McCain’s Plan

Yesterday Senator Barack Obama unveiled his proposal to alleviate the pain put forth on American taxpayers as a result of the current economic crisis.

24 hours later, his opponent in the 2008 presidential election made public a proposal of his own to address the country’s financial downfall.

Senator John McCain’s $52.5 billion plan includes:

• Elimination of tax on unemployment benefits (similar as Obama)
• Reduction of capital gains tax by half to 7.5%
• Guarantee 100% of all savings for six months (surpassing the current FDIC cap of $250,000)
• Reduction of tax rate on IRA and 401(k) plans to 10% on the first $50,000 withdrawn

Just as we did with Obama’s plan, let’s analyze each point briefly of the McCain proposal.

Unemployment Insurance

Just as we questioned with Obama’s plan, solutions have to be given as to how the loss of revenue from taxing unemployment benefits will be made up in the federal budget. Fortunately, McCain (even as a moderate conservative) is not the prototypical “tax-and-spend” liberal (like Obama).  Nevertheless, until the public is told how such a plan would be paid for – it means little to nothing at this time – whether it comes from the mouth of a Democrat or a Republican.

Capital gains

I am very much a proponent of a reduction of the capital gains tax rate.  By reducing this rate, investors are given additional encouragement to place money in the stock market – seeing as how the returns would essentially be higher with less money going into Uncle Sam’s pocket.  By boosting investor confidence on Wall Street through making stock purchases the most profitable investment avenue in terms of tax rates, this can help to inflate the Dow and bring the economy back from the dead.  Nevertheless, how room will be made in the budget to compensate for the loss of 50% of current capital gains tax revenue is a question that begs to be answered.

Guarantee of savings

In theory, this plan makes sense.  By guarnateeing 100% of savings in banks for the next six months, the government would be giving the public a sign that despite the fact that banks are needing to be bailed out – their money is safe and cannot be lost.  But in practice, this notion seems to accomplish very little.  Currently, most taxpayers have all of their money in various investment vehicles, including banks.  The only caveat being many taxpayers have their savings dispersed amongst a wide array of banks, with each institution housing the FDIC maximum insured amount.  By insituting this plan, it only gives the public confidence to consolidate all of their money into a single bank – but only for the next six months.  This proposal does very little to actually benefit taxpayers – and rather only places a notion in the public’s mind that their money is safe and guaranteed.

Retirement account tax rates

This plan would benefit seniors who are of age to safely withdraw money from their retirement accounts.  What about the rest of the country that has suffered greatly at the hands of the subprime mortgage crisis and its after effects?  Personally, I feel that Obama’s plan to allow taxpayers to dip into their retirement accounts, penalty free, is a better vehicle to help a broader swath of the public that have retirement accounts.  Why limit the benefit to seniors?  Why not help everyone?

Despite the various criticisms directed towards Obama and McCain for their new tax plans, we should all be happy that the two presidential candidates have finally decided to set aside their partisan bickering in time to put forth opinions on how to address the economic meltdown.

Perhaps tomorrow night’s debate will even include a discussion of these new proposed plans, and more importantly how they will be paid for.  Where will the $52.5 billion to support McCain’s plan come from?  In what other areas will spending be cut to make room for this plan or Obama’s plan?

Are you listening Bob Schieffer?

Obama the Socialist?

Many conservatives and moderates (such as myself) greatly fear Senator Barack Obama’s tax policies – and most especially when he utters things like this:

Are you serious?  “spread the wealth around”

When did that become a tenet of capitalism?  Sounds like Obama is in favor of creating a egalitarian and classless society .

Hmm….

One step closer to Socialism

“Government owning a take in any private U.S. company is objectionable to most Americans – me included.  Yet the alternative of leaving businesses and consumers without access to financing is totally unacceptable.”
-Hank Paulson

That’s a slippery slope my friends.  When we allow the government to make the decision on when it is right to alter the fundamental economic principles on which our great nation was founded, we move one step closer to a Socialist (and possibly a Communist) society.

