The Credit Crunch – Part 2 – The Bitter Pill

Savings then is one of the fundamental drivers of the economy. Why? Because savings create liquidity in the market. Savings allow banks to lend. YES, Savings allow banks to lend. And lending means companies investing, and investing means JOBS and JOBS means spending and savings. That is the proper and healthy way of doing economics.

The Root Cause of the Credit Crunch.

In the absence of savings, spending happens with borrowing. For example Government creates liquidity by selling bonds to countries like China. On the other hand consumers borrow from Banks. But what happened this time around is a bit different. Consumers borrowed against their home to fiance spending. As the housing bubble grew, consumers refinanced their homes and drew down the equity of their homes. When the speculation in the market ended, and the price of homes declined, the value of loans against the homes was more than the house is worth, and hence the housing meltdown.

The housing meltdown of course had a domino effect. No longer able to borrow to spend, consumers stopped buying, and the rest is history.

The Bitter Pill.

There is one thing that i have not yet heard discussed on CNN, NBC, CBC, etc… related to this, that must be fixed ASAP. There is a bitter pill that must be swallowed to make sure this does not happen again, EVER. There is something in the TAX code that has to be fixed.

CONSUMERS SHOULD NO LONGER BE ABLE TO CLAIM MORTGAGE INTEREST AGAINST THEIR TAXES.

As a mater of fact, consumers should be penalized for drawing on their houses and I would go further by suggesting that consumers should claim reduction in mortgages as Income.

Yes this is a very bitter pill. It will cause a significant disruptionn but it must be taken so that consumers no longer have a DOUBLE incentive to drain the values of their homes. The Tax code must be fixed first, so that SAVINGS are again an integral part of the economy.