Ask a D.C. insider what’s the best way to solve the debt crisis. Nine times out of ten, they’ll recommend taking on more debt. That’s how things operate in the Potomac swamp. Up is down, right is left, digging yourself into more debt is the best way to get out of it. But it wasn’t always like this. In fact, there used to be common sense when it came to the economy. So where did it all go wrong?
Politicians talk about the uninsured. Special interests argue on behalf of those with pre-existing conditions. But why is no one wondering how doctors are affected by the new law? They’re the ones on the frontlines dealing directly with new patients, as well as the red tape that makes bureaucracies go round.
Politicians proclaim the benefits of small business while on the campaign trail. But when they meet in the seedy halls of Congress, they have no problem doing whatever they can to stifle, regulate, and subdue their progress. Instead of siding with entrepreneurs, these politicians often side with political allies and cronies that helped put them into office.
Just because you’re retired doesn’t mean you have to stop working. Especially now that you have all the time in the world to do what you really want. Entrepreneurs don’t only come out of Silicon Valley. They come from all walks of life, from all different ages. If you’re retired and want to stay active while you relax, then find out the steps you need to take in order to start, manage, and grow your next small business.
Austrian economics does more than tell you what happens when the government disturbs market forces. In the hands of knowledgeable investors and entrepreneurs, it can tell you exactly what to expect from the market. Market behavior depends on how people behave. And how people behave is central to the Austrian perspective.
The U.S. dollar has been the world's reserve currency for almost a century, and already there are signs it may be in decline. But that doesn't mean it's not still valuable. On the contrary... As Chris Mayer explains, there are many reasons the U.S. dollar will remain relevant on the world stage for years to come. Read on...
World War II might have dragged the country out of the Great Depression, but it did so at a great price. Central planning took center stage, and politicans and bureaucrats suddenly knew what was best for America, the economy, and your life. On top of that, they replaced the free market with a new economic system… Creditism.
If you’re good at something should you be penalized so others have a chance at success? Should award winning actors and actresses be barred from future Oscar ceremonies to give other men and women the chance to succeed? Success should always be rewarded and encouraged. But what happens when you have a government that wants to even the playing field and take away the spoils of success. Gregory Bresiger finds out...
Practical people often pooh-pooh fiction reading as a time wasting dalliance, dominated by a Marxist coloring of the world. However, fiction readers were given a scientific reason recently for spending hours absorbing fanciful figments of someone’s imagination.
Argentina is suffering the ravages of government debasement of the currency -- i.e., inflation, the process by which government pays for its ever-increasing debts and bills by simply printing more paper currency. The expanded money supply results in a lower value of everyone’s money, which is reflected in the rising prices of the things that money buys.
When government expansion is allowed to continue unabated or when it casts a heavy regulatory shadow on America’s entrepreneurial spirit, the freedoms that we’ve come to know, and perhaps take for granted, slowly begin to slip away.
Its acceptance is as widespread as its justification is important, for it provides the rationale for the Federal Reserve’s unprecedented monetary expansion since 2008. While critics may dispute the wealth effect’s magnitude, few have challenged its conceptual soundness. Such is the purpose of this article. The wealth effect is but a mantra without merit.
Baron Rothschild, the famous French financier, was once heard to say that he knew of only two men who really understood money -- an obscure clerk in the Bank of France and one of the directors of the Bank of England. “Unfortunately,” he added, “they disagree.”
The new reality of Obamacare’s tax credits has left finance reporters to pen articles warning readers to “take care” when considering a tax credit and providing strategies for how best to “protect yourself.” So what do finance reporters know that the White House doesn’t?
Nihilo ex nihilo fit. Out of nothing, nothing comes. First put forward by ancient Greek philosopher Parmenides in the fifth century B.C., Thomas Aquinas and St. Augustine later used this axiom to prove that the universe needed a “first mover” to get things going. Even if the whole thing began with some kind of “Big Bang” moment, it still needed a banger to bang it. Who? God, of course.
Economic theories don’t lend themselves to laboratory testing, so the work of a national appraisal firm is especially enlightening. A new study lends support to the Austrian business cycle theory, which says that the less government is involved, the faster a market will recover.
What positive steps can we take? The energy that is now expended by well intentioned, freedom-seeking individuals on the destructive course of politics can be turned into powerful steps that will have a positive effect on the future. All are moral, right and just. None require aggressing. Consider the following...
The Affordable Care Act creates a new health insurance marketplace (the exchange). But because of the great uncertainty about what buyers will enter the market and who will buy what product, the law creates three vehicles to reduce insurance company risk.
