great Depression of the 1930s. As in the Great Depression of the 1930s, this recession was caused by a collapse of a credit bubble. If we continue on the same path that we are on, with bigger deficits, it will not turn the economy around. On the path we are on, I believe we are headed for a complete collapse if interest rates are raised. High inflation if interest rates are not raised, or hyperinflation when the Federal Reserve monetizes the federal government’s deficit.

You will find the answer to how the primary home credit bubble was created in the next chapter:  To Increase The Disposable Income And Confidence Of The Middle Class, Without Tax Increases, Tax Decreases, Or By Deficit Spending

We have two major problems. Getting the economy re-started, to create private sector jobs without creating more money, which will create high inflation, and inflation psychology. The other problem is: How do we slow down the economy, after it is up, and running again, without higher interest rates, which will cause the economy to collapse again. 

If President Obama wants the economy to improve, the middle class’s, and small businesses’ financial condition must be improved. His effort to get the economy moving again is faltering because he has been miss guided by the financial capitalist advisors that surround him.   We need to increase tax revenue, not by raising taxes or lowering taxes, but by increasing productive economic activity, by increasing demand without increasing the federal deficit, or the money supply. We do not want to create more paper profits as we have done in the past, to end previous recessions. 

By targeting a temporary ascending interest rate reduction for mortgages to the sectors of our economy that are having the most difficult time recovering, the primary home sector, and the consumer, this will allow the economy’s third leg (enterprise sector) to restart the economy again. The primary home sector of our economy is where the economic crisis was created, and where the credit bubble collapsed. We have not address this part of our economy in the correct way. I will explain.  

You might be thinking that mortgage interest rates are at a historical low rate. The spread between the cost of funds from the Federal Reserve, and the current mortgage rate needs to be much lower. Even then it would be at a historical high. When interest rates went to 21% for a mortgage in the early 1980s, that was less than 100% above the then inflation rate of 12%. Currently we have home prices that are still declining, yet the interest rate for a 30 year fixed rate mortgage is 450% or higher, (4.5% for the most credit worthy people), above the home price deflation/inflation rate. The banks can borrow money from the Fed for under .25%. They can loan it out for mortgages at 5%, that is a 20 times increase between the cost of funds and the sale of funds. Let me give you an example. If an auto manufacturer produced a car for $20,000.00, the sale price would be $400,000.00 marked up 20 times above the manufacturing cost. The financial capitalist businesses can pay enormous bonuses because of these huge profit margins. The profit margin on other consumer, and business credit is even greater. Take for example credit card rates. At an annual interest rate of 25%, the same car would sell for $4,000,000.00. You are not seeing things. It’s six zeros.

The economy should not have to be in a depression for the economy to have interest rates low enough to stimulate the economy. The banks have failed to pass through the low Fed rate to the main street economy, even through 98% of the new home mortgages are either being sold to, or guaranteed by government housing agencies. Since the terms of most mortgages that are purchased by government agencies are determined by the agencies, Fannie Mae and Freddie Mac, and government housing agencies could be used to offer a lower starting mortgage rate. If the agencies offered to purchase a primary home mortgage with the terms outlined here later, banks would offer it to the public. 

Our government was created by the people; for the benefit of the people. It was not created to only benefit the financial capitalist. The government does not have to make a profit from a program, for it to be beneficial for the people. A program has to make sense, and break even without burdening the people with increased taxes, Why cannot our government agencies be used, in the most efficient manner, to lower mortgage starting interest rates? Why can’t the government agencies invest in our new, and modified mortgages, which will increase in value, and earn interest to pay for the operating cost of this program? Why could not the housing agencies modify, or refinance people’s underwater mortgages at a lower starting interest rate. The banks won’t do it unless Fannie and Freddie, and the other government housing agencies offer to buy the mortgages with the new terms, outlined in the chapter, How To Increase The Disposable Income And Confidence Of The Middle Class .

It wouldn’t cost the taxpayer, or the government any money, because the program would be supported by the interest payments, and the increases in the value of the Mortgage Backed Securities that the government housing agency will be investing in, the same way The Home Owner Loan Corporation was supported in the Great Depression.  The Home Owner Loan Corp. closed down in the 1950s returning the excess money they had collected to the US Treasury. It was a very successful program. Posted on my website, in one of my articles, is a review of my recovery plan by CSUB Economics Professor Mark Evans. You can locate it on my website www.economysflaw.wordpress.com There is also an article on the web about the Home Owner Loan Corp.

