The primary problem we have right now is that people are spending more than they make. They've got loads of credit card debt, they've taken out interest-only loans on houses they can't really afford, and they're generally living beyond their means. On top of that, we have a bunch of lenders who have made risky loans ( i.e. 'subprime' loans) to people who are not likely to pay them back. And guess what? Due to these risky people living beyond their means, they're defaulting on their over-priced mortgages.
That's it. It's not complex.
Now, what is being proposed to fix it? There are a lot of different plans, mostly involving government intervention, but the nature of that intervention is key. Republicans, in general, are favoring tax cuts and benefits to help people start spending and investing again. Democrats, on the other hand, are leaning toward interest rate freezes and other such tricks. Let's look at each one.
Bush is proposing around $145 billion in tax aid, mostly in the form of rebates to taxpayers ($800 to individuals, $1,600 to married couples), but also with some tax reductions on businesses. Romney has gone even further, proposing $250 billion in lowered income tax rates, elimination of Social Security tax on people over 65 and capital gains/dividend taxes for households earning less than $200,000, and some corporate tax reductions. While tax decreases are great, Michelle Malkin sums up the sticking point here:
I'm all for the government giving me back my money. But why not drop the economic stimulus pretense? Just give me back my money. If the government can spare these "rebates" and send them back now, why did they take the money in the first place? Forget this temporary candy. Why not make this "rebate" permanent?
A very good point! Don Surber has a similar thought after discussing people who are 'in trouble' because they drive Corvettes or wear nothing but designer clothing despite the fact that they can't afford them:
Of course, first Congress has to live within its means - or better put, within the means of taxpayers.
Instead, Congress and President Bush are moving to encourage bad behavior. They will reward the Corvette owners and designer jeans ladies to spend, spend, spend without ever having to pay back.
Getting into a bidding war over how big an economic stimulus package to foist upon the taxpayers is not a confidence builder among the great majority of us who don't own Corvettes, don't wear designer jeans and don't miss mortgage payments.
I won't be at all upset by lower taxes or tax rebates, but it could be tough to get Democrats to go along with it. We'll see.
Speaking of Democrats, Hillary Clinton has proposed freezing interest rates for five years. Jon Birger at Fortune says the following of that plan:
If Clinton's only goal were to bail out homeowners facing steep rate resets on adjustable mortgages, her plan would work just fine.
For everyone else though, such a freeze would be disastrous. Interest rates on new mortgages would skyrocket - perhaps past 8 percent, as the mutual funds, pension funds and other investors who typically provide capital to the mortgage market shift their money into other investments where the government isn't impairing returns. With higher mortgage rates eroding buying power, the downward pressure on home prices would only increase. Lower home prices would lead to even more defaults, as more folks who'd lost the equity in their homes choose to walk away from their mortgages.
Not to be outdone, John Edwards proposes the same thing but for 7 years - even worse! Another economist, Jared Bernstein with the liberal-leaning Economic Policy Institute, calls an interest rate freeze an 'ugly' correction: "This kind of an idea is a little bit of untying your shoes with a buzz-saw."
Nice imagery there.
Anyway, I'm sure you've probably heard that the Fed just cut a key interest rate 3/4 of a percent, the biggest drop since 1982. While this is a welcome move for homeowners seeking to refinance into a better position, the drastic measure also sends the signal that they are very concerned about everything that's going on. This has, in turn, caused fluctuations in markets around the world.
So, should you be concerned? Sure, keep an eye on things. You'd be an idiot not to. But, as is plainly printed on the front cover of the eminent Hitchhiker's Guide to the Galaxy: DON'T PANIC.
Here's the reality of it - the market corrects itself from time to time. When things get overpriced, overhyped, and overexcited, they will inevitably come down at some point. We've seen six straight years of economic growth, and things have been roaring (despite the MSM's best efforts to portray doom and gloom every chance they get). Economically speaking, things have been great, and they are still very good. But, people who take too much risk will get burned from time to time, and that's what's going on here. These corrections are normal! The government should not get involved (although, again, I don't mind tax refunds, I just think they should be done for their own sake) to bail out slimy lenders and risky borrowers, or people with no sense of financial self-control. To do that would only be to remove the penalty for bad choices, and it is very likely that those same people will do the same things all over again. It's common sense.
Look at it as an opportunity. Ever heard the thing about buying low and selling high? If you have some money to invest, you should get it ready. Now would be a great time to get in! Rush Limbaugh framed it this way on his program yesterday:
In 1987, 20 years ago, the Dow Jones Industrial Average dropped more than one third in two weeks. On October 5th of '87, the Dow Jones Industrial Average was 2658. On October 19th, 1987, just two weeks later, the Dow Jones Industrial Average low was 1677. So in two weeks it went from 2658 to 1677 on October 19th of '87. That was the best buying opportunity in the last 20 years, because since 1987 we have gone from 1677 on the Dow to 14,200.
Don't you wish your retirement fund had started in 1987 at 1677 on the Dow? Even today, we're flirting with 12,000. What a growth opportunity, what a buying opportunity that was.
And we may be getting another one again.
So, what should you do? If you have investments, diversify. Spread things around so you can't lose it all in one place. Things are probably going to be bumpy for a while until the correction sorts itself out. Expect disastrous predictions from the MSM - they've been slashing at the economy for months and will continue to do so as we approach the election (regardless of the reality of the situation). If you can afford to invest, invest when you feel the time is right, while things are still low. We've seen incredible growth over the past few years, and there's no reason to think the growth won't continue after this bump is past. Of course, if Democrats gain control of the White House and Congress, we truly will be in for a disaster due to their monstrous tax increase plans. If you want a devastating recession, they've pledged it and are anxious to implement it. Even now, Michelle Malkin warns of Bush's pledge to 'find common ground' with Democrats on a stimulus package:
"Common ground" = Watch your wallets.
The two most important things to remember from all this:
1. DON'T PANIC.
2. Vote Republican.
There's my two cents.
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