The purpose of government is to protect the population. And while our government has served this purpose well over the last 200 years, it has now gone too far. It's time that we take back the responsibility to protect ourselves. We no longer need the government to watch out for us. In the past we were too busy or ignorant of banking systems and healthcare to make informed decisions for how to spend our money. These days, with the level of education that most of us have, and the widespread use of the internet in which information flows freely, we are more than capable of protecting ourselves and our families without big government 'help'. In fact, the problems that our nation faces today in banking, healthcare, and other areas are a direct result of our desire for government to take care of us.
Our government (along with private enterprise) should be more focused on educating the population about making the right decisions, and not trying to make the decisions for them. The best we can do is hope that people will make the 'right' decision based on the information supplied. But people must be responsible for their own decisions. If we leave the important decisions about healthcare and finances up to the government, we will have to suffer the consequences of their poor decision making. It's not rational to believe that suddenly the government will start making good policy decisions. Furthermore, even if they do, they will be overturned by the next administration.
Mortgage Interest Tax Deduction
One example of this is the mortgage tax deduction. There are many good reasons to encourage people to own homes instead of renting them. It improves property values and reduces crime. It strengthens the community. On the other hand, there are good reasons to rent. Not everyone is able to make a commitment to live somewhere for the rest of their lives, or even for a significant period of time. Many people need to be mobile - to move to where the jobs are, for example.
Which is the better policy? Should people be encouraged to buy homes or rent them? The answer is that it all depends. Unfortunately, the 'smart' people in government decided that it's better to own a home. And to encourage home ownership, they created a financial incentive: the mortgage interest tax deduction. As a result, many people who might have rented a home now own one. In fact, the US has one of the highest home ownership rates in the world.
Unfortunately this policy contributed to the real estate balloon. Too many people bought homes that were too expensive. When the market fell, they defaulted on their loans, resulting in the current financial crisis. Nevertheless, the National Association of Realtors continues to support the deduction. They claim that housing prices could fall 15% in some areas without it. If this is true, it is evidence that the policy significantly contributed to the housing crisis. (Was NAR behind the extensive home ownership tv commercial blitz of 2005-6?)
Without this incentive, many people simply would not have bought a home, or would have bought a cheaper home that they could better afford. The market would not have inflated as much. This would have reduced the foreclosure rate, mitigating the current crisis. Also, the work force would be more mobile, and people could more easily move to where the jobs are, instead of being stuck in a 'sinking ship'.
The deduction costs the government about $100 billion a year. Far better it would be if the government created a consumer education campaign about the benefits of home ownership, and let the citizens decide for themselves. An effective campaign would not even cost $100 million.
Yes, house values will fall. But the deduction is too expensive and fundamentally unfair to renters who have to bear a greater burden of tax. The policy also favors the rich who own more expensive homes, because their deduction is larger, and because lower income homeowners don't itemize. The rich are not paying their fair share of taxes.
The deduction should be discontinued for new home buyers in 5 years, and phased out over a period of 10 years for current mortgage holders.
Social Security was created in the 30's with the best of intentions - helping the aging workforce avoid poverty after retirement. It was a great program and very effective, and millions of seniors rely on it every month for their financial needs. Unfortunately, seniors are taking out of social security far more than they put in. Although the fund has money now, it will run out by 2020(?). At that point, the government will have to start borrowing money to pay for social security. Certainly there will be some increase in the workforce to supply additional funding, but ultimately it's a true pyramid scheme. It works great at the beginning, but fails catastrophically at some point. We should not wait for this time to come. Social security must be phased out over a period of 30 years. Workers must start to make financial decisions on their own for investing their retirement savings. They cannot rely on government. Of course some people will make poor decisions. And they should be helped. But the vast majority will invest wisely, and will have a substantial nest egg to retire with.
Financial education is a critical component of this shift. Children must be taught early on the basic concepts of financial planning, such as investment options and diversification. Consumer advocacy groups must be vigilant in detecting potential problems with investment strategies and alerting the population.
The FDIC was created to protect bank customer's deposits. Now, people must take responsibility for their money. We cannot rely on the government to protect us. If we do, we will continue to face crisis after crisis. It is simply unfair to ask other taxpayers to pay for our mistakes when choosing a reliable bank. (Although taxpayer funds have not been used to bail out the FDIC, this is only because the Government bailed out AIG and other banks with over $1 trillion, thereby allowing many banks to avoid insolvency.)
If we want our money to be completely secure, we should invest in US Treasuries. This is the most secure investment in the world. Of course, the return is not high, but that is the price for stability. If we want to invest in riskier markets, such as banks typically do, then we should expect that in some very rare cases the bank will lose a small amount of money. In the current foreclosure crisis, foreclosure rates reached a peak of only 4%. Assuming a bank was diversified in its holdings, the amount of loss of deposits would be only this amount. For a small risk, we can expect a much more stable banking system. Bank runs can be prevented by allowing banks to temporarily suspend withdrawals. If the bank is going to fail, then its assets can be sold in an orderly manner, extracting the greatest return for the depositors. We accept risk when investing in the stock market and real estate, we can certainly tolerate a small amount of risk with our bank accounts.
The current FDIC insurance mechanism is very unfair. The limit of $250,000 protects the very rich, who can get around the limit simply by dividing their assets into multiple accounts at different banks. Why should the average taxpayer be on the hook for the richest people's money?
We no longer need the 'Nanny State'. We are grown up now and can take of ourselves. We don't need government regulators and policy makers to spend our money for us. They will invariably make worse decisions, due to inevitable political pressure, than the great majority of American individuals. Financial regulation does not work, and cannot work, because financial institutions will always figure out new ways around them. Beware of anyone in finance who says their business should be more highly regulated. They are only seeking cover for the next time they take our money.
The great irony of government protection is that it protects the richest among us the most, leaving everybody else on the hook. The degree of government protection must be scaled back and phased out over time. People must take responsibility for their financial decisions. We must invest in high quality consumer education. Of course there will be problems, but the level of crisis will be greatly reduced. Don't underestimate an American's ability to make the right decision for his or her family.
None of this in any way reduces our moral duty to help out those who are in need.