Banks are not risk takers. They will only loan money when the collateral is maintaining, or increasing in value. If collateral prices are increasing, they are more than willing to loan you money. In fact banks don’t want to stop loaning money out, because this is how they earn their money. They don’t know how or are not willing to slow down the creation of money (debt) correctly, because they will be less profitable. I have no problem with people and banks making a profit. But as we have learned the creation of too much debt can destroy an economy.

Credit underwriting standards should be maintained not lowered as the economy improves, and collateral values increase. If home prices increase more than 2 to 3% a year, raise down payments requirements, and underwriting standards. This will allow production the time it needs to catchup with demand.

The mortgage unpaid balance reduction program for underwater mortgages, as outlined in my other articles, will end in 10 years, or less, without increasing our taxes. As the financial condition of the middle class improves, so will the financial condition of the banking service industry. A bank is only as strong as its customers, the value of its collateral, and capital. 

A lower starting home mortgage rate will increase consumer’s disposable income. As the economy improves, the foreclosure inventory will be eliminated. Since we will be modifying the mortgages, we will not be increasing the money supply, therefore the chance of creating hyperinflation will be decreased. We will be increasing people’s disposable income, but at the same time we will decrease their desire to use credit, and increase their desire to hold money as a store of wealth, during the inflation economic cycle, (as explained later) which will decrease the ability of the banking industry to over leverage the money supply during the inflation cycle. 

Because of the “standard deduction” and the exclusion of so many people from the income tax rolls, the upper middle class, the rich, and investors use the mortgage interest deduction to purchase primary housing, and buy single-family homes as investments. This extra stimulus/demand in primary housing is needed when the economy is experiencing a recession, but not when it is experiencing inflation. By using the income tax to reduce demand from the top of the economic ladder, with an automatic change in our income tax system, when inflation begins to occur, will make our economy more efficient, productive, and raise all of our citizen’s standard of living. 

We have a flaw in our economic policies. We have a dynamic economy that is changing from recession to inflation over the years. Yet we have an income tax that is static. The Flat Tax, and the Fair Tax are also static taxes. The stimulus that is enacted in a recession to improve the economy is left in tact as the economy moves into the inflation cycle. This causes the economy to heat up too much, and the economy collapses into a recession, or a depression. Our economy experiences Gloom, Boom, and Doom economic cycles. 

In the past the Federal Reserve used higher interest rate policies to control inflation in our economy. This policy reduces demand from the bottom of the economic ladder, which causes untold misery, and hardship for the middle class, the poor, and small businesses. Thereby increasing government dependency, and its deficit. Relying only on the Fed’s high interest rate policies to control inflation is an obsolete policy, and it should be changed.  

To Increase The Disposable Income And Confidence Of The Middle Class Without A Tax Cut, Tax Increase, Or Deficit Spending 

President Obama, and the financial capitalist stimulus plans are not working as well as they had hoped. Their plans are not lowering the unemployment and foreclosure rate. President Obama has surround himself with financial capitalist advisors. The financial capitalists have written the current recovery programs to benefit them, not Main Street. The recovery program I am purposing will help the banking sector, and main street. 

An economic recovery plan must increase productive economic activity, and the disposable income, of a majority of the people in the private sector of the economy, which will reduce unemployment, and foreclosures, by increasing aggregate demand.   

What Must Be Done To make Our Economy Better For All Our Citizens? 

 #1. Create a new mortgage that fits the current economic conditions. The mortgage would have a starting interest rate of 3%. The interest rate would increase at 1/4% a year for seven years, and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to most homeowners that could qualify, even those people who their mortgage is underwater. 

The Federal Reserve, US Treasury, or a new Home Loan Corp. (Fannie and Freddie were created for this reason), would purchase the new MBSs until the housing market stabilized, and then sell them to investors when the interest rate on the securities increased to 5%, and the value of the homes were 10% greater than the mortgages. This mortgage would increase middle class people’s disposable income, and confidence, thereby increasing productive economic activity, which would reduce unemployment by increasing demand for products, and services. The mortgage-backed securities the Fed currently holds would increase in value because they include mortgages that have a higher interest rate than the new mortgages will have. The Fed needs to sell the Mortgage Backed Securities that they currently hold. The purchase of these MBSs did not increase the disposable income of a sufficient number of people, to improve the financial condition, and confidence of consumers to restart the economy.  