So what’s the fuss?

Well, the government put into play a plan that will allow for $250 billion in taxpayer money to be directly injected into nine of the nation’s largest banks.  For this investment, the government will receive preferred shares of stock (I think we can all agree that no one wants the government to have voting rights in private companies) and the ability to legislate executive pay (i.e. no more golden parachutes).

Thus in essence the government has ownership in the country’s largest financial institutions.  A nationalization of the banking industry.  A scary proposition to say the least.

Furthermore the plan includes money to buy troubled assets from banks, insure deposits into non-interest bearing bank accounts (used by businesses to house payroll cash), and back senior unsecured debt from banks.  This combination of moves has been put in place to put liquidity within these financial institutions and to invoke investor confidence to park their money with banks so that the credit crunch can loosen at a quicker pace.

Might this plan work?

Sure.

But we are living in very tumultuous times.  By moving the line of demarcation between capitalism and socialism, we set new precedent.  We can only hope that the line can be moved back in the future – should this plan work successfully.

Obama’s Plan

Senator Barack Obama made public a four-part plan to address the current economic crisis – with a focus on his bread-and-butter – the middle class.

Obama has proposed the following:

• Temporary tax credit for firms that create new jobs in the U.S. over the next two years
• Penalty-free withdrawals from retirement accounts over until the end of next year
• Temporary lifting of taxes in unemployment insurance benefits
• 90-day foreclosure moratorium for homeowners “acting in good faith”

Let’s analyze each of Obama’s points individually.

Tax credits for new jobs

In practice, this sounds like a great idea.  However Obama needs to explain where the outlay for such a credit will come from before it can be proven to be beneficial.  What cuts will be made to the federal budget to allow for these credits?  Likely none, given the fact that cutting social programs isn’t what a Democrat is prone to do.  So the real question is what types of taxes will be increased to pay for these credits?  Will Obama propose to increase the capital gains rate even higher than he has already suggested?  Isn’t this a time when capital gains rates should be lowered, in order to provide more confidence in the stock market and to encourage taxpayers to put more money into the Dow, to prevent the daily sell-offs that have occured over the past two weeks?

So maybe he will increase the tax rate for those making over $250,000 a year to come up with the needed money.  But wouldn’t he be taxing the very same S-Corporations who he is also trying to reward with these job credits?  Seems counterproductive to me.

Retirement accounts

This is a very astute idea – giving those who have suffered from steep inclines in mortgage payments or those who have suffered dreadful losses because of a falling Dow a chance to dip into their retirement savings without punishment.

Specifically Obama has placed a cap of 15% with a maximum of $10,000 on the ability to dip into one’s retirement savings.  This maximum threshold sounds like a great idea – seeing as how letting people divest all retirement savings penalty free would leave many financial instituions in a world of pain with the sudden loss of previously guaranteed liquidity.  The loss of liquidity within these very instituitions is what got us into this “credit crunch” in the first place.  Hopefully a loss of what were once thought to be guaranteed funds wont’ put these institutions into a bigger pinch than they currently find themselves in.

Unemployment Insurance

Again, one has to ask where the money in the federal budget will come from to make up for the loss in revenue from nontaxation of unemployment insurance benefits.  Or of course, what taxes will be increased to pay for this proposal.

Foreclosure moratorium

Despite the fact that those who agreed to mortgages on homes who can no longer afford to pay actually deserve to be kicked to the street, it is an unfortuante side effect that foreclosures within a neighborhood devalue the property of upstanding citizens who live within their means.  These fine folks should not be punished for the idiotic actions of others.  However, how Obama plans to interpret the prhase “acting in good faith” will be the real key to this portion of the proposal.

As one can see, there are many holes that need to be addressed in Obama’s plan before a final verdict can be made on its potential for success.  One has to wonder what took Obama so long to address the economic crisis, as this problem has plagued the nation for well over six weeks.  He’s been awfully quiet about the economy until now – just a few weeks before election day.

