This morning I sat down to write an email that I will be forwarding to each member in Washington in addition to other entities to post on their websites if they wish to do so and also to several media outlets.  I’m not saying that this proposal will solve  all the issues pending but I do believe that it offers an alternative of hope.  What follows is the email.

Solution for Current Financial Crises -No Banking Bailout Required

 

Title:  Convert Social Security Retirement Fund into Personal “Limited” 401k Accounts

 

Note:  This is a win-win proposal for both financial lending institutions and American citizens that will not cost the taxpayer long term.

 

Synopsis:  How We Arrived at This Point in Time

 

  • Economic Contraction.  The current financial crises evolved as a result of many factors but primarily it is due to a slowdown in economic growth in broad-based manufacturing that has resulted in increased unemployment causing those Americans who have taken on debt to not be able to repay their loans on a month by month basis.
  • Household Savings.  The effective savings rate of average Americans is less than zero – expenses are greater than income.  When the economic contraction took place in the manufacturing sector due to outsourcing of jobs, followed by a contraction in the housing market, the workers in these and related sectors had no savings to “fall back” upon.  Some borrowed from their personal retirement accounts – IRA’s, 401k’s, others in order to make end meet borrowed on their homes, and still others resorted to increasing their use of credit cards.  The bottom line is that their debt kept rising as their wages/income fell.
  • Non-Performing Loans.  Without savings and without additional availability to credit, American citizens began to miss their monthly debt repayments.  This then caused those financial institutions who issued the debt initially to begin assessing late payment charges, followed by increasing the interest rate on credit cards some as high as 30% APR.  These steps only increased the problem Americans already had with servicing their existing debt.  Eventually more and more debtors stopped making payments, and this then resulted in financial institutions holding Non-Performing Loans.  Now both the borrowers and the lenders are being locked into a financial death spiral.  Available credit lines tighten even more making it increasingly difficult to borrow by those who are on the edge.
  • Mortgage Resets.  In the past year or so, new homeowners, who borrowed based upon minimal lending standards using teaser loans, were facing a reset in their monthly mortgage rates that when in place would result in their inability to service the debt.  As more and more of these loans were adjusted higher, more and more homeowners fell prey to excessive debt loads and financial institutions holding the mortgages had to add these loans to their Non-Performing column.  These series of events, along with others is what has brought the nation at this time to the current crises.

 

Solution: Conversion of SS Retirement Fund to Personal “Limited” 401 k Accounts

 

Note:  Americans in debt need a source to borrow from, and financial institutions need to move their Non-Performing Loans back into the Performing Loans category in order to strengthen their balance sheets.

 

Synopsis:  An Abbreviated Proposal to Restore Liquidity, Pay-Down Consumer Debt, Improve the Balance Sheets of Financial Institutions, and Fully Fund Social Security.

 

  • Replenish the Social Security Retirement Account.  At this time for many Americans their only source of savings is in their SS Accounts that they have been contributing to their entire lives.  Unfortunately, the SS System has been borrowed against and now contains IOU’s.  The first step is to pay off those IOU’s with Dollars that are now under consideration to be sent to just the financial institutions in exchange for their bad debts.  This will restore the SS System which is both the right step to take and also will need to be done at some point in the future anyway in order to save the retirement program.
  • Convert to 401k Limited Accounts.  Just as in the private sector 401k accounts where individuals can borrow funds and then pay back into the account on a monthly basis a predetermined amount, the SS 401k program could be set up to operate in the same fashion.  This would allow individuals who now are financially struggling to make ends meet the ability to either supplement their payments on their home mortgages, and/or to eliminate the excessive interest payments they currently are faced with on their credit cards or other loans by paying off the outstanding balance.
  • 401k Limitations.  Not all Americans will need to borrow from the fund but for those in need the ability to do so under certain conditions would be available.  Monies may only be borrowed up to the amount of the contribution level already made in prior years.  Monies to be borrowed would only be made available if proven through documentation that a supplemental mortgage payment is required to keep their home out of foreclosure.  Monies to be borrowed would only be made available to consolidate/payoff existing credit cards in order to eliminate excessive interest rate payments.  The borrower then must also agree to give up all current credit card accounts and agree to having only 1 credit card with a set limit of no more than $1,000.00 from that date forward until such time that the loan was paid back in full.  Other “emergency” situations that arise such as unexpected medical can be review as needed to determine if one can borrow against their personal account.
  • Financial Institutions.  All monies borrowed through the 401k program will be used to improve the balance sheets of financial institutions as borrowers pay down their debts.  This then will automatically improve the balance sheets of these institutions and therefore would not require a government bailout as is currently being considered.

 

This is but a “bare-bones” proposal that should be considered as a viable alternative to the current proposal which only is inflationary, assists only the financial institutions, and leaves the American citizens deeper in long term debt.  Experts in Washington and in the private sector can take this idea and work out the details in order to make a Personal 401k Limited Account a reality whereby all parties concerned benefit and not only those entities that contributed to the crises we now face.  We need a solution, not more debt.