Looking at US ongoing financial troubles, some ideas on what is possible towards -
MAINTAINING U.S. PROSPERITY AND PRE-EMINENCE:
The following economic recovery outline proposes workable, affordable solutions to critical issues facing the U.S. Federal, State, and Municipal Governments focuses on temporarily stopping residential subprime mortgage foreclosures, job and revenue creation, restoring and growing the nation’s high-tech industrial base, providing relevant and quality education, skill and apprenticeship training partnerships between industry and educational systems, ensuring USA leadership in all fields of high-technology, creating consumer and corporate demand and paying for Healthcare and Social Security (with a progressive type of flat tax), with budget and fiscal reforms.
Since subprime residential mortgages are a major underlying cause of the current domestic and global fiscal crisis, it would be better and cheaper to put a temporary moratorium on subprime mortgage foreclosures. This would substantially reduce the need for Trillions of Dollars (generated by the printing press) being needlessly wasted in economic stimulus packages, bailouts of corporations and banks (which are reluctant to lend to businesses or individuals and are under no obligation to do so), and Fanny May, Freddie Mac and the FHA (to takeover and extend bad mortgages and make new subprime loans). These programs won’t work. A subprime residential mortgage foreclosure moratorium would help avoid Stagflation and possibly a deeper recession. The Stimulus Packages resulted in waste and corruption, the sustaining of bloated state and city bureaucracies and not enough jobs, particularly in the industrial and service sectors. Most of the Stimulus Packages are unnecessary and counter productive.
Instead, create a standstill situation to make viable mortgage parties whole, provide time for economic recovery, and adopt the following measures to facilitate economic recovery:
A. (1) impose a 3 to 5 year subprime residential mortgage foreclosure moratorium period on banks, financial institutions, and other mortgage lenders or servicers;
(2) mandate workouts with borrowers as a condition of bank bailouts;
(3) require interest rates to be restored to original APR levels [Non-payment of this APR and real estate taxes would be the only exceptions to the residential subprime mortgage foreclosure moratorium. Foreclosed homeowners might remain in their homes as renters to prevent substantial lender loss on a forced sale in a down market and to provide revenue to the successor owner (former lender, financial institution or investor entity). To induce a defaulting homeowner to consent to a foreclosure, the homeowner could be allowed to remain in possession as a tenant and given an option to repurchase his home within 5 years at the same principal amount remaining on the mortgage at the time of default, conditioned upon tenant compliance with its obligations];
(4) to protect credit worthy homeowners who lost their jobs: (a) in the absence of an agreement to do so, judicial intervention could permit defaulted debt service payments to be added to their mortgage principal to the limit of the property’s value or the homeowner’s net worth or (b) the government could make available temporary (short term) low cost, second mortgages subject to a credit worthy borrower’s personal guarantee;
(5) eliminate related penalties and fees;
(6) increase bank liquidity by: (a) phasing in higher reserve requirements on all banks, financial institutions hedge funds, and brokerage houses over 3 to 5 years and (b) phasing in the bank requirement to mark to market subprime residential mortgage assets over 3 to 5 years [However, any and all securities and /or assets being swapped for T-Bills, Federal Funds, or other government assets would be reappraised to market value, substantially discounted, and have legitimate triple A ratings. (Transferors get tax deductions on write downs.)];
(7) restore equitable individual usury and bankruptcy protections including judicial cram-downs and fair limits on credit card and lender interest rates;
(8) set higher transparency, disclosure, and due diligence requirements on all loans, mortgages, and financial instruments and set minimum equity capital
requirements in every type or class of financial transaction;
(9) revive the Glass-Steagall Act to prevent banks and financial institutions from obtaining windfall profits through stock market speculation and by buying up corporate equities and other assets at public expense with government bailout and Federal Reserve Open Window funds during a fiscal crisis caused by these same parties and repeating the activities and excesses that caused the fiscal crisis in the future — instead of domestic lending;
(10) extend and increase unemployment benefits and food stamps;
(11) Invest in education and scientific and technical research and development;
(12) fund infrastructure repair and improvements to provide jobs and facilitate economic growth;
(13) reduce corporate tax rates to competitive global levels to create jobs;
(14) Instead of layoffs, employers, state and local governments, and unions should voluntarily agree to temporary 4 or 3 day workweeks to reduce unemployment hardship;
(15) to create demand: (a) allow individuals to deduct auto, homes, appliances, computers, and home entertainment equipment purchases from their income tax on an accelerated depreciation basis – manufacturers could also offer better values and (b) accelerate depreciation to encourage capital investment on the part of business.