Kashkari speaks

The “Bailout Boss,” Neel Kashkari, spoke today to provide details on how the taxpayers’ infamous $700 billion will be used.  Namely, Kashkari provided five key arenas in which the Treasury Department will expend this money:

• Purchase of failed mortgage-backed securities
• Purchase of mortgages
• Purchase of equity in banks
• Assistance to delinquent borrowers to prevent foreclosures
• Insurance of mortgage-backed securities and mortgages

These ideas may sound good on paper, or in a speech, as the case may be.  But let’s examine a bit further, especially on the purchase of mortgages and assistance to delinquent borrowers.

During the second presidential debate, Senator John McCain made reference to buying up mortgages and manipulating their terms in order to prevent foreclosures.  It appears Kashkari and the Treasury are on board with this plan.

However, a couple of large caveats need to be made for such provisions.

Firstly, the principal on any mortgage should not be adjusted downwards to reflect the true current property value of a home.  If the federal government is going to bail out borrowers who can no longer afford their mortgages for purchasing homes that have dropped in value, then I (as someone who can pay my mortgage) expect the same treatment.  My property values have lowered in the last 5 years due to the enormous amount of homes that have been on the market in my neighborhood, all of which have struggled to move.  Just because I can pay my mortgage each month doesn’t mean I don’t deserve equal treatment as those stupid enough to buy homes that they couldn’t afford through the use of adjustable-rate mortgages.

What’s good for the goose is good for the gander.  And as a proud gander, I expect my principal to be adjusted just as much as any low-income earner.

Now that’s just not feasible, right?

So instead of adjusting the principal, and punishing the responsible folks of our great nation, what needs to be done is an adjustment on the interest rates.  Bring the interest rates down on the houses purchased by those who bought over their heads.  Most importantly, though, let the losses be realized by the lending institutions who were “mavericky” enough to approve loans to risky borrowers, all in the name of a quick buck.

Let those who caused the housing bubble to inflate and then subsequently pop be the ones to take responsibility.  The banks, the underwriters, the faulty credit score reporters, those that practiced in mortgage fraud – these should be the parties who have to take the losses as a result of decreased interest rates on homes on the brink of foreclosure.  Not responsible Americans, not the federal government, and not taxpayers as a whole.

Stocks tumble at opening bell

Within the first five minutes of trading today, the Dow dropped 600 points and fell below the 8,000 mark.

President George Bush is scheduled to discuss the economy in a press conference at 9:00am CST.

The G7 can’t meet fast enough.

Folks – Is this is a real emergency we’re facing?  Is this bear market gonna turn around?

Maybe it is time to jump in at these rock bottom, 52-week low prices?

Who knows?

I can tell you this much – I’m going to wait to hear the details from the G7 meeting before jumping back into Wall Street.

How do we sleep when our beds are burning?

Those of us hoping to wake up to good news this morning were severely disappointed.

Overnight the financial crisis that his hit the U.S. economy continued to trickle to markets around the nation.

As domestic stock futures tumbled last night, the European markets were hit heavily.  The English, French, and German markets all fell 6-10% overnight while Japan’s Nikkei Exchange closed down nearly 10%.  Meanwhile Australia closed 8% down and India at 7.4% down.  Things were so bad in Russia that the government closed the markets on Friday and has decided to keep them closed until further notice.

These same countries appear to be following in America’s footsteps in the form of government bailouts.  Japan has offered $45 billion, India has offered $8.2 billion, and three European central banks have offered $120 billion to increase liquidty within each country’s financial institutions.

So now we ask ourselves what the next step will be to eradicate this mess.

We all know that the United States Federal Reserve has taken action, but now its time to find solutions on a more global level.  It has become obvious with this recent course of events that the foreign capital invested into America’s failed mortgage-based securities over the last 10 years was enough to cause banking crises around the world.