#2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to 10 yrs, or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate, and terms would be the same as the first lien holder. A modification agreement letter could be used for most mortgages that are held by the banks and federal agencies, and have not been securitized. I believe that the investors that hold securitized mortgages will prefer this program, than a possible foreclosure. The banks, and F&F that hold securitized mortgages should also prefer this program to the short sale. 

Under the current economic conditions I would send out modifications letters without the existing homeowners having to qualify at the 5% interest rate. Only new home buyers or people who must refinance their home, should need to be qualified. This policy will eliminate the problems that the government’s HAMP program has experienced. The policy will immediately increase people’s disposable income, and reduce the number of foreclosures, and nonpreforming mortgages. 

If after the modification terms have been agreed to by the homeowner, and the mortgage is still a nonpreforming asset, contact the homeowner with a follow-up letter to have them come in, to discuss the matter, and qualify them. If they are not going to be able to make their new mortgage payment, serve them a Notice of Foreclosure. The homeowner will have time with an improving economy to improve their financial condition or get a job. If they know that the new terms and the principal reduction clause will be available, they will be more motivated to not give up their home.

This policy will greatly reduce the work load of the mortgage servicers, and the court system. The policy will reduce the billions of dollars the financial institutions are losing on foreclosure cost, and short sales. The economy, financial institutions, and the homeowners will benefit also, because the housing market will stabilize, and they will not see more of their equity disappear. The local, state, and federal government will benefit, because their tax base will stabilize, and their liabilities will decrease as people go back to work.

It is not necessary to mark the mortgage down to the current market value of the home as long as the borrower has hope that the mortgage will, at some point, equal the possible selling price of the home. The homeowner will continue to make the reduced mortgage payments as the market stabilizes, and the home starts to go up in value, closing the gap between the appraised value of the home, and the mortgage during the 10 yrs allowed by this program. With a 2 to 3% increase in the price of the home each year, and a 2 to 3% decrease in the unpaid balance of the mortgage, the maximum amount the mortgage that may be discounted would be 30% over a ten-year period. If you add in the 30% increase in the value of the home the total amount would be a 60% change in the owner’s financial position in the home. It could be much less if the economy improves, and the home’s value equals the mortgage amount in a much shorter period of time.

 I don’t believe there would be a moral hazard with this proposal, because the terms are being offered to everyone, and in a few years, homes would slowly increase in value as the foreclosure inventory is sold. There are several sites on the web that could be used to determine an average market value of the home. If either party disagrees with the average market value they would be required to pay for an appraisal.

#3. Enact the Zero Inflation Taxation Policy. This policy would decrease the chance of another bubble/ bust economic cycle.  It will stabilize interest rates so debt will not lose value because of interest rate increases.  People will be more willing to invest in mortgage-backed securities, and other long term debt, thereby maintaining interest rates at the lowest possible rate. Low interest rates will help the private sector maintain cost, and the government’s interest payments on the national debt will remain a smaller part of the budget, thereby not bankrupting our economy, and the government, which would cause hyperinflation to be created.  

To turn the economy around and end the Great Recession we must re-establish the disposable income of the millions of people who have lost their disposable income, and increase the confidence of the general population, so that there will be a better future. A future made up of a different set of rules. A future where jobs are available, and the economy will not be moving so fast that they cannot save, and invest without it all disappearing again, caused by a financial collapse, or inflation or hyperinflation.

What And Who Created The Housing Price Bubble

Our homes, and other real estate had become the new “gold standard.” Almost all consumer, and small business credit was established with the collateral value of our homes, and real estate. The financial capitalist in their desire to increase profits, created ways to increase the amount of money that could be created. In 1999 President Clinton and Congress changed the capital gains tax on the sale of primary homes, making it zero for most sales of primary homes. 

 It took a couple of years to get the snow ball rolling but this change gave the home owner a profitable reason to sell, and a buyer, expecting to reap the same rewards when they sold the home, brought the home without much concern about the price, because primary home prices have been rising since the end of World War Two. 