Politicians and bureaucrats are notorious for manufacturing euphemisms -- clever but deceptive substitutes for what they really mean but don’t want to admit. That’s how the phrase “revenue enhancement” entered the vocabulary. Some of our courageous friends in government couldn’t bring themselves to say “tax hike.”
It’s easy to be negative about the U.S. economy these days. Find a glint of silver, and folks come running to point out all of the dark clouds looming about. This, of course, is what we got last week when the monthly jobs report was released from the U.S. Department of Labor (DOL). Folks pooh-poohed the number of jobs and whining that they’re not enough or that it’s less than a bunch of economists thought that it might be. But you know what? Stuff ’em.
Facts are easy. You can check facts. What supporters of the Affordable Care Act are doing, on the other hand, transcends factual bungling. It’s far more advanced: a warping of reality so debauched it looks like something out of a tale by H.P. Lovecraft.
The east coast and parts of the southern U.S. were to varying degrees paralyzed by blizzards a few weeks ago. The snow as expected rendered the roads treacherous, and in anticipation of slick streets, shoppers flocked to the grocery stores in advance.The rush into grocery stores, and its aftermath, offers worthwhile lessons in economics.First up, […]
The highest form of charity, argued the 12th-century Jewish philosopher Maimonides, is when the help given enables the receiver to become self-sufficient.But our systems of state charity — aka welfare — have too frequently had the opposite effect: They have actually created dependency. It is time to rethink the way we help people.I’m going to […]
Last year was quite the year for Bitcoin. We’ve seen exponential growth in Bitcoin’s exchange rate and extensive coverage in the media. Another phenomenon we have witnessed is the proliferation of alternative cryptocurrencies, five of which we’ve provided below.What all of these cryptocurrencies have in common is that they rely on a decentralized network to […]
President Obama crowed in his State of the Union speech about the economy, even mentioning “a rebounding housing market.” Maybe he was referring to friends in high places, like the seller of Penthouse One in New York, which just closed for $50.9 million, all cash. Millions of mere-mortal homeowners likely wanted to throw something at […]
The nonpartisan Congressional Budget Office is acting in a bipartisan way to cover up the biggest single threat to the bipartisan political alliance that is stripping America of its wealth: the United States Congress.There is no question that the following policy is bipartisan. Democrats and Republicans in Congress are completely agreed that the following information […]
Recent difficulties with implementing the Affordable Care Act have increased opposition to the program. A majority of Americans now oppose it. Problems with the HealthCare.gov website are in all likelihood temporary. However, there are serious long-term problems, particularly considering long-term finance and labor supply issues. Given the mounting difficulties with and growing concerns about the […]
In 2008, the American dream of homeownership turned into an incredible nightmare for millions. The government had been subsidizing this stuff for nearly a century, and it all turned to dust. As is typical, government has swung back the other way, seeking to discourage reckless borrowing on houses and to suppress mortgage rackets.
This time, however, the regulations, as harmful as they are, might work in your favor.
The Consumer Financial Protection Bureau (CFPB) has issued new rules on mortgage making, and any sort of interest-only mischief is just plain not allowed.
One must remember to put their Orwellian hat on to understand what the government means when it creates new rules. Take for instance the latest tax bill approved in the wee hours of Jan. 1. It’s called the American Taxpayer Relief Act of 2012. Meanwhile, it provides no relief at all, but, in fact, increased taxes on virtually every American.
Bear that in mind when you read: “Our goal here is not only to stop reckless lending, but to enable consumers to access affordable credit,” said CFPB director Richard Cordray. “We can draw up the greatest consumer protections ever devised, but if consumers cannot get credit, then there is nothing to protect.”
First, the regulations will not stop reckless lending. Second, it will make affordable credit harder to get.
The linchpin to the CFPB’s rules requires that lenders ensure that their borrowers have the ability to repay the loan. Now, you’d think lenders would do that because, well, they want to be repaid. But in fact, most originating lenders don’t stick around to collect payments. They sell the loan to Fannie, Freddie, or whomever. So the government is going to legislate proper loan underwriting. Can the licensing of loan underwriters be far off?
The definition of prudent underwriting will not be left to the market or limited by the customer’s willingness to provide endless amounts of paper. From now on, lenders must consider the borrower’s current income or assets, employment status, credit history, monthly payment obligations beside the proposed mortgage, and monthly debt-to-income ratio.
For loans to be classified as “qualified mortgages” the borrower’s debt-to-income ratio can be no more than 43%. Also, lenders must keep records for three years proving they complied with ability-to-pay rules.