(16) Allow each bank to transfer its toxic assets into a separate corporate entity that would be spun off to its stockholders to clear its balance sheet. These toxic asset transfers could take place in up to five separate increments within a five year period to maximize recovery. 100% of the loss of value in a mark to market write-down of said initial transfer of toxic assets into the separate corporate entity could be written off by the bank and the balance written off by its stockholders as said assets are sold off. Each party would be granted a loss carry forward or backward tax deduction. Sale proceeds could be split (Say 50/50). No Federal bailout or taxpayer loss. Bank access to the Federal Reserve window provided for responsible business lending and operational needs only, not for market speculation or acquisitions..
B. As an alternative to bank and financial institution bailouts and the reluctance by banks to lend to industry, it is suggested that the Federal Government:
(1) lend (within reasonable limit and for short term–3 to 5 years) directly to select large, qualified credit worthy corporate borrowers engaged in domestic production of manufactured goods (not assembly of imported parts or subassemblies) that employ a minimum of 500 workers in specific industrial sectors; (2) accelerate depreciation to encourage capital investment;
(3) lower corporate tax and interest rates to match those of global competitors to create jobs and boost exports;
(4) grant tax credits and increase grants for scientific and high-tech research and development to maintain U. S. leadership in these sectors and foster economic and revenue growth;
(5) provide free college and graduate school tuition to qualified U.S. students in those scientific, engineering, and high-tech disciplines essential to the national interests to maintain and grow our superiority and leadership in cutting-edge High-Tech innovation and production;
(6). provide short term liquidity, by buy (within reasonable limits) short term special issue corporate bonds of select financially secure companies that would have first lien on corporate assets in the event of default [These bonds would bear an interest rate comparable to that of federal funds or the prime rate. This program, which would have a sunset provision, could be administered by the independent, non-political Federal Reserve System through its separate regional entities who are familiar with the economies and needs of their individual regions and can assess and administer financial risk. The IRS could assist in collection of interest and principal. Also, banks could play a role but only on a modest administration fee basis]; and
(7) alternatively, the government could guarantee short term bank loans (within limit) to select, qualified, credit worthy companies to encourage private sector lending and avoid government funding outlays.
All parties would benefit and remain whole including the banks. The above measures would stabilize the real estate market and home values; maintain affordable debt service rates; minimize foreclosures and keep people in their homes; avoid or postpone most financial institution write
downs; allow 3 to 5 years to substantially increase bank reserves (providing more liquidity and gradually reducing excessive leverage); give the economy time to recover and address the energy
and infrastructure crises; create jobs and revenues; maintain municipal real estate tax revenues; stabilize pension funds; minimize the risk of recession and inflation; neutralize a potential credit
default insurance crisis of about $60 Trillion; avoid the need for government to take over and evaluate complex residential mortgage assets; and save taxpayers $Trillions in bank bailouts.
Without bailouts, most banks and other financial institutions still have enough capital and reserves to accommodate the borrowing needs of small and mid cap companies, provide residential and commercial mortgages to qualified borrowers, and get tax benefits from toxic asset write-downs. Nationalize failed banks.
C. Only Jobs and Revenues can cure recession, depression, and deflation:
To survive, the U.S. must retain and grow high-tech jobs and industries (its greatest strength) via quality high-tech, engineering, and scientific education, innovation, and R&D. A vibrant wealth generating industrial base is essential to provide the funds to support a service society.
To prosper, the U.S. must export goods and services instead of high-tech jobs and industries.
JOB AND REVENUE CREATION can be achieved through a Nationwide High-Tech Export Free Zone Light Industrial Job Development Program (EFPZ) for Major Urban Centers (which contain the bulk of our population). The EFPZ program would incorporate relevant education, skill and apprenticeship training partnerships between industry and our educational systems and offer incentives that can make the U.S. cost effective and competitive (through productivity, automation, technological advancement) in the global economy, create the quantity and quality of jobs needed, and give our urban centers fiscal and social viability.