The financial capitalist with their new ways of expanding credit, were more than willing to finance the increases in home prices, thus creating enormous amounts of  “paper profits”. As more, and more people realized that easy profits could be had, it became a feeding frenzy. Banks lowered their underwriting standards, because they felt safe knowing that, because the home that was securing the mortgage was going up in value, and they could sell the mortgage to Wall St. or a government agency.

 The Federal Reserve did not do anything about the bubble, because they couldn’t do anything (as explained in article on my web site)except  collapse the entire economy.  Besides the consumer price index had been changed not to reflect the cost of owning a home, therefore even tho homes prices were going up 30% a year, we had low inflation based on the CPI, during the bubble years, so the Fed took no action at all, even if they had known what to do. I am sorry to say, the rest of the story is history. 

Home prices have been falling for over 3 years. Foreclosures, and unemployment are increasing. The Federal Deficit is growing larger everyday.  Something has to change.

If you agree that this program will be better for the economy (people), than the financial capitalist, President Obama’s, and Congress’s deficit spending economic recovery plans, send this article to your friends, and neighbors. Tell them to send a message to the President (click the contact button on the white house page), www.WhiteHouse.gov/  and their representatives in Congress www.contactingthecongress.org/ . Don’t break the chain until we are heard in Washington D.C 

Very, Very Important: To help spread the word please click the “Like” button at the top of the website.  The more people we can get evolved, the faster we can change the future. The sooner the economy improves, less taxes we, and our children, and our great, great grand children will have to pay to reduce the deficit. 

To futher help spread the message, please fill out the subscription form to my site. There is no cost to do this, but it will make it easier for people to locate my blog with, google, yahoo, and the other search engines. In this way I will be able to inform you when I post more information about this very important matter.

Sincerely Leonard C. Tekaat

Exsiting Home Sales Drop 27%

Exsiting home sales droped 27% in July 2010.  Part of the drop was caused by the end of the “first time buyer tax credit.” The tax credit is like a flash in a pan.  It adds to the federal deficit. It does not solve the home foreclosure and unemployment problem. It took years to create the current economis crisis. What is needed is a plan that increases the purchasing power and confidence, over an extended period of time, of  60% of the population not just the 40% of government dependent people, to increase demand sufficiently to put the unemployed back to work. 

On Friday the 19th of August there was an article about the price of homes and Fannie Mae and Freddie Mac.  It is my opinion that we are not using these government agencies to our best advantage to end the foreclosure and unemployment crises.

 

President Obama and the Democratic party are failing in their effort to get the economy moving again. The Democrat Party wants to raise taxes which will increase the deficit. The Republicans want to cut taxes more, but I feel this will only add to the deficit also.

I believe, by targeting a temporary interest rate reduction to the sectors of our economy that are having the most difficult time recovering, the home sector and the consumer, this will allow the economy’s third leg to restart the economy again.  

You might be thinking that interest rates are at a historical low.  The spread between the cost of funds from the Federal Reserve and the current mortgage rate needs to be at least another 1.5% lower. Even then they would be historical high. When interest rates went to 21% for a mortgage in the early 1980s that was less than 100% above the inflation rate of 12%. Currently we have close to 0% inflation and home prices are still declining yet the interest rate for a 30yr fixed rate mortgage is 450% above the inflation rate.  

The economy should not have to be in a depression for the economy to have interest rates low enough to stimulate the economy.  The banks have failed to pass through the Fed’s low interest rate policies to the economy even through 98% of the new mortgages are being sold to government agencies. F&F could be used to offer a lower mortgage rate. 

Because of the “standard deduction” and the exclusion of so many people from the income tax roles, the mortgage interest deduction is primarily used by the upper middle class, the rich and investors to purchase primary housing and buy single family homes as investments. This extra demand is needed when the economy is experiencing a recession but not when it is experiencing inflation. By reducing demand from the top of the economic ladder, with an automatic change in our income tax system, when inflation begins to occur, will make our economy more efficient and raise all of our citizens standard of living. 

We have a flaw in our economic policies. We have a dinamic economy that is changing from inflation to recession over the years. Yet we have a income tax that is stactic. The Flat Tax and the Fair Tax are the also stactic taxes. The stimuli that is enacted in a recession to improve the economy is left in tact as the economy moves into the inflation cycle.  This causes the economy to heat up too much and the economy colapses into a recession or a depression. 