But will this paper chase take the risk out of mortgages? A risk manager who goes by the name Nom de Plumber tells bank analyst Chris Whalen, “However, if risk is defined as value or cash flow volatility, please note how both real estate and personal incomes are far riskier than their associated mortgages — whose payments are typically static, rather than volatile.”
Mr. (or Ms.) de Plumber makes the point that people quit paying not because their payments exploded upward, but because the value of their home plunged or their income crashed or both. Besides, the government-mandated 43% debt-to-income ratio actually exceeds the pre-bubble norm of 30-35%.
What will really make mortgages less risky is to lower leverage. But the CFPB regs say nothing about down payments. Former Fannie Mae chief credit officer Edward Pinto points out, “Under its tortured definition of ‘prime,’ a borrower can have no down payment, a credit score of 580, and a debt ratio over 50% as long as they are approved by a government-sanctioned underwriting system.”
And for all of this de-risking the CFPB says it’s doing, the government lenders’ underwriting systems, that according to Pinto “were instrumental in the housing market collapse,” have been grandfathered in for seven years.
Once the CFPB requirements kick in, bankers are going to only want to make “qualified mortgages” (QM), because if a mortgage is classified as qualified, it is guaranteed to comply with the ability-to-pay rules and thus the lender is shielded from future litigation that could be brought against them for making that loan.
“The core of the ability-to-repay rule rests on two basic, common-sense precepts: Lenders have to check on the numbers and make sure that the numbers check out,” Cordray said. And “Borrowers no longer will be sold mortgages that are predestined to fail.”
So what happens if a lender makes a loan to a borrower that the borrower later determines he couldn’t service?
“Specifically, the final rule provides that consumers may show a violation with regard to a subprime qualified mortgage by showing that at the time the loan was originated, the consumer’s income and debt obligations left insufficient residual income or assets to meet living expenses,” the bureau said in its summary.
“The analysis would consider the consumer’s monthly payments on the loan, loan-related obligations, and any simultaneous loans of which the creditor was aware, as well as any recurring material living expenses of which the creditor was aware.”
Now if the loan is blessed as QM and made at prime rates, it will get what lawyers call “safe harbor,” meaning, according to the CFPB summary, it is “conclusively presumed that the creditor made a good faith and reasonable determination of the consumer’s ability to repay.”
If the loan is made at subprime rates, the borrower has more legal options to sue the lender if they can’t pay. What’s interesting is that it’s not the risk of a loan that makes it prime or subprime, but the loan’s interest rate.
American Banker says, “The rule effectively eliminates the use of so-called no-doc or low-doc loans. It also prevents lenders from basing ability-to-repay decisions on teaser rates, instead requiring them to base it on the principal and interest of the mortgage over its life.”
Also, a QM, “cannot include certain characteristics of nontraditional mortgages, including interest-only and negative-amortization loans, as well as mortgages for a period of longer than 30 years.”
Qualified mortgages also have a 3% cap on the loan fees a borrower can pay. Loan fees are how mortgage brokers are paid. They generally take a couple points, and the actual lender also charges loan fees and passes on other costs. This cap may drive some mortgage brokers out of business. Debra W. Still, chairman of the Mortgage Bankers Association, said in a press release, “The 3% cap on points and fees appears to be overly inclusive,” and would cause some loans to surpass the limit just because the borrower used a mortgage broker or chose settlement services from a provider associated with the lender.
While the Center for Responsible Lending calls the new rules a “reasonable approach to mortgage lending — for the most part,” there is no way the CFPB is, in its words, “enabl[ing] consumers to access affordable credit.”
Leave it to government to miss the forest from the trees. Requiring a bunch of paperwork will not make the industry safer or sounder. But what could it really do? Undoubtedly, requiring large down payments and minimum credit scores that would really strengthen loan portfolios would run afoul of other credit social engineering such as the Community Reinvestment Act (CRA).
The CFPB regulations will not stop the next meltdown. As Mr. Pinto says, “Booms are fueled by excessive leverage. This rule does little to limit borrower leverage and lays the foundation for the next bust.”
But should you shed any tears because you can’t make a 30-year deal that only limits your options and keeps you tied down in a particular location? The CFPB is doing you a favor. If you pay $200,000 for a house, borrowing all of it at 4%, your total payments over 30 years will be over $340,000.
So just how much did you pay for that slice of heaven? We won’t even go into property taxes, maintenance, repairs, and who knows what all. Houses are black hole money pits that hold a psychic spell over owners, causing them to make irrational financial decisions because of the memories made at the house.
Travel light, avoid the intrusive paperwork, and rent. The money you save and flexibility you gain will be well worth it.