Category Archives: Economy

Here’s Why The Dot Com Bubble Began And Why It Popped

 

 

 

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This article appeared in Business Insider on Dec 15, 2010 by Ironman Calculations

We’ve long known that the U.S. stock market’s “Dot Com Bubble” really began in April 1997 and ended in June 2003, but we’ve never addressed two key questions about the event:

  1. What caused it to begin?
  2. What caused it to end?

Today, we can answer those two questions. Let’s begin by revisiting and tweaking our operational definition of just what an economic bubble is:

An economic bubble exists whenever the price of an asset that may be freely exchanged in a well-established market first soars then plummets over a sustained period of time at rates that are decoupled from the rate of growth of the income that might reasonably be expected to be realized from owning or holding the asset.

By applying that definition and noting the last month that changes in stock prices were coupled with changes in their underlying dividends per share before the Dot Com Bubble began, we identified April 1997 as the true starting point in time for the Dot Com Bubble. Likewise, we identified June 2003 as being the first month following the end of the period in which changes in stock prices and their dividends per share were decoupled from one another.

Political Calculations

Having now identified those key months, we can look toward the specific events that occurred either during that month or the month preceding these months to identify the specific causes of the Dot Com Bubble’s beginning and end.

As it happens, we discovered the specific cause behind the rapid expansion of the Dot Com Bubble in what we’ll describe as a landmark paper by Zhonglan Dai, Douglas A. Shackelford and Harold H. Zhang. In Capital Gains Taxes and Stock Return Volatility: Evidence from the Taxpayer Relief Act of 1997, Dai, Shackelford and Zhang describe the events that led to the Dot Com Bubble’s inflation:

We use the Taxpayer Relief Act of 1997 as our event to empirically test the impact of a change in the capital gains tax rate on stock return volatility. TRA97 lowered the maximum tax rate on capital gains for individual investors from 28 percent to 20 percent for assets held more than 18 months. TRA97 is particularly attractive for an event study because the capital gains tax cut was large and relatively unexpected, and the bill included few other changes that might confound our analysis. Little information was released about TRA97, until Wednesday, April 30, 1997, when the Congressional Budget Office (CBO) surprisingly announced that the estimate of the 1997 deficit had been reduced by $45 billion. Two days later, on May 2, the President and Congressional leaders announced an agreement to balance the budget by 2002 and, among other things, reduce the capital gains tax rate. These announcements greatly increased the probability of a capital gains tax cut. On Wednesday, May 7, 1997, Senate Finance Chairman William Roth and House Ways and Means Chairman William Archer jointly announced that the effective date on any reduction in the capital gains tax rate would be May 7, 1997. As promised, the lower tax rate on long-term capital gains (eventually set at 20 percent) became retroactively effective to May 7, 1997, when the President signed the legislation on August 5, 1997.

Empirically testing stock market return data before and after the key date of 7 May 1997, when investors would suddenly have a reasonable expectation that a reduction in the capital gains tax rate would become effective, the authors made a stunning finding:

To provide more compelling evidence that the 1997 tax cut affected volatility (and mitigate concerns about omitted correlated variables), we focus on cross-sectional tests which are designed to detect the differential responses in return volatility of stocks with different characteristics. We hypothesize that the effect of a capital gains tax change on stock return volatility should vary depending upon dividend policy and the size of the unrealized capital losses (or gains). Consistent with expectations, we find that non and lower dividend-paying stocks experienced a larger increase in return volatility than high dividend-paying stocks. We also find that stocks with large unrealized capital losses had a larger increase in return volatility after a capital gains tax rate reduction than stocks with small unrealized capital losses. However, we do not find a similar relation with unrealized capital gains.

The difference in volatility between high dividend-paying stocks and non-or-low dividend paying stocks provided the key evidence pointing the finger at the Taxpayer Relief Act of 1997:

We infer from the findings in this study that the volatility left, after controlling for every known determinant, reflects the influence of the 1997 capital gains tax rate cut. Stock return volatility was substantially greater after 1997. Furthermore, firms most affected by the rate reduction showed the greatest change in volatility. Specifically, non-dividend paying firms had a greater increase in volatility than dividend-paying firms and firms with large unrealized capital losses experienced a greater increase in volatility than firms with small unrealized losses.

