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03.01.2009 0

A Mere Illusion

  • On: 03/06/2009 10:24:47
  • In: Economy
  • By Robert Romano

    “This keeps being called the American Dream. It was actually the American Delusion.”—Richard Cohen, “History Roars Back,” The Washington Post, March 3rd, 2009.

    It is clear—well, as clear as an illusion can be—that President Barack Obama’s plan for the economy is to make water run uphill.

    Just yesterday, the House passed by a vote of 234-191 to give bankruptcy judges the arbitrary authority to reduce mortgages—decreasing the principal owed, lowering the interest rate, and extending the length of the loan.

    Ostensibly, the measure was to “prevent” foreclosures, but the negative effects are numerous: it will further toxify mortgage-backed “assets” that the market already cannot value, it will clog up bankruptcy courts, and it will force banks to eat the costs of the cram-downs.

    Then, the banks, who already face insolvency, will be forced to turn to the taxpayer-funded Treasury and Fed for more assets, who in turn plan on forcing TARP-recipient banks to lend yet more money, give more mortgages, and proceed further into the breach of the growing debt crisis.

    Bad debt got the nation here, and Mr. Obama plans on more of the same to get us out. It is an illusion. And an economic delusion.

    But the illusion of “relief” and “recovery” does not end there. His is a plan that intends to save a system that cannot be; it is akin to defying the laws of physics as the above illusion illustrates. He wants to shore up this crumbling regime by squeezing those he thinks are “wealthy.”

    One controversial provision of the Obama Administration’s proposed $3.6 trillion budget would cap the mortgage deduction at 28 percent for couples making over $250,000.

    Not only is this class warfare, it will also result in yet more foreclosures, further wrecking an already troubled housing market. The President apparently believes that based on the mere fact that a couple makes more than $250,000, that of course they can afford this deduction reduction.

    But when homeowners and banks agreed to the terms of mortgages—even those making more than $250,000—the mortgage deduction was factored in to what was affordable. For many, if the President’s plan becomes law, mortgage payments will most certainly become unaffordable.

    And for Americans more well to do, it will discourage new home purchases by the very people who presently can afford them. Demand will be reduced, and prices will fall, which is contradictory to one of the Administration’s goals of “stabilizing” housing prices.

    Therefore, it simultaneously punishes those who can ill afford it, and discourages those who could conceivably help the housing market to recover.

    For example, for a couple currently paying $3000 a month in mortgage interest, or $36,000 annually, the current deduction at 35 percent is $12,600. Reduced to 28 percent, the deduction falls to $10,080, which represents a $2,520 increase in taxable income.

    And at a whopping 39.6 percent at the highest rate—another increase that occurs under Mr. Obama’s plan—that couple would see almost a $1,000 increase in their tax bill. That does not even factor in the overall increase in taxes that moving from 35 percent to 39.6 percent will inflict upon this hypothetical couple.

    Let’s just look at the $1,000 increase. It may not seem like much, but consider this.

    If the couple is currently just able to keep up with monthly payments even at their higher income level, they’re screwed. Even they, the so-called wealthy, could and may fall behind on their mortgage payments—to say nothing of outrageous property taxes that are collected in high density areas like New York, California, or Virginia, the increase in the capital gains tax that also occurs under Mr. Obama’s plan, and other hikes they are likely to see this year from state and local government looking for revenue under rocks.

    And if another couple were looking to purchase a new home, they may reconsider the proposition all together. It may become unaffordable, or at least unattractive, under the new rules.

    The Obama Administration believes that capping the mortgage interest deduction and those for charitable deductions will raise some $318 billion over 10 years. But that is simply near-sighted central-planning. And it looks desperate.

    For example, it does not even come close to paying for the some $600 billion the government is currently spending in the past year to purchase mortgage-backed securities from Government Sponsored Enterprises Fannie Mae and Freddie Mac.

    Nor does it come close to paying for the $700 billion Troubled Asset Relief Program (TARP) of 2008, or the $750 billion addition to the TARP that Mr. Obama proposes in his budget for this year—“just in case.” Or the over-$2 trillion proposed for his financial “stability” plan.

    And the expansions of FDIC assurances by some $2 trillion in the past year? Forget about it.

    As Bloomberg reports, the FDIC is on the brink of insolvency itself. Remember the risky increase in FDIC deposit insurance to $250,000 to “increase” confidence in banks and “prevent” failures? The risk was that if the failures happened anyway, then the FDIC would then be forced to pay out twice as much.

    Guess what? Bank failures are still occurring—25 last year, and 16 already this year—and to make matters worse, the amount of money that FDIC now has to pay out doubled. Thanks to the TARP, which increased FDIC’s commitments over 100 fold.

    Next thing you know, bank withdrawals will become taxable “income.” That is, if there’s even any money left in your account when the government is through stealing it all.

    It all puts the lie to Mr. Obama’s alleged intention to “prevent” foreclosures. To restore growth and prosperity. To slash the deficit. To pay down the debt. To save the financial system.

    His plan amounts to squeezing those who he views as the wealthy to shore up a broken financial system—to which both the public and private sectors are hopelessly tethered to—that is too big to save. There are simply too many debts to pay back.

    Under Mr. Obama’s budget scam, the deficit rises to $1.75 trillion—just for one year. That is as astounding as it is unaffordable.

    And unsustainable. According to Time’s Michael Kinsley, as of September 30th, 2008, the U.S. had $56.5 trillion in assets, and some $56.4 trillion in unfunded liabilities both publicly and privately. And as he noted, since then it has undoubtedly gotten worse.

    To sum up this untenable crisis—and indefensible approach to addressing it—government could levy a 100 percent luxury tax, a 100 percent property tax, and a 100 percent income tax on the entire economy to pay it all back, and the American people would have exactly zero assets.

    In other words, we’re bankrupt.

    Making water uphill will not work, and without addressing the dependency upon debt that is the root cause of the nation’s economic woes, recovery and prosperity will remain nebulous, and promises of it illusionary.

    Robert Romano is the Senior Editor of ALG News Bureau.

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