The repeating theme of a cable television show called “Supernanny” is one of spoiled, undisciplined children with frustrated and overly permissive parents resulting in an out-of-control household. In comes supernanny who meets with the parents, explains basic laws of discipline, and guides the household through the transition from chaos into a functional family. One basic premise is that good behavior is rewarded and bad behavior is punished. Consistency in the enforcement of rules is important. Seems simple, doesn’t it?
As a financial planner, much of my effort is to educate clients about good financial behavior. It requires the discipline to establish and then live within a budget, recognize that there is a difference between needs and wants and, if they follow these rules, establish a surplus. Once this surplus is established it builds upon itself and within time, wealth is established.
However, it gets harder each year to teach good financial behavior because there is this glaring bad example that all of my clients are exposed to every day called the federal government. Like the overly permissive parents in “Supernanny,” it encourages its citizens to spend money that they do not have and helps them get houses that they cannot afford by loaning them money that it doesn’t have. If that isn’t bad enough, it now wants to borrow more money from these same citizens so it can turn around and give it back to them to spend this year while these same citizens don’t quite realize that they will need it to pay it back in future years. And it is afraid to discipline its citizens less they favor the parent dressed in red more than the parent dressed in blue.
To put this into perspective, the federal budget as submitted for 2009 was $3.1 trillion, which doesn’t include the $800 billion economic stimulus plan. With an approximate 305 million population, this suggests budget spending of about $10.160 and a stimulus package of $2,600 for every person in the U.S. The current federal budget deficit stands at $10.7 trillion or $35,000 per person and interest payments on that debt are about $450 billion per year or $1,500 per person and rapidly growing.
The result of this bad behavior will be devaluation of the dollar with respect to other currencies, unless of course these other countries are facing the same type of issues we have, in which case a lot of governments will be printing a lot of money. This will allow the debt to be paid back in cheaper dollars, which means future inflation is the most likely result of the actions being currently taken.
There are a few recommendations that would add some discipline into the system but I doubt that the parents being overly sensitive to not being loved during the next election would be willing to enact:
1. For a fee of $500 or less, allow conversion of variable rate mortgages to a reasonable fixed rate of 5.0 to 5.5 percent and extend existing fixed rate mortgages from 30 to 40 years. This would still allow the borrower to reduce monthly payments by about 10 percent without causing the lender to reduce the value of the loan. The amount of interest paid per month is unchanged and there is no write-down of principal.
2. If a financial institution decides to initiate foreclosure action, it must immediately write-down the value of the loan by 30 percent. This would encourage the institution to sell the property rather than holding it on their books at a higher-than-market value.
3. Once the foreclosure action is taken, the existing borrower could be given the option of renting the property for up to two years at a rate equal to interest-only of the reduced loan value.
4. Since many Wall Street firms gave out bonuses that were a result of improperly valued derivatives inflating profits, the government should require that since these derivatives are now understood to be worth much less, go back and earnings for the past three years should be re-stated. Bonuses that were due to these innocent miscalculations should be returned.
5. The 1973 Arab Oil Embargo caused oil shortages and prices to go from $8 to $35 a barrel which resulted in the U.S. building ethanol plants.
Then oil prices suddenly declined, causing the ethanol plants to become unprofitable and to be abandoned.
Let us not be fooled again. Add a tax on imported oil and use it to subsidize U.S. manufactured renewable fuels and alternative energies.
Lea Smith Johnson, a certified financial planner, consultant, and fraternal insurance counselor, can be reached at 4026 37th St. Court W., Bradenton, (941) 755-0975.