We have had too many short term fixes from our government. It is time to look long term in respect to interest rates and taxes.

I can normally come up with a way to fix the world’s problems in about 30-40 seconds. I’m not claiming to have all of the answers, but I have quite a few of them, and they aren’t really that challenging. The big problem with finding the answers to things like health care and the current financial crises we are facing is that most people are too ignorant of the facts to deal with them. Those who aren’t actually ignorant of the facts are too busy trying to get re-elected or line their pockets.

The current economic problem in this country was created by the Fed Rate being dropped to 1%. This led to people borrowing money that they could not afford to pay back. Many of them borrowed that money promising to pay it back at a higher rate upon the adjustment of the Fed Rate. If you sign up for an adjustable rate while the rates are at an all time low, what can you reasonably expect to happen? That rate is now over 4% so guess what has happened to the monthly payments. They have of course increased.

The other issue with the low Fed Rate is the devaluation of the US Dollar. This has caused inflation, despite what Bernanke is saying, inflation is indeed flying. With the USD falling, coupled with higher demand for oil world-wide, oil is bouncing between $80 and $100 a barrel. If the USD were to gain back some of it’s value, oil would fall modestly. This would have a double impact on inflation since lower oil means lower transportation costs for things like food.

Where am I going with this? Well, the current attempts by our wonderful government to bail out the economy stink to high heaven. You don’t fix the problem with over-liquidity by increasing liquidity. This is kind of like tossing dynamite into a forest fire and expecting the fire to die. Lowering the rate is not going to fix anything right now. It may cause short term fixes, but we have a long term problem. The government is also proposing tax rebates and the sort for low income families. Again, this will have short term fixes, but will hurt in the long term. Tax cuts must target the broad economy to have a lasting effect. This is why the tax cuts that we have seen under George W Bush were largely targeted to business owners. Allowing tax cuts gave them the ability to re-invest back into their companies, which helps create new jobs.

So how do we fix it? We start by eliminating all corporate taxes. Now I know full well that this will never happen because democrats in Congress are too busy lying to you to inform you that this would have a massive positive impact on the US economy. So I offer a compromise. Eliminate taxes for all corporations that pay 100% of all health care insurance for their employees. I would bet that the tax savings for a number of companies in this country would allow this. Many already pay a large portion of the insurance for their employees, so they don’t need much more in their pockets to do this. They would also be able to fire their tax attorneys which would help. The savings to the employee replaces the need for more tax rebates. You now give more employers an incentive to make sure their people have insurance, which takes part of the burden off of the government. You also create additional revenue because you give insurance agents more business. And now insurance companies have a reason to try and become even more competitive because they want to attract this additional business. To attract more business, they have to lower their rates. I could think up more advantages to doing this, but this is getting boring and I don’t want this to get too long.

What do we do about the foreclosures? Nothing. That’s right, nothing. We can’t continue to lower rates and we certainly can’t bail people out. If the government bails people out, then we take away from the price of risk. Pricing risk improperly is another reason we are in this mess right now, so I go back to the dynamite in the forest fire example. The reality is that the people losing their houses are not going to be homeless. They simply have to change their style and may have to rent for a while. The other reality is that the banks are now selling these houses off at a loss which simply creates more opportunity for smart people. We have to let this cycle. Anything that resembles a bail out continues to hurt the USD and continues to push up inflation.

I know that you are thinking that I haven’t done anything to actually fix the foreclosure problem, but indeed I have. You see, realizing that a 1% Fed Rate was partly responsible for this mess tells a reasonable person to not do it again. Properly pricing the rate prevents this problem in the future and in fact causes the current issue to stay put instead of expanding. A bail out would extend the problem, again, the inflation thing. Also, the brilliant idea I gave you earlier about corporate taxes puts more money into the pockets of the people trying so hard to pay the mortgage.

Glad I could help.