A G7 meeting has been planned for this weekend, with the financial heads of the seven major industrial nations in the world to meet and discuss options and solutions to the economic turmoil.  Hopefully a worldwide amicable solution can be identified.

Freefallin’

Anyone who tracked the Dow over the last 1.5 hours before the closing bell this afternoon was privy to some amazing fireworks.

The Dow plunged 679 points (more than seven percent) to close below 9,000 for the first time in 5 years.  For most of the day the Dow hovered at the 9,200 mark.  In what can only be deemed as a sudden rash of stock sales, the Dow closed at 8,579.19.

Various media outlets have all tried to predict when the market will bottom out, so that savvy investors can “buy low and long” to replenish their portfolios.

However, with today’s sudden drop off, when the Dow will hit rock bottom is anyone’s guess.  In seven sessions the Dow has fallen nearly 2,000 points, and there is no end in sight to the madness.

What can be done to retain investor confidence in the market and reverse this trend?

Perhaps once companies are able to obtain funds from the still-frozen credit markets, people will feel more secure in purchasing stock?  Or perhaps once companies get liquidity from the Fed buying up commercial paper?  Maybe if the discount rate at which banks can conduct intra-lending drops even lower?

Regardless, until that momentum shifting event occurs many people, such as myself, will continue to cash out and watch the fireworks from the sideline.

Secretary Pandit?

During last night’s debates, both candidates were posed with the question as to who they would tab to replace Henry Paulson as the next Treasury Secretary.

Both men brought up Berkshire Hathaway’s Warren Buffet – whose lifelong history of sound investment strategies and overall lifestyle of using credit wisely would prove to be an excellent candidate.

Unfortunately Mr. Buffet is 78-years old and probably not looking to spend his twilight years fixing a mess that may take decades to repair.

Senator McCain also referenced Meg Whitman, CEO of eBay, as a possible candidate.  But what kind of banking / investment experience does she really bring to the table?

I’d like to propose a name that has had little traction in this discussion thus far.

Vikram Pandit.

Mr. Pandit is the CEO of Citigroup and has previously spent time as the President and COO of the Investment Banking Group at Morgan Stanley.  After leaving MS and before joining Citi, Pandit started a hedge fund called Old Lane Partners, which was purchased by Citigroup for $800 million.

Mr. Pandit is a rising star in the banking industry, and serves on the boards of Columbia University, the Indian School of Business, Columbia Business School, the Trinity School, and is a former board member of NASDAQ. He holds both a B.S. and M.S. in Electrical Engineering from Columbia, as well as an MBA and Ph.D in finance from Columbia Business School.

At the age of 51, Mr. Pandit has both the educational and professional background to lead the American economy back from the depths of Hades.

Wait, have we even reached rock bottom yet?  No, don’t answer that!

How low can we go?

Today’s federal funds rate cut did little to instill investor confidence in the market, as the Dow plunged nearly 200 points to close at 9,258.10.  Wall Street insiders are claiming that despite the recent sequence of events undertaken by the Fed to bolster the American economy in the short term, it appears that the global economy (not just the U.S.) is headed towards a recession and there is little that can be done to prevent this final outcome.

Nevertheless, economists are predicting that more rate cuts will be on the way, on the heals of Fed chairman Ben Bernanke vowing to take any necessary actions to address the credit crunch that has seized our nation.

Wait a minute.  The rate was cut to 1.5% today.  If the rate is cut any lower at the Fed’s next meeting in late October, won’t we find ourselves staring down the same barrel of a gun that has put a hole in our economy?

Wasn’t it low interest rates earlier this decade that created the environment for easy credit and lending for any and all taxpayers (no matter how qualified they were to pay it back) to qualify for mortgages that created the housing bubble that has burst?

What makes us think greed won’t be a driving factor to cause the same problem to creep up once more, especially since the cast of characters involved is pretty much the same that got us in to this mess in the first place.

There has to be another way.  There just has to.