Fixing What Congress Broke

Six years ago, a very dear friend of ours gave us the book "The Total Money Makeover" by Dave Ramsey. Using the principles laid out in the book, we worked hard and a year later became debt free (aside from the mortgage). It is a glorious feeling. Well today another dear friend sent me an email with Mr. Ramsey's solution to the current fiscal crisis. As usual, I find a lot of common sense in what he has to say.

I. INSURANCE
a. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.
b. In order for a company to accept the government-backed insurance, they must do two things:
1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.
a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

Good points - this will help keep the banks from adding to their glut of inventory.

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

Another great point - this allows borrowers to get out of their upside down mortgage without adding to the problem.

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

Jazz and I discussed this on our show last week (Thursday's at 1pm Eastern, 11 Mountain at Blog Talk Radio). If the taxpayers are going to be "on the hook" for these CEO's mistakes then there needs to be some protection to the taxpayers to keep them from making the same mistakes. You do not give more money to a chronic gambler without some conditions - why would you do the same here?

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

The cheapskate in me loves this part the most (so far).

II. MARK TO MARKET
a. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.
b. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

My dear friend (and economics professor) King Banaian over at SCSU Scholars said that this is not helpful. He says that there are ways around it. Since he is the expert, I will take his word that this might not be the best part of the idea.

III. CAPITAL GAINS TAX
a. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.
b. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down.

He is absolutely correct here. Removing the Capital Gains tax penalty will loosen up equity from private investors like you would not believe thereby solving the liquidity "crisis" that is a part of the current financial mess. Give people an incentive to invest that money and if they have it - they will.

Mr. Ramsey is encouraging his listeners and readers to send copies of this to their legislators. I think that is a grand idea - one I intend to follow up on now.