The Necessary Steps Forward

Unemployment inching closer to 10%, an unprecedented federal budged deficit, and a new found skepticism towards anything government related.  This is the state of our country right now, currently it’s a problem and eventually it will lead to our demise.  The media blames the banks for being too greedy and only caring about the bottom line.  You’ll also here politicians saying we need to put more emphasis on main street and not on wall street.  With all of the smoke being blown, its tough to really disseminate what actually needs to be done.  In order to understand what we need to do in the future, we need to understand the mistakes that we made in our past.

Past

                 The recession that started in 2008 was a result of the crash of the housing market.  Things known as CMO’s (Collateralized Mortgage Obligations) were being sold in dollar amounts in the trillions, which is a common practice.  This has been done for years, and is not the reason why the economy crashed.  The real reason is the types of mortgages being put into the CMO’s.  I know this sounds arbitrary but its not.  Banks operate in the capacity in which they’re allowed to operate in, and they have laws and regulations to abide by just like we do.  The true cause of this was the ease in which mortgages were available.  The reason mortgage restrictions became so light, is because of the legislation by Congress to make home ownership easier to come by.  This is the problem.  Too many mortgages being taken on by people who couldn’t afford the payments.  Eventually when the mortgages rates increased people were forced to default on a mass level.  This is the true reason for the recession, not because of greed but because of faulty legislation.

               This was the American way though.  Spend spend spend because you could access your lines of credit whether it be through your home equity loans or by your credit cards.  People everyday were charging everything to their cards and taking out loans for items that were unnecessary.  This was the start to a new way of life that was exciting, but involved unsustainable amounts of debt.  Eventually these debts had to be paid and that’s when the problem started on a more microeconomic scale rather than the housing crisis.

Future

In the coming years we have a choice, repeat our previous mistakes or learn from them.  I’m proposing ways to fix our mistakes on a personal level and on a more national level.  If we can improve our habits on a personal level, then we can allow our government the freedom to invest in the future of this country.  We have to make the first step though to insure that there isn’t another meltdown like in 2008.

Personal

                We need to embrace frugality again.  Just because we have the lines of credit, doesn’t mean they need to be used let alone maxed out.  We need to start saving again, as our grandparents did.  I’m 22 years old and I frequently wonder about how the world will change when I retire (hopefully at a young age).  I think that social security will be non existent.  We will be responsible for our own retirement funds.  I don’t think that is a problem.  If I work for 40 years I will be able to save a considerable amount of money to retire, I’m taking on that responsibility.  We should all think like this, the age is over where we should depend on our government for things such as social security and healthcare.  At the end of the day, we have to be more dependent on ourselves and not the government. 

                One day I’m sure we’ll all want to buy homes, it’s a necessary investment for our future.  This time around though we need to live within our means and not take on a mortgage that is over fifty percent of our monthly income, it isn’t sustainable.  When you sign this mortgage contract I stress to you the words “fixed interest rate” not variable.  Variable interest rates fluctuate in accordance with the market rates, which was a major reason why people defaulted on their payments.  It’s that simple, just live within your means.  Don’t buy the house and the BMW at 25 when you can wait till later when you can actually afford it.  Oh and also, if we all do this the volatility of CMO’s will not exist anymore because the mortgages that compose each CMO will be made by responsible homeowners who can afford their way of life.

Federal

                These changes that we are all going to make will allow the government to focus on investing in our future rather than bailing us out from our past.  I think there are five issues the government needs to focus on improving in the future.

1.       Alternative Energy: Our dependence on foreign oil is no surprise to anyone.  We are the biggest consumer of oil on the planet.  We don’t produce much of it, so we need to import it from outside of the nation.  This leaves us susceptible to constant influxes in the cost of this commodity which leads to instabilities in domestic oil prices.  Regardless of what we invest in, it needs to be easier to produce, safer, and cheaper than oil.  The government should take steps to seriously research the pros and cons of each type of alternative fuel by outside research facilities, not the “bipartisan” congressional budget office. 

2.       Infrastructure: This nation’s infrastructure used to be something to be proud of, anymore it’s a mess.  Living in PA I’m all to familiar with the inefficiencies of PENDOT.  I don’t think it’s the federal government’s job to invest in infrastructure, beside US interstates.  I do believe though, that the federal government should provide incentives for the states to rebuild their infrastructures.  States usually raise capital to invest in such things by issuing municipal bonds, which are the state equivalent of treasury securities.  Perhaps the states could offer municipal bonds at an interest rate equaling that of the 10 year T-Bond exclusively to the Federal Government.  In this scenario it is an investment for the fed and provides states the ability to issue debt at a below market interest rate.  The downside to this is that most roads would become toll roads which I’m ok with.  I’d rather pay 50 cents to use a highway everyday then have the state levy a construction tax on all of its residents.

3.       Education Reform: In the state of the union address last night President Obama mentioned that in South Korea teachers are referred to as nation builders.  I don’t think it gets much truer than that.  We should provide incentives for our nation builders to be better, more dedicated and influential teachers.  I’m not familiar with the education system enough to make a suggestion of reform, but I can suggest that full time public school teachers should be exempt from paying federal taxes.  I think they’ve earned it.  It would be a lot easier to raise their after tax income by doing this rather than forcing school districts to increase the pay grade scale of teachers.

4.       Healthcare: I used to say healthcare is a luxury, and that everyone doesn’t deserve it.  I’m going to take back that statement.  The question is what type of healthcare.  The kind that we get should be contingent on the premiums we pay, but all patients who are terminally ill or have a disease should receive the same treatment regardless.  The fact is, we shouldn’t nationalize healthcare, we should regulate it more.  It’s too market driven.  We need to find a balance so that we don’t stifle the innovation of medicine but also we don’t pad their pockets with excess profits.  If we can make healthcare more affordable then there is no reason to nationalize healthcare.

5.       Immigration: Everyone deserves a chance to come to America and make something of themselves.  Although, when you do it register properly and pay taxes.  I don’t care if 5000 Mexicans come over daily, just as long as they don’t work illegally and they pay their taxes.  Eventually the jobs that they yearn for won’t be available, and we’ll see a huge decrease of Mexicans crossing the border.  The problem is we haven’t reached that point yet so we all assume the entire country of Mexico is trying to set up shop a little north.

These suggestions are very practical.  They just need to be done in a responsible manner.  We can’t burden the states and federal government to provide things for us in the future.  We have to take control and change our own situations, before they will embrace a more frugal spending regimen.   In time, I’m confident that solutions will be made to benefit the country, and we will no longer have to worry about ending up like Greece and Ireland.  We can’t let our government go bankrupt, because then everything that I just mentioned will no longer be able to happen.