The reason we find that conclusion to be significant is because the Taxpayer Relief Act of 1997 left dividend tax rates unchanged – they continued to be taxed at the same rates as regular income in the United States, which provided a powerful incentive for investors to treat the two kinds of stocks very differently, favoring the low-to-no dividend paying stocks over those that paid out more significant dividends.

At least, until May 2003, when the compromises that led to, and ultimately the signing of the Jobs and Growth Tax Relief Reconciliation Act of 2003 would set both the tax rates for capital gains and for dividends to once again be equal to one another, as they had been in the years from 1986 through 1997:
political calc

Political Calculations

With the disparity in taxes assessed against dividend paying compared to non-dividend paying stocks now gone, stock prices once again resumed their closely-coupled relationship with their dividends per share, and volatility was reduced.

Of course, that raises the question of why a bubble didn’t exist in the pre-1986 period where both capital gains and dividends were taxed at different rates. We would however point out that a very large percentage of publicly-traded companies paid dividends in that earlier period, limiting the effect of such a disparity.

By contrast, the founding and rapid growth of new computer and Internet technology-oriented companies in the early 1990s, which grew rapidly to become large companies and which as growth companies, did not pay significant dividends to shareholders, provided the critical mass needed for the 1997 capital gains tax cut to launch the Dot Com Bubble. We can see this in the size of Initial Public Offerings in each year since 1980, beginning from a very low level at the beginning of the 1980s, to their peak at the height of the Dot Com Bubble:
political calcThomson Reuters

In the end however, we find that it took an act of Congress to launch the stock market bubble of the late 1990s, and that it took another act of Congress to undo its disruptive effect. The Taxpayer Relief Act of 1997 and the Jobs and Growth Tax Relief Reconciliation Act of 2003 are quite literally the bookends defining the period of disorder in the U.S. stock market known as the Dot Com Bubble.

Read more: http://www.businessinsider.com/heres-why-the-dot-com-bubble-began-and-why-it-popped-2010-12#ixzz3Dz8c2GWR

 

Underwater Mortgages Resolved Without Excessively Inflating Asset And Primary Home Prices

