Mark Carolin

Posts Tagged ‘Sum Of Money’

Recently the news has been dominated by developments with the 700 billion dollar bailout package, and rightfully so. 700 billion is an astronomical sum of money. The first problem is that the 700 billion dollar bailout adds a huge amount of money to the national debt. Not only that, some have hinted that the bailout is so large it could actually lower the US Credit Rating. The second problem is just as serious. There is no guarantee that the bailout will work.

The idea behind the bailout is that by taking on billions of dollars of toxic loans the government hopes to “influence” banks to start lending again. The past attempts of the government to “influence” banks have all failed. The fed lowered the fed rate to influence banks to lower mortgage rates. While the banks were appreciative of lower rates they did not lower mortgage interest rates. In fact after the fed cut rates the banks increased mortgage rates because they saw negative prospects in the housing market. In a similar way, after the US government takes over the toxic loans away from them the banks could continue to see negative prospects in the housing market and therefore would continue to have strict lending practices. The idea of spending 700 billion with no guarantees seems like a poor use of capitol.

When people hear the word “National Bank” the first thoughts are of a socialized banking system. A national bank would not replace the current banking industry. It also does not “introduce” government involvement into the banking industry. With the Fed influencing interest rates and the government rushing in to bailout every bank that runs into problems the government already has a large hand in the banking industry. I don’t want to argue whether the government should have a role in the banking industry. Currently the government already has a significant role in the banking/mortgage industry. My argument is that if the government does have a role it should be effective and cost efficient.

A national bank would be a cheaper and more cost effective way to steady the financial markets. To understand how a national bank would work lets first talk a little more about what is currently causing the housing crisis. The mortgage market operates a little like a basketball game. Lenders go from one extreme to another. For awhile lenders will lend to anyone that walks in the door with a pulse. During these periods lenders accept less and less qualified applicants in an attempt to gain market share. Then the lenders get freaked out (often because someone realizes they have been giving out billions in loans to unqualified applicants that are unlikely to pay their mortgages) and lenders run to the other extreme and practice extremely restrictive lending practices (the insurance industry sees the same cycles but that is another topic). If you haven’t already guessed currently we are in the second scenario with lenders practicing extremely restrictive lending practices. The problem with the second situation is that such extreme changes shocks the housing market and basically causes a financial crisis. The banks are in a catch 22. If collectively the banks don’t lend the housing market will continue to deteriorate. But no one wants to lend because they are worried the housing market will continue to deteriorate because collectively they are not lending. It’s kind of like at a party where you don’t want to be the first person to jump into the pool because if no one else does you look foolish. Substitute looking foolish with going bankrupt and you kind of see where banks are coming from.

The great depression and the S&L crisis were both basically examples of this same problem. Initially during the great depression the conventional logic was the government should not intervene. As the stock market continued to drop (it dropped over 80% in less than a year) and people realized how bad an economy can get (pretty bad) the idea of government intervention seemed more palatable compared to the alternative.

So now during periods where lenders are freaked the government attempts to “influence” lenders. The problem is its extremely expensive. Currently the government is taking on years and years of bad loans in an attempt to “influence” lenders to loosen their current restrictive lending practices for the next 6 months to pull us out of the housing crisis. This is kind of like trying to influence your local school to spend money on new textbooks by building them a new school. Not only is it ridiculously expensive after you build the new school you have no guarantee they will buy the textbooks. It’s not simply a poor use of government funds it’s utterly outlandish.

So how would a national bank operate? During periods where banks are giving out loans to everyone that walked in the door the national bank would practice have average lending restrictions with interest rates slightly higher than what is available at most banks and give out very few loans. When the banks became ultra restrictive the bank would again have average lending restrictions. During these periods it would give out more loans.

So the government would not practice the outlandish lending practices we saw during the boom they would not be as restrictive as the banks are now. In fact this would probably do more to influence banks lending practices than the 700 billion giveaway. Remember how we talked about banks not wanting to lend money because no one else was lending money therefore making them nervous about the prospects of the housing market. Knowing that money would always flow provides some stability to the market. Also it would be much less expensive. Having the government provide some loans over the next 6 months with average restrictions during a low point in the market would be much better than taking on years of crappy loans given out during the peak of the market to very unqualified home buyers.

Would some banks go under? Yes. But you know what they should. Bailing out foolish banks that threw caution to the wind and had wildly risky lending practices almost guarantees that we will be faced with another housing crisis in the future. Instead we should allow some of these banks to die. First it prevents these banks without a sense of risk from causing these problems again. Secondly, it influences other banks to exercise more caution during boom times. The bailout sends a message to banks that during the boom they should ignore caution because the government will come in and take all their bad loans away like some kind of bizarre magical bad loan tooth fairy.

I realize this article might bother people that want the government to have no role in the banking/mortgage market. But if we accept that the government already has a role in the banking industry (the possibility of the government taking itself out is pretty much nill for the next decade) to stabilize markets at the least it should do so in a way that is effective and cost efficient.

Prepaid credit cards are becoming increasingly popular especially amongst people who have a bad credit rating and who are unable to get a traditional type of card. But this is not their only use. In this article we will discuss whether a prepaid credit card is right for you and look at some of the advantages that they offer.

These cards make great gifts which you can give with a sum of money already loaded on them. They are also a good alternative to traditional cards if you are making purchases online and are worried about possible fraud. They can also be a good choice to use for student spending. The purpose of this article is to increase your knowledge and awareness of prepaid credit cards and to decide if using one is right for you.

Prepaid cards can usually be used in much the same way as traditional ones. You can use them at most shops and stores and also online. Because the card has a limited amount of money on it is impossible to go over your limit or to spend more money than you have. This means that you never have to pay any late payment fees and that it is impossible to run up a large debt.

If you are stuck for a gift idea then consider using one of these cards. They make good gifts for children and adults. You can purchase them online and have them sent out to the recipients almost immediately. Prepaid credit cards can also be purchased solely for use online where they are usually referred to as virtual credit cards. These also make great gifts providing the recipient does not want to make an offline purchase.

If you like to shop online and regularly use a card to make purchases than using a prepaid credit card makes the likelihood of theft or a fraud which takes a large amount of money from your account less likely. Using one of these cards can also stop you from spending too much money when you are shopping. Because the card has a limited amount of money deposited on it, it is impossible for you to go over your spending limit.

If you are considering getting a student credit card either for yourself or for a family member then consider using a prepaid one for this purpose. This can give you peace of mind and stop you worrying that your card will be used too much and too much money will be spent.

In conclusion, prepaid cards can be a good choice if you have a poor credit rating, if you are worried about spending online, if you are in need of a gift idea or want a student card with a limited spending ability. I hope that the information in this article has helped you to decide whether a prepaid credit card is right for you.