In the past the Federal Reserve used higher interest rate policies to control inflation in our economy. This policy reduces demand from the bottom of the economic ladder which causes untold misery and hardship for the middle class and the poor. Thereby increasing government dependency. Relying only on the fed’s high interest rate policies to control inflation is an obsolete policy and it should be changed. 

Article 1 

A previous comment was “it is very hard to create inflation in housing.” I say it is harder to control inflation in home prices under the current government housing policies. I do not want to create inflation in housing but I do want to stabilize home prices and increase home appreciation rates to about 2 to 3% a year with the following recovery program. As we have learned in the past 2 years consumer confidence and disposable income is very important for our economy to fully recover without high inflation.

 

To Increase The Disposable Income Of The Middle Class Without A Tax Cut

Obama and the capitalist stimulus plan is not working. It is not lowering the unemployment and foreclosure rate. President Obama has surrounded himself with capitalist. The capitalist have written the current recovery program to benefit themselves not main street.The recovery program I am purposing will help the banking sector and main street. 

An economic recovery plan must increase economic activity and disposable incomes, which will reduce unemployment.  

The responsible home buyerer or homeowner did not create the foreclosure crisis, economic crisis, or the unemployment crisis. The taxpayers should not have their taxes increased to bail out the economy or to pay for a huge federal deficit. It was the Capitalistic entity (Banks and Federal Reserve) and the government that caused the Great Recession of 2008.  

What Must Be Done 

 #1. Create a stimulus mortgage that fits the current economic conditions.  The mortgage would have a starting interest rate of 3%. The interest rate would increase a 1/4% a year for seven years and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to any home-owner that could qualify, even those people that their mortgage is underwater. 

The Federal Reserve, US Treasury or a Home Loan Corp., as it did in the Great Recession, would purchase the mortgage backed securities until the housing market stabilized and then sell them to investors when the interest rate on the securities increased to 5% and the value of the homes were 10% greater than the mortgages.  This mortgage would increase middle class people’s disposable income and confidence, thereby increasing economic activity, which would reduce unemployment by increase demand for products and services. 

#2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to10 yrs or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate and terms would be the same as the first lien holder. A modification agreement would be used.  

#3.  Enact the Zero Inflation Taxation Policy. This policy would decrease the chance of another bubble/ bust economic cycle. 

For more detailed information go to www.economysflaw.wordpress.com/  These polices will not cost the taxpayers a dime.  

Leonard Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. Over forty years experience in the financial world. He is the Chairman of the Committee for Economic Reform and a Better Economic Future. 

Copy right 7-20-2010 by Leonard C. Tekaat  All rights reserved 

Article 2.