Briefly, the EFPZ Program would create tax free zones (similar to customs free areas within ports and airports) for new and expanded operations of qualified multi-national companies for the production of select categories of high-tech light industrial goods for the export markets (primarily small, high value, easily transportable goods that can be produced within municipalities and their suburbs). There would be minimum employment level requirements. Local and State taxes would be waived on profits from goods made within these zones and sold overseas. Also, all extant Federal, State, and Local economic development programs would be automatically available to zone users, including job training. Goods sold domestically would be fully taxed to prevent unfair competition and loss of current revenues. Only a level of revenues not otherwise obtained would be waived.
Companies would benefit from a business friendly environment, economies of scale, a skilled and productive work force, research and development incentives, cost reduction, compulsory arbitration, and, a general reduction in corporate income taxes.
Municipalities would get jobs and revenues, fiscal and social viability; ground and facility rents from zone users; increased sales and personal income taxes; and a reduction of public assistance costs and anti social behavior. For every family breadwinner employed, an average of four would be removed from the public assistance rolls and gain self sufficiency. The EFPZ would have a great job creating multiplier effect on service and supplier industries.
Federal Government would get a restoration and expansion of the country’s industrial base, reinforcement of U.S. economic pre-eminence and High-Tech leadership, economic recovery, revenues, debt reduction, and national prosperity. (A copy of EFPZ Proposal is available upon request.)
D. Domestic outsourcing to depressed U.S. areas through a Federal/State/Industry nationwide job development program incorporating all extant government incentives, relevant training and apprenticeships with local school systems to avoid off-shoring of industrial and service jobs.
E. Change Foreign Aid: Give food, growing assistance, supplies and equipment, not arms, as foreign aid to help alleviate Third World hunger, foster food self sufficiency and encourage the creation of their own export production of foods appropriate to their regions and cultures. This would boost U.S. agricultural sector and produce domestic jobs and revenues from related U. S. seed and fertilizer producers, supplier and farm equipment industries (tractors, solar pumps, solar generators solar stoves, solar or wind powered irrigation and water purification systems, etc.). This could also help solve the poppy and drug problems in Afghanistan and elsewhere through an initial purchase of poppy and drug crops with payment in modest amount of currency (to subsist farmers until the harvest of the replacement crops) but primarily in seed fertilizer, supplies (in accordance with soil, climate and cultural conditions), tools, tractors and spreaders (for community ownership and use), and growing assistance, conditioned upon the permanent abandonment of drug crop production in lieu of continuous drug crop destruction. This could help end the Afghanistan war (and Mexican) crises by depriving the Taliban and Al Qaeda (as well as local and international criminal gangs) of their major source of drugs and funds and increase the allegiance and support of the general population. Additional security protection for the population is also necessary. Aid should be given directly to village and tribal leaders not to corrupt governments. Such a food aid program would enable the U.S. to reduce or eliminate domestic agricultural subsidies by encouraging production and purchasing the surpluses at fair prices for aid distribution.
F. Use Sovereign funds to provide Liquidity for the Global Economy: Sovereign Funds (and those of their affiliates) spent offshore should be restricted to only lending to private and public enterprises (not purchasing equities) via an international oversight and regulatory mechanism like the IMF, World Bank, WTO, or OECD. The country or state of origin of each multi-national company or other entity borrower could guarantee said loans to protect the capital of sovereign fund lenders. Local or regional banks could assist in placing and servicing said loans on a modest fee basis.
(1) help solve the worldwide fiscal crisis legislatively without creating the stagflation that would result from just printing Trillions of bailout and stimulus monies for unworkable programs;
(2) provide the capital to create and grow the jobs and revenues necessary for the recovery of the global economy; and
(a) protectionism, economic/political aggression, and strife;
(b) the undermining of national security and economies;
(c) the theft of technology.
G. Restructure State and Major Urban Center Debt With a Federal Bond Swap: The stifling debt service burden of many States and Urban centers and their agencies and authorities are now approaching or exceeding the combined costs of their Police, Fire, and Sanitation Departments making their Education and Social Service obligations (along with their related health and pension costs) and are unaffordable. The impact of lowered debt ratings and the dried up interest auction market for state, municipal, and public authority bonds have created refinancing problems and substantially increased borrowing costs. This has compounded their fiscal problems resulting from the job and revenue shortfalls brought about by worsening economic conditions and the subprime residential mortgage crisis.