New Mortgage Terms and Tax Policies Help Reduces Unemployment and Foreclosures

The Federal Government has failed to develop a viable national plan to resolve the underwater mortgage problem nationally.
For years the Federal Reserve has been using monetary policies to maintain low interest rates to help revive the economy.  Monetary policies alone cannot provide our economy with a sustainable recovery.  Government deficit spending policies have not fully revived the economy either.  For the Main St. economy to benefit from the long term low interest rates the Federal Reserve has created with its monetary policies, better mortgage terms, and the correct principal reduction plan for underwater mortgages are needed.  To jolt the economy back to life we need to increase aggregate demand. Our economy also needs a change in our taxation policies to have a sustainable recovery.
The Federal Reserve has been using quantitative easing to create long term low interest rates, which, used by itself, will re-inflate housing prices, which is currently occurring in the housing market, and eventually cause interest rates to rise, which will cause another recession.
We can have a sustainable economic recovery by creating a mortgage with a lower starting interest rate, and then a fixed interest rate for the remaining term of the mortgage.  We can also maintain lower long term interest rates with a change in our tax code as explained later.  The Fed’s monetary policies should not be the only tool we use to control inflation, and to stimulate the economy. https://wp.me/p42WQA-7c
I am sure the Fed would agree that an infusion of confidence, and purchasing power into the middle class will go a long way in obtaining their goal of lowering the unemployment rate, and price stability.  We have all the necessary institutions in place to help the Fed make it happen, if we fully utilize these institutions.
The backbone of any modern consumption economy is its middle-income population.  If they are financially strong, the economy will be strong, and the government will have the revenue to pay its debt and current expenditures.  70% of the economic activity in our economy relies on the consumer.  It is consumer demand that drives increases in employment, and productive investment.
The financial sector needs to adopt a mortgage, with new terms that are more appealing to investors than the 10 year US Treasury Note, to provide people with a mortgage with a lower starting mortgage interest rate, and then a long-term fixed interest rate. The Home Owners Loan Corporation, (HOLC) a federal agency, created new mortgage terms  in the 1930s by adopting the thirty year fixed interest rate mortgage, and a principal reduction plan to help improve the economy, and reduce unemployment.  We need to do the same thing now!  A monthly principal reduction plan needs to be put in place for all underwater mortgages to reduce strategic abandonment, to quicken the balancing of the primary home market, and to hasten an economic recovery.
A mortgage-backed security (MBS) needs to be created that the interest rate increases each year until the interest rate equals the thirty year fixed rate mortgage interest rate, or a little above it.  A guaranteed annual increase in the interest rate is something a 10 year US Treasury Note doesn’t have.  If the mortgages are securitized by Fannie Mae or Freddie Mac, the Mortgage Backed Security should be guaranteed by the full faith and credit of the federal government, similar to US Treasury notes and bonds, after certain conditions are met, as explained later.  Mortgages that are collateralized with less than 10% equity should be insured, if possible, with a mortgage payment insurance policy, rather than mortgage insurance, to guarantee payment of the payment each month if the homeowner is unable to make the payment. We should also consider a combination of the two types of insurance to insure the mortgage.
To improve Main Street’s economy and reduce unemployment, people’s monthly disposable income, and confidence needs to improve, to increase aggregate demand. By restructuring, or refinancing almost all primary home mortgages.  With the correct mortgage terms people’s purchasing power would be increased on Main St., which would speed-up economic recovery without increasing the money supply.  Increasing the money supply, without increasing the supply of products and services, debases the currency, which leads to higher prices.
How the “Plan” increases people’s monthly disposable income and confidence, to increase aggregate demand, is by making available, to all qualified homeowners, and home buyers, a mortgage with new terms. The primary home buyers, and those homeowners that want to refinance need terms that they can succeed at, unlike the previous mortgages that created the collapse of our economy, and the collapse of most of the world’s economies.
The risk of default of the new mortgage is near zero, because the borrower would qualify at the highest rate of interest the mortgage interest rate would rise to, which would be the 30 years fixed rate mortgage interest rate, or a little above it. The two types of mortgage insurance would also decrease the possibility of the taxpayers losing any money, after the mortgage originator has assumed the first 10% of the losses of a defaulted mortgage.
The new mortgage terms would be similar to other mortgages that are available to home owners, and home buyers It starts out at a low-interest rate, but, and this is important, the Ascending Interest Rate Mortgage is not indexed after a few years. as the current 5/1 Adjustable Rate Mortgage is. The lower starting interest rate would allow the homeowner the time needed to build equity, establish their household, and begin a family. The stronger the family is the stronger our economy is.
Do we want a nation of renters, or do we want people involved in our capitalist system? Do we want people, and families that are solidly tied to the neighborhood?  The mortgage terms I am proposing would encourage home ownership for qualified people, and stability for our economy.
If it is profitable for the financial sector to offer the 5/1 ARM that maintains interest rates at 2.75% for 5 year, and the 15 year fixed interest rate mortgage at about 3%, the mortgage originators should be able to offer the following mortgage terms without any lost to their profit margin.
What mortgage terms should be offered to the public, to improve the primary home market, reduce foreclosures, and unemployment, with the 10 year US Treasury Note yielding about 2% and with the Fed rate at .25%?