INFLATION PSYCHOLOGY, INTEREST RATES, AND PREVENTING ANOTHER BUBBLETo get our economy moving again and prevent another housing bubble, the U.S. Congress needs to change the income tax laws. The change I am purposing would allow the finanial sector to offer long term starting mortgage rates at 3% with an increase of 1/4% per year and be capped at 5%. This policy will stabilize housing prices and interest rates, lower the number of foreclosures, increase consumer confidence and purchasing power, which would reduce the unemployment rate by increasing demand for products and services.  I believe the current credit crisis could have been avoided by a change in our income tax laws. We should enact what I call “THE ZERO INFLATION TAXATION POLICY”. This policy is a new way of controlling inflation in our economy. When inflation starts to occur in our economy, the interest deduction, and the tax on interest income must be decreased. This would cause the economy to become more efficient, create more real wealth and strengthen the American dollar in the world markets. This change in our tax code would help the Federal Reserve System (Fed) control inflation and maintain employment.  In the 1980s, I wrote a book titled INFLATION THE ECONOMY KILLER, that outlined this policy. I ran for the office of California state senator in 1992 to help people deal with inflation and their financial affairs. Back then, I predicted the current problems would occur in our economy because nothing has changed in the last 75 yrs to correct the cause of ” INFLATION PSYCHOLOGY”, and the creation of “PAPER PROFITS.”  Inflation psychology is the perception that rising prices is profitable and money is losing it’s value. When people are affected by this perception, they are unwilling to put any part of their money into the credit system of our economy, to support long term debt, which in turn supports increased production. People feel that inflation is eroding the value of their money and that it must be spent or invested in the products of the economy as quickly as possible before it looses any more purchasing power. Paper profit is the money people receive from inflationary investments. (investments in housing, commodities etc., purchased with credit, that increases in price without making improvements or increasing supply)  The government has changed the way it figures the Consumer Price Index, by removing the cost of purchasing housing. This does not mean that we haven’t had HIGH INFLATION in our economy in the last 25 yrs. Home prices have increased  600% or more.  The U.S. government does a lot, sometimes too much, to prevent a recession but very little to control a boom. A boom is very profitable for governments, but leads to a recession. When the Fed steps in with their HIGH INTEREST RATE POLICY the economy goes bust again and thousands of small business go bankrupt. We need this tax policy change, before more and more people become government dependent.  We need a new method controlling inflation in our economy. It has become so big and electronically sophisticated the old ways no longer work. I submit that my idea is a real answer to this problem. One of the reasons inflation exist in our economy is that we have made it very profitable . Another reason is we have made money investments (savings and bonds) compete with inflationary investments. Since inflationary investment income is taxed at 15%, (long-term capital gains tax rate), money investment income, which is taxed at up to 35%, is worth 20% less. To offset this difference in the percentages in the tax rates, the Fed would have to maintain interest rates 20% above the inflation rate. This would mean, if the inflation rate were 12 %, interest rates would have to go to approx. 16.5% to control inflation psychology. In fact, to offset the capital gains rate on personal residences which is at 0%, and the home’s annual appreciation rate is 30%, interest rates earned on bonds and bank accounts would have to go all the way up to approx. 48.5% to control inflation psychology.  The Federal Reserve, in the early 1980s, tightened the money supply enough to raise interest rates to 21%. Of course this created a recession, because normal production and consumption cannot continue under these conditions . Many people were thrown into the unemployment lines. Small and large businesses went bankrupt and the government’s responsibilities increased as more people became dependent on welfare.  A better way to control inflation psychology and maintain the value of money is by progressively reducing the interest deduction and the tax on interest income, at the same percentage rate, as inflation increases in our economy. The balance of our economy would be maintained. Whenever the interest earned on money investments becomes 15% taxable income, money investments would be as valuable as inflationary investments . This “zero inflation taxation policy” when used during an inflationary period would automaticly take excess demand out of the market place, slow down the economy and maintain the value of money as needed. The same thing happens when the Federal Reserve tightens up the money supply by raising interest rates. But this action causes interest rates to go much higher than the inflation rate, raising the cost of credit for consumers and producers.  It must be remembered that the value of our money is determined by the amount of interest a debt is earning above the inflation rate. It is also determined by the borrowers ability to repay the debt. According to the U.S. Constitution, the U.S. Congress has the power, “ to coin money and regulate the value thereof”.. Congress is responsibile for maintaining the value of the debt (money) in our economy. If Congress continues to tax interest earned on debt or savings under the national inflation rate, it will be taxing a nonprofit. The money (debt) is losing purchasing power, by the inflation rate each year, therefore making the money investment worthless over the years. Inflation psychology should not exist in our economy. People are not responsible for maintaining the value of their money; it is Congress’s responsibility. If people try to protect the value of their money from inflation, by investing in inflationary investments, they create more debt (money) and more inflation.  With the enactment of the “zero inflation taxation policy” normal production and consumption would continue. It would have the money, at the lowest possible interest rate, it needs to maintain employment and raise the standard of living of all our citizens. The long-term capital gains tax rate would still be in effect but those people who make capital improvements and increase the real wealth of our economy would benefit from its existence. They would not be making inflationary investments because inflation would not be profitable, or making investments to protect their money from inflation. Their money would stay in the credit system of our country, supporting increases in production and normal consumption, thus maintaining low interest rates and inflation rates.  The ZERO INFLATION TAXATION POLICY would eliminate inflation psychology without raising interest rates, therefore stabilizing credit cost. This policy would not reward inflationary investment. It would encourage productive investment. It would automatically change, when needed, our economy from a high credit use and a decreased saving economy, to a system that encourages money and productive investments. This change is exactly what our country needs right now! We need to be able to lower interest rates without creating another round of inflation and inflation psychology. We need a 3% mortgage rate to refinance the economy and return purchasing power to the consumer to avoid a deep recession.  Feel free to contact me if you need additional information. Sincerely Leonard C. Tekaat E-mail address: economysflaw@yahoo.com/ Copyright 1992