Consequently, it is suggested that consideration be given to a Federal Debt Swap program which may be a more practical, politically palatable, and acceptable form of aid from Congress.
This qualified Debt Swap* would involve a mandatory exchange of a special issue of low interest Treasury Bills (or government bonds) for select high interest State, Municipal, Public Authority and /or Fiscal Oversight Entity Bonds which might be at risk in the event of actual or threatened default. This bond swap would be more acceptable to State, Municipal, and/or Public Authority bondholders than default. It would guarantee return of principal despite lower interest and free their capital. Said Special Government Bonds could then be sold incrementally in the future at discretion of the Treasury.
For Federal repayment: The treasury would be given (1) a claim on percentages of State and Municipal tax revenues and Public Authority tolls, fares, and rents that could be adjustable by the Treasury as economic conditions necessitate and/or (2) a flexible repayment term for reimbursement of debt service and retirement of said Special Issue Treasury Bills (or Government
bonds) which could be extended or shortened dependent upon economic conditions also at the judgment and discretion of Treasury officials.
This could reduce the debt service burdens of State and Municipal governments to manageable levels and allow them to maintain feasible essential services levels.
The goal of this debt swap proposal is to make all parties whole, repay the Federal Government, and allow State and Municipal Governments to continue to provide essential services within their means.
An alternative to said Debt Swap would be redemption of State, Municipal, Public Authority, and Fiscal Oversight Entity high cost bonds and a Federal guarantee for their replacement bonds. While this would have the effect of lowering the issuers’ interest costs and require little or no Federal funds or securities outlay, if unlimited, such federal guarantees could lead to unaffordable prolificacy on the part of said borrowers, placing them and the federal government at great financial risk. Unchecked, unlimited, and combined with the nation’s enormous deficits from its stimulus expenses and its tremendous trade imbalance, foreign and domestic debt, and military and defense expenditures, this additional federal
financial exposure could lead to an adverse federal credit rating which would be disastrous (economically, politically, socially, and could threaten domestic and global security).
**[Said Debt Swap or Loan Program would be contingent upon State, Municipal and Public Authority spending, budget, operational reforms, a reduction of bloated bureaucracies, and the elimination of redundant and unnecessary services and programs.]
Without greater fiscal restraint, effective controls, and better governance at all government levels, fiscal disaster and runaway inflation could be our future.
H. CHANGE THE TAX CODE TO FUND HEALTHCARE AND SOCIAL SECURITY
(A Comprehensive Restructuring to Make Them Universal, Non-Restrictive, Revenue & Tax Neutral, & Affordable,)
In order to compete in the global economy and provide the jobs and revenues for economic recovery, it is necessary for U.S. companies to be relieved of the stifling twin burdens of healthcare and pension obligations. Likewise, local and state governments and their public authorities are going broke from their unaffordable healthcare and pension obligations and must be relieved of these burdens to maintain fiscal and social stability. The federal government must:
(1) provide a practical, affordable, revenue neutral universal healthcare [by expanding and incorporating into our existing Medicare System the best features of the best universal healthcare systems worldwide, with appropriate controls, efficiencies, medical records sharing, provisions for continual system improvement, a fee structure based upon quality care, tort reform, hub diagnostic centers, ban doctors from owning medical testing companies and/or getting referral kickbacks from such companies (Medicaid would be unnecessary)],
(2) provide a basic, livable retirement system, and
(3) Adopt a progressive Flat Tax system to pay for Healthcare and Social Security that would produce more revenue without raising current tax levels.
AFFORDABILITY By Changing the tax Code: Government should institute a progressive Flat Tax Revenue System with rates based upon Congressional Budget Office and/or the Office of Management and Budget calculations to meet all government (and its agencies and authorities) obligations and programs including debt service. In addition there would be dedicated separate surcharge rate increases to cover actual individual
costs of the Healthcare, Social Security, and Defense Programs. This is the most feasible means to finance Universal Healthcare and Social Security, control Defense spending and restore fiscal and social stability. Moreover, said surcharges would create an electorate watchdog effect on cost containment and controlling exploitation of these programs.
(A) An Individual Flat Tax: would commence above the poverty level guidelines for individuals and families as published by the U.S. Department of Labor with one flat tax rate for incomes to $275,000, another flat tax rate for incomes to $500.000, and a third flat tax rate above that level. All tax deductions would be eliminated as would gift and estate taxes. This would be a progressive tax program and the poor would not pay taxes.