The Ascending Interest Rate Mortgage has a starting interest rate of around 2.75% or lower, based on the ten-year US Treasury Note. Currently the 10 year Treasury Note is about 2%. That would make the interest rate for the first year lower than 2.75%. The interest rate would increase .25% per year, unlike a Treasury Note which has no increase in the interest rate during its term. The interest rate would stop increasing at 5%, which will take 9 years to obtain, or at the 30 year fixed rate mortgage interest rate, or a little higher, whichever is lower.
Underwater mortgage principal reduction should be done on a monthly basis based on 33.33% of the interest and principal monthly payment. If a person was making a $1500.00 monthly P&I mortgage payment, an additional $500.00 principal amount would be subtracted from the underwater mortgage each month, for a total of $6000.00 a year. For a total, if warranted, of $60,000.00 maximum over a ten year period. This policy would encourage people to stay in their homes, and continue to make their mortgage payments.  It would give them hope that their mortgage would, sooner than later, equal the sale price of their home, without re-inflating primary home prices. Primary home prices rising too fast, based on wage increases, fraud, and an over leveraged financial sector is what created the financial crisis.  We do not want to repeat history. We need to re-balance our economy, reduce the debt overhang, and change tax policy to have a sustainable economic recovery. wp.me/p42WQA-1E
There is no lost in purchasing power of the mortgage investor’s invested money if the unpaid principal amount is reduced 6% in one year, or the price of primary homes increase 6% in one year. With the Fed’s very low interest rate policy, created with it purchasing mortgage backed securities and government debt, mortgage investors are losing a greater amount of purchasing power, because, in the last couple years, primary home prices have increased an average of more than 20%, in some markets, in one year.
As the economy improves the Ascending Interest Rate Mortgage will decrease people’s purchasing power with a .25% higher interest rate each year to help prevent too much aggregate demand from being created, which would help create another cycle of inflation, or a primary home price bubble.
The new mortgage terms would only be available to owners, or buyers of owner occupied homes. The home buyers, or the homeowner will embrace the new mortgage terms, because they will know what their housing cost will be for years to come. With predictability comes confidence in taking on the responsibly of a mortgage. They will also prefer the AIR Mortgage over the 30 year fixed rate mortgage, because of the lower starting interest rate. A simple letter of modification stating the old terms, and the new terms is all that is needed to modify those mortgages that have remained current, and are held in Fannie and Freddie’s portfolio of mortgages. Because of low starting interest rate, the risk of default, or foreclosure would be drastically reduced.
I believe investors would embrace the new terms, because of the reduced risk of default, and the reduced interest rate change risk as outlined later in the new taxation policy I am proposing.
With the AIR Mortgage available, more homes will be sold and refinanced. The AIR Mortgage will increase economic activity in the primary home sector, which will help the primary home market, and the economy to improve. The foreclosure rate should decrease. The foreclosure inventory would be quickly sold to owner occupied home buyers. The primary home market will stabilize, and then home values will slowly increase 1 to 2% a year if the “Plan” is fully implemented.
For the AIR Mortgage to become available, Fannie Mae and Freddie Mac, and other government home financing agencies will need to offer to purchase the mortgage from the banks, and other mortgage originators, before the banks and mortgage brokers will offer the new mortgage terms to the public. If the Fed agrees that they will purchase the AIR Mortgage securities from Fannie Mae and Freddie Mac, and other housing agencies, there is no reason for F&F, and other government housing financing agencies not to offer the AIR Mortgage to the public.
The Director of the FHFA, Mr. Mel Watt, needs to be replaced if he fails to allow F&F to purchase the AIR Mortgage, and use the monthly principal reduction procedure to quicken the restructuring of, and the stabilization of F&F’s mortgage portfolios.
We should take Fannie and Freddie out of conservator-ship and use them to improve the economy, and the primary housing market. We made a mistake when we allowed the government to privatize Fannie Mae. Fannie Mae and Freddie Mac should be foreclosed upon, and then used for the public benefit, as they were originally created for, instead of for profit.
With the housing market improving, and F&F earning more money than it is costing to operate F&F, we will be able to repay the 160 billion F&F have borrowed from the US Treasury. When HOLC was shut down in the 1950s, it returned the excess funds it had collected, after all the mortgages they held were paid off, back to the US Treasury.
If the restructuring, mortgage monthly principal reduction, and refinancing of the mortgages is done quickly, and the housing market and the unemployment rate begin to improve, we may be able to let the Bush Tax Cuts expire, without creating a recession, because of the increase in aggregate demand the new mortgage terms will create with an increase in disposable income on Main Street.
Investors will invest in the AIR Mortgage securities, because the securities will increase in value as the annual interest rate increases .25% a year, unlike the 10 yr. treasury note, and other fixed rate debt instruments, which will decrease in value, as interest rates increase. Also the Ascending Interest Rate Mortgages that are securitized in the MBS would have a near zero default rate, because of the lower starting interest rate.
Banks and mortgage brokers do not hold all the mortgages they originate. They sell most of them to investors, or they are securitized into Mortgage Backed Securities (MBSs). If investors don’t see the value in the AIR Mortgage security, the Fed should sell the mortgage securities they are holding with higher interest rates, because they will become more valuable when the new mortgage terms are made available. The Fed would then hold the new AIR Mortgage securities until their interest rate increases to the 30 year fixed interest rate. The Fed would then sell the mortgages to investors.
