There is no doubt we have a problem. Financial markets are in crisis. But why do we need $700 Billion from the taxpayers when that money is readily available in world capital markets?
Come Monday there either will, or will not, be a bailout bill.
I have heard both Democratic and Republican congressmen on TV reporting that calls from the people in their districts are running as high as 5 to 1 against a Wall Street bailout with taxpayer’s money.
There are two parts to this crisis and two solutions that require very little, if any, taxpayer money:
Problem Number 1: There are several million foreclosed houses on the market that are depressing real estate values and new home construction and sales.
This has had a cascading effect on jobs and the economy and the value of all the mortgages held by institutions –even the vast majority of good ones.
Solution: Congress could pass a simple tax bill that said anyone buying a home out of foreclosure would not have to pay any capital gain on the sale of that house. If you wanted to take it one step further, the Congress could sweeten the deal by offering a one-time $5,000 tax credit towards any money spent in the first year on repairs or improvements to the property.
Remember, money hasn’t dried up; Credit, and the willingness to take risk, has dried up. Offering this tax break would bring billions of dollars worth of investment capital out of the woodwork and attract investment dollars from overseas wealth funds that now hold trillions of US dollars they can’t make any money on.
You would have everyone from small independent house flippers to massive Real Estate Investment Trusts and overseas investors buying up the distressed property. Buying these now empty homes would increase value of both those properties, and the neighboring properties, and take a ton of excess inventory off of the market. This would restart sales of existing homes and new home construction. Home prices would immediately stabilize and once again start to rise.
The cost to the taxpayers in lost revenue from the capital gains taxes would be more than offset by people paying taxes as the economy improves and people go back to work –including the construction industry which has shed over 2 million jobs in the past two years.
Problem Number 2: Banks, S&Ls and other investors are holding Trillions of Dollars worth of mortgages that they can’t sell because they can’t set a value on them.
This has caused business credit to dry up. And when that happens, personal credit will start to dry up shortly thereafter. That will send the economy into a deep recession that will cost millions of jobs.
It would take three pages to explain how this happened, but is was the perfect storm of Wall Street and investor greed, incompetence, fraud and self-serving corrupt politicians from both parties. There will be plenty of time to investigate and assign blame –and that will happen. But we have to do something now to prevent a financial meltdown.
Solution: Create a public Exchange Traded Fund (ETF) to buy the mortgage paper. ETF’s are mutual funds that trade daily on the stock market. There are several ways to get this fund started. The Treasury or the Fed could offer insurance, much like MGIC (Mortgage Guarantee Insurance Corporation) on the mortgages. Or the fund could be set up as tax free. Any and all investors, foreign or domestic, could invest in the fund and pay no (or less) taxes on any profits or dividend distributions. An insured tax-free fund would attract billions of dollars of investment capital into the funds. Banks could sell their mortgage paper to the funds, or use the fund’s valuation to put a value on their securities. This would allow banks to improve their reserves and balance sheets and give depositors confidence.
What does all this mean to eBay sellers?
Simply put –we are part of the economy too. Last year about 50% of my eBay sales were paid with a credit card. As I pointed out above, when business credit dries up consumer credit soon follows. Credit card rates will increase leaving less money to spend on the goods and services people use credit cards for. Unemployment will increase. People will still buy the basics: food, clothing, gas and health care. But the market for discretionary consumer goods will collapse. This has already started. Last week, the largest boat dealer in the Pacific Northwest went bankrupt.
However, a $700 Billion (or more?) bailout using taxpayer money will have the same effect. This will be hugely inflationary. The only way the Federal Reserve can come up with $700 Billion is to print it. That causes inflation. When you have inflation, interest rates, including mortgage rates, will rise and the value of the dollar will fall. This will reduce consumer purchasing power, kill jobs and reduce investment money from overseas. The stock market will initially jump on news of the bailout, but then it will begin to fall as interest rates rise and the economy tanks. Any gains will be short-lived.
If private capital is used instead of taxpayer funds, money will pour into our financial markets and they will stabilize. Inflation will remain under control and interest rates will remain low. We may still have a slowdown, or even a mild recession, but a long-lasting major recession will be avoided.
But, I suspect, that congress will do the political thing rather than the correct thing. There will be some type of bill. To the extent it uses taxpayer money it will have a negative effect.
One way or the other, eBay sellers who deal in impulse products, or unnecessary consumer goods, will be hurt the most. Sellers of used items and basic consumer goods will not only be OK –they may actually do well as demand for these goods increase.
The focus for the future of eBay will be on bargain hunters and folks looking to save money on goods they need rather than goods they want –or would be nice to have. The other area that could do well is any type of hard asset or stable collectible such as stamps and coins and collectibles with a long history of holding their value. When inflation and recession loom, and in times of uncertainty, people with money look for safe places to put it.
So, depending on how things look a week from now, you may want to take a look at your business with an eye towards the future. In the meantime, call or email your congressperson and let them know how you feel about them spending your money to bail out Wall Street and their political cronies.
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