(B) Dual Business Flat Tax rates:
(1) One Flat Tax rate on domestic business profits.
(2) Another lower flat tax rate on profits from overseas operations and/or subsidiaries or joint ventures (to offset foreign taxes) conditioned upon the repatriation of profits to increase domestic liquidity, improve U.S. balance of payments, reduce current account deficits, and help pay for Universal Healthcare and Social Security.
All tax shelters, loop holes, and tax havens would be eliminated (both individual and business) as would all business, state and local government, and private medical, hospital, and pension plan expenses. Business capital investments would be expensed, depreciation schedules and interest charges abolished. Only business tax incentives for domestic job creation and research and development would be allowed.
Social Security pension eligibility extended to age 67 except for disabled or indigent. Other than Social Security, no Federal, State or City Government, education, union, or corporate pensions permitted (to eliminate corruption and fraud and avoid unsustainable financial burdens). A supplementary Social Security plan could allow individuals to increase their benefits. Only single pension allowed. No double dipping. In addition to Social Security, only a Roth type IRA would be allowed individuals with authorized private sector regulated investment institutions with transparency, full disclosure, and fee competition. Mandatory tax free conversion of all pension, IRA and 401K for accounts under $500,000 into Roth IRA’s with a modest progressive conversion tax levy on those accounts over $500,000 based upon discounted present value of actuarial pension entitlement schedules. Said levy could be paid in installments. This would increase government and private sector efficiency and liquidity, reduce overhead and risk, help restore lost individual pension values.
I. Financial Sector Reform
(Without Strangulating the Financial
Sector or expanding the bureaucracy)
*Restore a revised Glass/Steagall Act to separate banking and speculation to reduce systemic risk.
*Restore former individual usury 7% to 8% interest limits and bankruptcy protection standards (including judicial cram-downs) and limit arbitrary fees and penalty charges. Set and enforce heavy civil and criminal penalties for non-compliance. No need for an additional consumer protection agency.
*Restrict access to the Federal Reserve Window to legitimate commercial and savings banks for domestic lending and normal operational purposes only [not to bank capital market affiliates, Wall Street financial houses or hedge or equity funds (and/or their reincarnation into bank holding companies) in order to prevent their gaming of the financial markets, speculation and obscene remuneration at taxpayer risk and expense].
*Set uniform domestic and global minimum reserve and maximum leverage limits for each type of bank, financial institution, insurer, pension fund, hedge fund, equity fund mutual fund etc. (via BIS, Group of 20, or IMF).
*Set uniform domestic and global minimum equity capital requirements and maximum leverage limits in each category of financial transactions domestically and globally (via BIS, Group of 20, and/or the IMF).
*Establish and enforce uniform standards of transparency, disclosure, and due diligence in all individual and consumer financial transactions including mortgages, credit cards, credit & investment accounts, etc.
*Prohibit Credit Default Swaps.
*Establish an exchange for derivatives and put Hedge Funds under SEC supervision and regulations.
*Prohibit all campaign and political party contributions and personal gifts or benefits to elected or appointed public officials by business, banking, financial entities, unions, and their lobbyists.
*Prohibit the rotation of officials between Wall Street, financial institutions hedge funds, lobbyists, and banks, and government regulatory agencies and departments (Treasury, Federal Reserve, SEC, FDIC, all other regulators, etc.) to avoid a ” clubby,” revolving door buddy system and stop special individual financial institution, personal, and industry favoritism and gain at public expense. Government agency staffing should mostly come from top highly qualified independent professionals (academics, economists, former heads of international financial institutions (IMF, World Bank, etc.) retired and active top executives of leading corporations, think tank experts, etc.) without ties to banks, Wall Street, financial institutions hedge funds, investment houses, and industry special interests. An independent agency of independent financial and economic experts to oversee regulation by the Federal Reserve and other regulatory departments or agencies should be established to maintain economic growth and stability, and detect and avoid risk.
*No bank bonuses until the government gets repaid and then bank bonuses should be paid in stock options at a higher target bank stock price.
Although they perform certain beneficial financial and capital market and merger services, Wall Street houses, financial institutions, and hedge and equity funds can also suck the wealth out of the economy for themselves at the expense of jobs, economic growth, their corporate targets and their target company stockholders and must be regulated in the public interest.