Tuesday, October 4, 2011

Investors are fed up. When will we start solving our economic problems?


They've finally done it!
As an average semi-retired baby-boomer and long-time investor I am totally and completely fed up.
Fed up with the sky-is-falling market gyrations fueled by the European Greek debt chaos.
Fed up with the constant barrage of daily economic news that in the past three months has eroded consumer confidence in the U.S.

And completely disgusted with partisan politics and the woeful lack of leadership in Congress to solve our debt issues, reform entitlement programs and keep our fragile economic recovery going.

If the meltdown in 2008 was caused by greedy bankers and mortgage lenders run amok. This time the blame goes to the President and to Congress for not rising above politics as usual. I'm actually tired of hearing them talk, talk, talk. President Obama's "Jobs Speech" was a non-starter for me. This week's example: U.S. Sen. Dick Durbin's two-faced whine to fellow senators about Bank of America.

Durbin essentially told Bank of America customers to dump the bank because of its announcement that it will start charging debit card customers a $5 a month fee. Was the bank stupid for the timing of this announcement and the blunt way it made the announcement? Yes. But banks have a right to make a profit.

Durbin was a prime architect of the Dodd-Frank financial reform law that stripped banks of their ability to make money from credit card interest, debit card fees to retailers and bank-account overdraft fees.

In the old days banks were supposed to make money by lending to borrowers who used the money to buy houses and grow businesses. That's way down the list of revenue producers for banks.

So Durbin is ranting about the debit card fee, telling bank customers to dump the bank. Great. Let's put Bank of America...the nation's largest bank...on the ropes. According to report, Durbin's amendment capped the "swipe fees" that banks charge retailers.

Senators should not be in the business of running banks and bank businesses, but that's where we're headed.

Meanwhile, there are much bigger unsolved issues...the federal debt, government funding and jobs. There are solutions but again I have no faith that our elected leaders will do what needs to be done. Neither the far right nor the far left get it.

The federal government can not be compared to the average household where you can't borrow more than you spend. That is just too simplistic. Governments do borrow, they do carry debt and grease the economy with the spending and debt. For example, Treasury bills weren't invented yesterday.

Charles Krauthammer in a recent column sees a three-prong solution to the serious issues we face that will return our economy and our investment markets to something more normal. The so called super-committee established by the debt-ceiling deal from two months ago has the power to deal with this, he said,

First tax reform: True tax reform,he said, would remove loopholes while lowering tax rates. "It appeals equally to left and right because, almost uniquely, it promotes both economic efficiency and fairness." The committee doesn't need to reinvent the wheel because the proposals were already laid out by the Simpson-Bowles Commission in 2010.

Secondly, Revenue Neutrality

Krauthammer says every dollar of revenue raised by stripping out a loophole is to be returned to the citizenry in the form of lower tax rates. "Start with the obvious boondoggles," he says, "from the $6 billion-a-year ethanol subsidies to your Democratic perennials — corporate jets, oil-company breaks, etc." But it will take more than that. "The real money is in the popular tax breaks: employer-provided health insurance, mortgage interest and charitable contributions. Altering some of these heretofore politically untouchable tax breaks would alone be a singular achievement," he said.

Take the mortgage interest deduction: Krauthammer suggests gradual elimination of the mortgage-interest deduction by first excluding second homes and mortgages greater than, say, $500,000. Then lowering that threshold by $100,000 chunks as the housing market meets certain threshold indexes of recovery."

And finally, Krauthammer talks about a "Grand Bargain."

"Once you have serious revenue from neutral tax reform in place, the ideological horse-trading that is required for massive deficit reduction — tax hikes vs. entitlement reform — can begin."
Republicans will resist the former, Democrats the latter, he said.

"But tax-reform-first makes possible the compromise that eluded John Boehner and Barack Obama," he said. Dealing with Social Security, Medicare and Medicaid in some sort of trade-off negotiations would cut our debt, restore world confidence in the American economy and "best of all, we would be back on the road to national solvency."

Smart people have been explaining this formula or variations of this formula to Congress for years, even decades, but we Americans never solve problems unless we have to. Congress was set up to compromise but in the 24/7 news world of "transparency" it's difficult for reasonable people to have a conversation.

I still believe in American capitalism. I still believe in our ability as a people to solve problems. Today, the Washington-Post reported that hopes that the super-committee will come up with something big are growing less and less likely. But maybe the best indicator that things will be better is that they can't get much worse.

If history is any indicator there are better days ahead for investors, for markets and for the economy. Where will the leadership come from to make it happen?

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