The “Plan” would be more efficient if it was adopted nationally, because F&F would be able to offer the lowest possible interest rates, but a State, or county could adopt the Plan by selling bonds, and then using the money to purchase the underwater mortgages at fair market value from investors and banks, and then restructure the mortgages as outlined in the Plan.
Purchasing the underwater mortgages may not be necessary.  Investors will want to stay invested in the mortgages after they accept the new terms, and the monthly principal reduction plan, because of the benefits this plan has over a full principal reduction of the underwater mortgage to market value, or an eminent domain procedure or foreclosure.
The monthly principal reduction plan can be thought of as an appreciation sharing plan, because the mortgage is not reduced to the current sale value of the home, but to a value that equals the unpaid balance of the mortgage in the future after the home appreciates to the reduced mortgage amount, which is being reduced monthly for a maximum of 10 yrs., or until the sale price of the home, and mortgage are the same monetary amount.
The other possibility would be to create a State, regional, or a county wide bank that would have access to the Fed’s discount window to borrow the funds to start the mortgage restructuring. North Dakota has a state bank. California is considering a state bank, and has created a study group to take a closer look at the benefits, and pitfalls of having a state bank. North Dakota’s economy is doing very good with a 4.5% unemployment rate, and a normal foreclosure rate.
It is very possible, that because the underwater mortgage’s unpaid balance will be reduced monthly, under the terms of the Plan, that the total return on investment will be much more than the spread between the cost of funds, and the interest rate the homeowners will be paying, if the underwater mortgages are purchased at market value. The increase in return on investment occurs, because of the increase in a home’s value  will have over a few years, using the Plan. The mortgage may have only been reduced by a small percentage, using the monthly principal reduction procedure, when the underwater mortgage equals the resale value of the home, if compared to a full discount to the market value of the home, when the mortgage is restructured. This makes the mortgage more valuable for resale purposes. Not only would the investor be collecting interest on a larger principal balance, the investor will receive a larger principal pay off when the loan is paid off, or the home is sold. The homeowner will be paying a lower interest rate on a larger principal amount, but the monthly payment will be much lower than their current monthly payment. The mortgage principal and interest payment may be reduced 50% if the current interest rate of the mortgage is 100% higher than the starting interest rate of the new Air Mortgage. If the homeowner is paying $1500.00 P&I per month, the P&I payment on the new Air Mortgage will be $750.00.
When a recession occurs in an economy, interest rates decrease. To increase demand on Main St., to reduce the length, and depth of the recession, or financial crisis, all single family home mortgages should include a clause that lowers the interest rate, as the Federal Reserve lowers interest rates to the financial sector. This change will eliminate refinancing cost, and increase economic activity, and aggregate demand on Main St. rather than primarily increasing economic activity in the financial sector, increasing it’s profits, and bonuses. As the economy improves, the Fed will increase the cost of funds to the financial sector, the interest rate should then increase slowly until it rises to the interest rate of the 30 year fix rate interest rate, or the prior interest rate the mortgage interest rate was at prior to the interest rate being lowered, which ever is the lowest interest rate.
As I mentioned earlier: You can think of the monthly principal reduction procedure as a future equity sharing plan. Therefore the mortgage could be readily sold to FHA, or private investment funds after the mortgage has been restructured.
The county or cities tax base would also be maintained at a higher value if home values are not decreased. When the homeowner sells the home in the future the home should sell for a higher price if surrounding homes have not been decreased in price.
The new mortgage should be able to be assumed by a qualified buyer to increase mobility of the current homeowner, so they will be able to find work in other areas of the country. Having the AIR Mortgage assumable would also assure a continuation of mortgage payments.
The primary single unit home market should be composed of people wanting a home to live in. In this way they will not be competing with investors for a home to live in. Investors have many multi- unit housing opportunities to invest in. All tax deductible expenses should be eliminated from the tax code for investors in single unit family homes. If homeowners are given the tax deduction, that investors now have, to repair their homes, they will buy the homes that need repairs, and fix them up, there-by stabilizing and improving neighborhoods. Single family home prices would be based on the purchasing power of the people that want to live in the home. Not the greater purchasing power of investors.
The private financial sector, Fannie and Freddie and the other government housing financing agencies could save millions of dollars by preventing millions of unnecessary foreclosures by adopting the AIR Mortgage terms, with monthly principal reduction, to restructure most of the underwater mortgages they hold in their portfolios. The financial sector, and F&F would win the support of millions of families if they succeeded in this endeavor.
Our economy would be on a defined road to recovery. The deficit would decrease as employment improved.
The People’s Economic Recovery Plan presents a better procedure to dispose of the underwater mortgage situation, and create a more productive and stable economy, without costing the taxpayers a dime. Please read the Plan to learn all the benefits of a monthly principal reduction program, and the 2% Appreciation/Inflation Taxation Policy. Go to http://www.taxpolicyusa.wordpress.com/  for more information!
Chris Hall is an author, real estate investor, and retired small businessman.