Mortgage Rates Not Tax Cuts Increase Middle Class Disposable Income

Recently Mr. Bullard, the President of the St. Louis Federal Reserve, reversed is position on “quantitative easing” This is when the Fed buys billions of dollars of government and agency securities. Mr. Bullard is correct in reversing his position. The problem with the last round of purchases was that they were buying MBS with terms and an interest rate that was not much different from those of pre crisis securities and therefore did not improve the economy as much as expected. As outlined below I believe a new mortgage needs to be created. Some people say, “It is very hard to create inflation in housing.” We have found out it is very easy to create inflation in home prices by changing the guidelines of our economy. I say, It is harder to control inflation in home prices under the current government housing policies. I do not want to create inflation in housing but I do want to stabilize home prices and increase home appreciation rates to about 2 to 3 present a year with the following recovery program. As we have learned in the past 2 years consumer confidence and disposable income is very important for our economy to fully recover without high inflation.Obama and the capitalist stimulus plan is not working. It is not lowering the unemployment and foreclosure rate. An economic recovery plan must increase economic activity and disposable incomes, which will reduce unemployment.   The responsible home buyer or homeowner did not create the foreclosure crisis, economic crisis, or the unemployment crisis. The taxpayers should not have their taxes increased to bail out the economy or to pay for a huge federal deficit. It was the Capitalistic entity (Banks and Wall St.) and the government that caused the Great Recession of 2008.   What Must Be Done   #1. Create a stimulus mortgage that fits the current economic conditions.  The mortgage would have a starting interest rate of 3%. The interest rate would increase a 1/4% a year for seven years and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to any homeowner that could qualify, even those people that their mortgage is underwater.  The Federal Reserve or the US Treasury would purchase the mortgage backed securities until the housing market stabilized and then sell them to investors when the interest rate on the securities increased to 5% and the value of the homes were 10% greater than the mortgages.  This mortgage would increase middle class people’s disposable income and confidence, thereby increasing economic activity, which would reduce unemployment.   #2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to10 yrs or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate and terms would be the same as the first lien holder. A modification agreement would be used.  #3.  Enact the Zero Inflation Taxation Policy. This policy would decrease the chance of another bubble/ bust economic cycle.  These polices will not cost the taxpayers a dime.   Leonard Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor, author and former candidate for California Congress. Over forty years experience in the financial world. He is the Chairman of the Committee for Economic Reform and a Better Economic Future.   Leonard C. Tekaat

Private Foreclosure Reduction Plan Trumps Government Plan

Three Policy Changes; that is all it will take to decrease unemployment and foreclosures. 

 #! Create a mortgage that fits the current economic conditions. I am proposing: A mortgage with a starting interest rate of 3% and go up 1/4% a year for seven years and cap out at 5%. The borrower must qualify at the 5% interest rate. This mortgage would be available to any homeowner that could qualify, even those people that their mortgage is underwater. (Currently banks offer the 5/1 Adjustable Rate Mortgage, which earns about the same amount of interest in the first 5yrs. The new mortgage is not indexed. Therefore people will refinance their homes.)

 #2. Mortgages that are underwater would have their unpaid balance reduced by an amount equal to 30% of their monthly payment amount each month for up to 10 yrs or until the mortgage equals the then current possible sale price of the home, which ever is less. Second lien holders would be able to participate in this mortgage reduction plan. Their interest rate and terms would be the same as the first lien holder. A modification agreement would be used to modify the terms of the mortgage.

#3. Enact the Zero Inflation Taxation Policy.  This policy decreases the chance of another bubble/bust economic cycle and stabilizes interest rates.

These polices http://www.economysflaw.wordpress.com/ will not cost the taxpayers a dime.

Leonard C. Tekaat is a retired economic analyst, economic scholar, businessman, financier, investor and author. He has over forty years experience in the financial world. He is Chairman of the Committee for Economic Reform and a Better Economic Future. He is a Tea Party member.

