Dave Ramsey Offers His Solution to the Financial Crisis

SO, with the Senate trying its darnedest to revive the ailing bailout bill, Dave Ramsey has revealed his thoughts on the financial crisis. I read about this over at All Financial Matters. And I think it’s worth a look because a lot of it makes sense. Here’s an overview of Dave Ramsey’s solution to the financial crisis:

I. INSURANCE

A. Insure the subprime bonds/mortgages with an underlying FHA-type insurance. Government-insured and backed loans would have an instant market all over the world, creating immediate and needed liquidity.

B. In order for a company to accept the government-backed insurance, they must do two things:

1. Rewrite any mortgage that is more than three months delinquent to a 6% fixed-rate mortgage.

a. Roll all back payments with no late fees or legal costs into the balance. This brings homeowners current and allows them a chance to keep their homes.

b. Cancel all prepayment penalties to encourage refinancing or the sale of the property to pay off the bad loan. In the event of foreclosure or short sale, the borrower will not be held liable for any deficit balance. FHA does this now, and that encourages mortgage companies to go the extra mile while working with the borrower—again limiting foreclosures and ruined lives.

2. Cancel ALL golden parachutes of EXISTING and FUTURE CEOs and executive team members as long as the company holds these government-insured bonds/mortgages. This keeps underperforming executives from being paid when they don’t do their jobs.

C. This backstop will cost less than $50 billion—a small fraction of the current proposal.

II. MARK TO MARKET

A. Remove mark to market accounting rules for two years on only subprime Tier III bonds/mortgages. This keeps companies from being forced to artificially mark down bonds/mortgages below the value of the underlying mortgages and real estate.

B. This move creates patience in the market and has an immediate stabilizing effect on failing and ailing banks—and it costs the taxpayer nothing.

III. CAPITAL GAINS TAX

A. Remove the capital gains tax completely. Investors will flood the real estate and stock market in search of tax-free profits, creating tremendous—and immediate—liquidity in the markets. Again, this costs the taxpayer nothing.

B. This move will be seen as a lightning rod politically because many will say it is helping the rich. The truth is the rich will benefit, but it will be their money that stimulates the economy. This will enable all Americans to have more stable jobs and retirement investments that go up instead of down. This is not a time for envy, and it’s not a time for politics. It’s time for all of us, as Americans, to stand up, speak out, and fix this mess.

The only part that I’m not really in agreement with is the capital gains tax. While I think cutting it might help a bit, having a capital gains tax doesn’t really stop investment. Personally, I think raising the limits on retirement fund contributions would be a bigger help. Since tax-advantaged IRAs and 401(k)s are investment vehicles, I like the idea of saying that you could put $10,000 or $12,000 a year into your IRA (instead of $4,000) and put $25,000 into your 401(k). For those of us with long time horizons, that would be a great deal. AND it would help boost investment in a way that benefits more of us “regular” folks as well.

As for the “trickle down” claim — well, I don’t really think it works. We’ve had ample evidence of that as the middle class has been shrinking since the Reagan Administration.

I would like to see the government make loans to troubled Wall Street firms, rather than just buying up bad assets (and getting some equity in the company for the trouble).

In the end, something probably does need to be done, since these Wall Street troubles do affect Main Street. But I don’t think that what the government is doing is necessarily the right thing. Maybe Congress needs a couple weeks to think things over, rather than rush to a hasty and possibly ill-advised decision.