Plan first written 12/1/2008 since then it has been updated
Copyright 12/1/2008

A Letter To President Obama And A Short Article

Description: Newspaper clipping USA, Woodrow W...

Woodrow Wilson signs creation of the Federal Reserve. Source: Date: 24 December 1913 (Photo credit: Wikipedia)

Dear President Obama:

I listened to you talking about the need to extend unemployment insurance this morning 1/7/14. I agree unemployment  benefits should be extended. At the same time we should change a couple of our income tax laws to help prevent the next financial crisis, and to increase the financial strength of the middle income people, and the working poor.

The question is :  Are  we using the correct tool to  maintain economic growth?

Hi my name is Chris Hall.  I have been in the real estate market since 1970 when I bought my first home.

I am writing you not to tell you my story, but the story of millions of families that have been affected by a flaw in our economic operational and guiding polices.

I believe “the flaw” is one of the reasons why poverty in our economy is increasing and the middle class is shrinking .

We need to use the income tax code to correctly control Inflation and inflation psychology and not only rely on the Federeral Reserve’s monetary policies. We need to change a couple of our income tax laws to help prevent the next financial crisis, and to increase the financial strength of the middle income people, and the working poor.

Enclosed you will find a short article outlining the income tax changes that are needed before the Federal Reserve changes monetary policy, which will increase interest rates! Higher interest rates could trigger another financial crisis.

Please stroll down the page at http://www.taxpolicyusa.wordpress.com to read the other articles about “Household Formation and Why We Have A Failure To Launch Generation”– “Government Policies That Keep  You Homeless And Make Your Money Worth Less” and “ Underwater Mortgages Resolved Without Inflating Asset And Primary Home Prices”

Would you please sponsor the legislation to enact the 2% Appreciation/Inflation Taxation Policy, and the other tax reforms needed to improve the operation of our economy, and to maintain the value of our money (debt). If you can’t do it for America, please pass this information on to someone who will. Thank you

Sincerely1/11/2014
Chris  HalL

The  Federal Reserve  Cannot Control  inflation, Inflation Psycholgy and Economic Bubbles  By Themselves!

Ninety seven percent of our money is created by private banks as they make loans. Financial crisis are created by the excessive creation of private sector debt. (money) Therefore we should be concerned with how much private sector debt is being created in the private sector, and in which economic cycle it is being created, to control economic bubbles, high inflation, and deep recessions.

The question is: Are we using the correct “tools” to maintain economic growth?

The US economy is slowly improving, but it has come about by housing, and asset prices being inflated with very low interest rate money created with the Federal Reserve’s monetary policy of quantitative easing.

The Fed is currently purchasing between 70 to 80 billion dollars of Mortgage Backed Securities, and Federal Government Debt combined, per month. This monetary policy is known as Quantitative Easing, which has the effect of lowering long term interest rates.

Low interest rate have benefited Wall St. and investors.  In some US housing markets investors have bought more than 40% of the single family homes for sale. Single family home prices have increase, in some markets, as high as they were before the financial crisis occurred, due to investor demand. Encouraging investors to invest in single family homes with tax incentives, and other financial ploys during a recession is shortsighted, and could lead to another sell off in single family homes. The single family home market should only include the families that want to live in the homes. Single family home prices should reflect their purchasing power, not the greater purchasing power of investors.

The tax  deduction that investors currently have, that allows investors to deduct the cost  of repairing  a house should be  given to homeowners. so neighborhoods do not deteriorate. Homeowners will hire contractors to do the work, thereby reducing unemployment  and neighborhood  blight.

Investors have many opportunities to invest in multi-unit housing. All tax incentives in the tax code for investors to invest in single family homes should be eliminated. If an investor does buy a single family home in an area that allows multi-unit housing, they will quickly build multi-unit housing on the land, which will increase the housing supply during the high appreciation cycle.