Review of policies by Economics Professor Mark Evans CSUB

From: “Economics Professor Mark Evans CSUB” To: “Leonard Tekaat” Hi, Leonard. I agree that current policies haven’t been very effective thus far in addressing the foreclosure mess and that the macro economy remains vulnerable to a two-dipper because of it. I think we probably need something along the lines you suggest that cuts both interest rates and the principle upon which the monthly payments are based. Several months ago, I found a couple of columns online, by Alan Blinder, (Home Owner Loan Corp.) which described the highly successful program that was implemented during the depression due to upside-down mortgages and defaults. The agency that was created to run this program ran a profit and was “put to rest” sometime in the 1950′s when the last of the contracts expired. I’m not sure without looking at it more closely, but I think your suggestion may work in a similar fashion. We also need some regulatory changes to reduce the risk of bubbles and we needed the stimulus package, as imperfect as it was. Professor Mark Evans. 

The Private Fix is the correct way to solve the foreclosure crisis because it does not award the reckless home buyer or flipping investors. It will increase economic activity and the disposable income of a large number of people, which will reduce unemployment.  It is a fair plan.

The responsible homebuyer or homeowner did not create the foreclosure crisis, economic crisis, or the unemployment crisis. The taxpayers should not have their taxes increased to bail out the economy or to pay for a huge federal deficit. It was the Capitalistic entity (Banks and Federal Reserve) and the government’s taxation and housing policies that caused the housing bubble and the Great Recession of 2008. 

How will this mortgage help the economy?  The banks and the homeowner will both benefit.  The homeowner’s monthly interest payment will be lower for eights years. If the homeowner refinances a 6% loan their interest will decrease by 50% from say $1500.00 to $750.00, the first year and slowly increase the other seven years.

It is going to take time to heal our economy but this private economic recovery plan will help the housing market recover faster and make the financial service sector stronger.

The banks will benefit because the new mortgage cost them less than the amount to foreclose or short sale the house. They are currently losing hundreds of millions of dollars due to foreclosures, short sales, and lost of interest and principal payments. 

The economy will improve because more people’s disposable income will be increased, than with the government’s economic recovery plan. This will increase aggregate demand, increasing economic activity thereby reducing unemployment and foreclosures, shortening the Great Recession of 2008.  For more detailed Info. Go to http://www.economysflaw.wordpress.com/

Copy right by Leonard C. Tekaat 3-28-2010

All Rights Reserved

Comments

Posted by catpaw on Mar 27, 2010 at 08:18 AM <Delete>

These polices will not cost the taxpayers a dime.

But how much would it cost the banks? Banks are not about to set a dangerous precedent of social conscience or giving a rat’s tail about rectifying the duplicity that sucked home buyers into this mess or in any way show a sense of responsibility for the economic downturn they helped create.

Banks are in the business of making money. And they don’t care where it comes from or how they get it.

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Posted by happyashell on Mar 27, 2010 at 10:12 PM

To catpaw, Banks want to make money that is correct.  They also don’t want to lose money if they can prevent it. If a person bought a 2000 sq ft. house in 2007, for $400,000.00, it might sell now for around $200,000.00.  If the borrower decided they didn’t want to pay for the house.  The bank’s, if the buyer had put down 10%($20,000.00), unpaid balance on the mortgage is $380,000.00.  The bank or the investor, who invested in the mortgage, would loose $180,000.00 on the mortgage, $10,000.00 on foreclosure and selling cost.  They would loose the unpaid interest for all the months the borrower had not paid the mortgage and the time it sat empty waiting for it to be sold.  Say a year at 5% is $10,000.00.  This all adds up to $200,000.00.  If the house is damaged while its empty or it needed repairs when it was foreclosed on, it might sell for a lot less than $200,000.00. So the loss could be more.  If the bank or investor did sell the house, they would earn 5% interest on the $200,000.00 or a smaller amount.  At that selling price, the interest earned for 30yrs can be over $100,000.00 less than if they allowed the borrower stay in the home, if they were not a credit risk. This is why I think it best to qualify the borrower at the 5% interest rate.

If the banks offer the homeowner, the terms of my mortgage they would lose about $35,000.00 in interest in the <b>eight years </b>until the interest rate reaches 5%. and 30% of the principle amount, or about $7300.00 a year until the home went up in price and it met the mortgage as it was being discounted down.  If the home does not go up in ten years the maximum amount that would be discounted is $73,000.00 plus the interest of $35,000.00 for a total of $108,000.00.  They will make some of the lose back because they will be receiving interest on the larger unpaid balance for 22 yrs which will be a higher unpaid balance than if they foreclosed or short sold the home today.  Also more than likely the home will go up in price before the ten years is up and everyone will be smiling again.

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