Conner's Blog

As things stand this morning, all signs are pointing to an Obama victory tomorrow.  I am hoping for this result.  One of the reasons I am hoping for an Obama win is the candidate’s tax proposals.  As the election reached the final stages, other than negative ads, the only argument McCain seemed to throw at Obama is that his tax policy is going to cost America jobs.  At first glance, the logic does seem to back up McCain. What McCain and other conservatives seem to ignore is that some of their own policies show Obama’s plan will be better for the economy.  

It is true that until recently, Bush’s tax plans seemed to be working.  Companies were profitable and other than post 9/11 the markets were growing.  This did not continue though, and for the last two or three years, economic indicators showed that the economy was slowing down.  

The fact that the economy slowed down is not an argument against Bush and McCain’s tax plan.  The argument is the economic stimulus plan that both Republicans and Democrats supported in an attempt to stop the slowdown. The economic stimulus plan gave the middle class extra income.  The hope was this extra income would go towards the purchase of goods and services in an attempt to jump-start the economy.  This is counter to the trickle down tax policies of Bush’s eight years.  If trickle down economics worked, the solution to the economic slowdown would have been to send the stimulus package to large companies so they could pay their employees more, or show more profit on their balance sheet.  One could argue that the reason this was not proposed is it sounds insane.  I say that Bush’s argument for trickle down economics sounded just as insane.  

Looking at the two presidential candidate’s tax plans in this context may not be 100% correct, but it is interesting.  In this context, Obama’s plan acts like an economic stimulus plan for anyone making less than $200,000.  Granted he will repeal Bush’s tax cuts, which will hurt some upper income tax payers.  This is not a problem if you believe as I do that everyone is better off if everyone who makes less money than them makes more money.  Why do I think this?  It is simple, for business to thrive it needs customers.  For people to be customers they need money to spend on goods and services.  If you run a business, chances are you can afford your product.  If everyone who bringing home less income than you has more disposable income, you have more potential customers.  More customers mean more opportunities to bring home a profit, which will trickle up to those hurt by Obama’s tax policies. 

Obama’s tax plan acts like an economic stimulus plan.  It gives the middle class extra take home income to the middle class that they can use to purchase goods and services.  If a $600 per person economic stimulus package is good for the economy, how can anyone say that Obama’s tax plan is going to kill job creation.  If that was the case then conservatives should have fought tooth and nail to keep the economic stimulus package from going through.

During my roundup of the debate post, I took an exception to comments made by Biden in the VP debate and to McCain’s new housing plan.  Each talked about taking home loans that were on the verge of foreclosure and allowing renegotiation of the terms to lower the interest rate and the principle.  I wanted expand on my thoughts in this post.

My issue with Biden and McCain’s plans is due to lowering the principle.  I have no problem with bankruptcy judges having authority to lower the interest rate on a loan.  That makes sense, especially with the predatory lending and the bad loans people took on. Additionally, if banks continue to pay the price for foreclosures the economic crisis will continue for far longer.  On the other hand, the thought of people being able to lower the principle owed on their loans is ridiculous.  The argument seems to be that since home values have decreased so much, it is only fair to allow people to pay what their home is worth now instead of the agreed upon purchase price.  This is frightening to me.

I’m not sure if this has ever been allowed before.  I did a search but could not come up with any historical cases.  However, I will admit, my research skills may not be up to the task.  I could see this happening in the days of the hometown bank when the mortgage stayed with the initial lender.  In that case, the borrower would work directly with the loan owner.  The resulting agreement would have been beneficial to both parties. Today on the other hand, due in part to deregulation, we don’t know who the loan holder is in most cases.  To solve this problem, under either the McCain or Biden proposal the government will step in and renegotiate the terms of the loans.  Without the lenders input these negotiations will be one sided, and will benefit the borrowers who didn’t educate themselves before making a the purchase.  Due to their bad decision, instead of being punished, they will receive a benefit.  In the case of someone who purchased a home for $300,000 two years ago, whose house is now worth $250,000, they get the benefit of a $50,000 payment on their principle–for free.  Now once the market turns around and that home regains value, they are making an extra $50,000 on the home.

This is unfair to the millions of borrowers who purchased a home they could afford.  They will see their neighbors who were on the verge of foreclosure keep their homes.  This is a good thing of course, but when they go to sell their home, they will be put in a situation where those around them can afford to chop $50,000 off their selling price without losing money.  Responsible borrowers will be punished for their neighbors irresponsibility.

This country is treading down a very dangerous path if we keep bailing out those that make these kinds of mistakes.  For a capitalist economy to function we need risk to come with a cost if something goes wrong. And today it’s even more important that home buying is included in that.  It is unfortunate that Americans spent the last 25 years telling their children that a home is basically at 100% safe investment.  It seems most of my generation was taught that you are always better off buying then renting.  Unfortunately, that isn’t always true and purchasing a home is a risk.  It may have been a safer risk then purchasing stocks for random IPO’s but it was still a risk.   There is no such thing as a 100% risk free investment.  Putting your money in US treasury bonds or into a savings account is close but even that carries a small risk.  Unfortunately, as our tax dollars continue to go toward saving those who lose money when taking a risk, we are sending a message to everyone to continue taking on absurd risks without concern.  It appears the worse that can happen is falling into taxpayer-funded safety net.  Or, even better, in the case of the housing plan that McCain and Biden proposed, a government mandated profit.

I understand that we need work hard at trying to keep people in their homes.  With that though we need to impose a level of responsibility on the borrower.  They negotiated the purchase price and they signed a contract agreeing to that price.  If we can lower their interest rates to something very close to the current market and allow them to keep their homes go for it.  If they can’t keep their home without lowering the principle, then unfortunately they shouldn’t have been in that house to start with.  The citizens of this country need to step up and start taking responsibility for the direction we are heading.  Let it start with paying back our debts.