We have had one primary home bubble, do we really want to repeat history again?

Consider this, If we could create an economy that allowed people to stay housed, employed, and productive, taxes would not have to be collected, or increased to pay for a larger government “safety net.”

We should eliminate the high appreciation/inflation cycle, and deep recessions, control the creation of economic bubbles, and the excessive creation of debt (money) with the “2% Appreciation/Inflation Taxation Policy.”

History has shown us that the Fed does not have the correct tools to control high appreciation/inflation rates, or stimulate the economy correctly. In the last 50 years prices have increase 1000%. If the 2% Appreciation/Inflation Taxation Policy had been enacted 50 years ago, prices may have increased only 100%. Even if prices had increased 200%, our wages would have maintained their purchasing power with affordable raises, and our manufacturing capabilities would have remained in the USA. Our production jobs would not have been outsourced to other countries. Our wages, and products would have remained competitive in the world market place. We probably would not have become a debtor nation.

We need good paying jobs in our economy. Not policies that create “paper profits” and higher prices. We need to enact the “2% Appreciation/Inflation Taxation Policy,” Now!!!; before the Fed changes monetary policy, and interest rates rise further. Higher interest rates will decrease the value of all the money (debt) that has been created with a lower interest rate. This situation could create another financial crisis as money (debt) investors sell their money investments, in a panic, to preserve their wealth. We need to create a sustainable recovery on Main St.

The 2% Policy would work like this: If asset, and real estate prices were increasing more than 2% a year, the tax on savings and money investments would decrease based on the appreciation/true inflation rate. At the same time the interest tax deduction would decrease based on the appreciation/true inflation rate. This tax policy reform change would automatically change the tax code as our economy changes from the recession cycle towards the high appreciation/inflation cycle. This change in the income tax code would reduce the stimuli in the tax code for people to create excessive amounts of debt (money), which creates high inflation, and high appreciation rates. Money (debt) would become more valuable because of the lower tax rate on money investments and savings. More real wealth would be created. Our economy would become more productive, and less speculative. After annual appreciation/ inflation rates returned to 2%, the tax rate on interest income , and the interest deduction would automatically return to their previous tax rate and deductibility, to maintain demand.

It is a major flaw in the financial operation of our economy to rely primary on the Fed to stimulate, and control inflation and inflation psychology with interest rate changes. Instead of interest rates changing by excessive amounts, the 2% Policy would help maintain interest rates in a much narrower range. This would allow businesses, and consumers to make long term financial decisions. The middle class, and working poor would be able to stay employed as the economy balanced itself. They would be able to retain and increase their wealth, and climb the economic ladder. The 2% Policy would reduce government’s interest cost on the national debt, government social expenditures, and decrease government deficits by reducing unemployment insurance cost, food stamps, Medicaid, and welfare usage.

With the 2%Policy enacted we would not be relying primarily on the Fed to stimulate the economy, and control inflation and inflation psychology with lower, or higher than necessary interest rates. Changing interest rates excessively up, or down has proven to be very damaging to a capitalist economy by creating unemployment, foreclosures and bankruptcies, as higher interest rates reduce demand from the bottom of the economy, which reduces the ability of people to climb the economic ladder.

Very low interest rates increase senior poverty. With lower interest income, seniors deplete their savings, they then turn to government programs to sustain themselves, increasing government dependency, and their deficits. With less interest income senior’s demand for products and services decreases when the economy needs more aggregate demand. The baby boom generation is retiring by tens of thousands in this decade and beyond. It will be very important for our economy to increase employment, that seniors are able to maintain themselves, and increase their consumption as the next generation matures. The baby boom generation will remain a very large portion of our economy for many years. Their consumption will add many jobs to our economy if they remain economic viable, and do not become government dependent.

This is a shortened version of the complete article posted at http://www.taxpolicyusa.wordpress.com  ” Government  Policies That Keep You  Homeless And Make Your Money  Worth Less”

You will find the other articles posted there also.

Please share this article with your friends, to get them involved. Ask them to send this letter to their representatives in Congress to show their support. President Obama’s e-mail is: whitehouse.gov/contact   We don’t want to keep repeating history. There, has to be a better way than Gloom, Boom, and Doom economics. What are your ideas! Please comment!