Tell me what's wrong with Dave Ramsey's suggestion?

On this page is a PDF file that has his quick fix of the economy. It seems to make sense, but most of you are more expert at this than I. So tell me what’s wrong with it:

It doesn’t make anybody obscenely rich. FAIL.

(Actually, it looks pretty darn sane and sounds just like the conversation I had with our senior accountant today)

If you don’t mark mortgages to market, how do you value them?

How can he claim that eliminating the capital gains tax will “cost the taxpayer nothing”?

Uh, the capital gains tax produces revenue that goes to the fed. That’s taxpayer money, right?

I’m a lawyer not an accountant or economist but I’ll try my hand at a real answer. This guy’s plan is terrible on most levels.

I. Insurance – this exposes the government to big losses if the loans default without providing ANY upside at all in terms of long term profit. He doesn’t put a figure on this but there are literally tens of trillions of dollars of mortages who would find a way to qualify under his criteria, and certainly hundreds of billions, or maybe trillions of dollars of those would end up in some stage of default. How much would the taxpayers end up paying on these insurance policies? Unknown but highly likely to be a lot (like hundreds of billions). He is claiming this “costs” the taxpayers only 50 billion but hes talking upfront costs (and I think he’s way wrong on that too). But in terms of long term costs and downside risks this is a shitty deal.

II. Regulation – change the mark to market rules. I don’t know enough to evaluate this as it is quite technical, but I find it highly unlikely that there is a no-cost magic bullet super panacea that no one has yet used. Folks are mentioning this, but my vague impression is that it’s a common sense change that might help somewhat but is unlikely to be a game changer. I defer to those knowledgeable on the subject, but my gut feeling is there are no free ponies.

III. Remove the capital gain tax completely. HOLY FUCKING SHIT! First, all capital gain tax? How long? Any restrictions? Second off, he says this “costs the taxpayer nothing” which is flat out wrong. Capital Gains tax produce a chunk of federal revenue every year (I couldnt find the exact number with a quick googling but its either in the high tens of billions or low hundreds of billions; its a substantial number). This would cost the government a LOT, and indirectly over time the rest of the taxpaying base would have to make that up either in higher taxes or lower spending. There’s no such thing as a free lunch. Third off, the bad assets here have sustained capital losses not gains so removing the capital gains tax would not help with the toxic mortage assets at all. He’s hoping that by causing a huge asset sell off this would improve liquidity, but there’s no guarantee that would happen as the source of the liquidity crisis is not a lack of capital but a lack of confidence.

This is a terrible plan. Basically its a massive give away to people who own a lot of capital assets (ie the very tip top of the wealth pyramid) with a patina of regulatory changes to make it palatable. It is, in other words, a shit cake with chocolate frosting. Enjoy!

Only if you don’t PRAY hard enough.

This is a joke. Whoever came up with it doesn’t even seem to understand that that this has gone way way beyond subprime. Let me give an example: Wachovia and WaMu all by themselves had something like 200 Billion worth of pay option ARMs (these are considered prime, not subprime mortgages) on their books. These were mostly in California, almost all recent, the majority of which the borrowers are only making minimum payments on (meaning they are in negative amortization), and obviously now many (probably a very large majority) are for amounts more than the houses are currently worth. Let’s see, this plan is just going to convert all those to 6% fixed mortgages, which in most cases that would mean a 50% or more increase in monthly payments for the homeowners, on mortgages that are underwater?? What do you think those borrowers are going to do? Right, the ones that can’t afford a jump like that are on the street, the ones that can are gonna walk away just the same. Oh, good thing the government is picking up the tab for all of that for the banks. Too bad about the homeowners. Also I’m sure the housing market, particularly in Cali, won’t mind literally hundereds of thousands of new foreclosures on the market all at once. Oops.

You basically giving away government insurance policies on assets that have already gone up in smoke and being utterly retarded about it in the process. It is just some bullshit put together by someone that knows nothing whatsoever.

I know! I know! You make a wish upon a star, and then whisper your wish to your accountant. Poof - you’re solvent again! Whew, crisis averted.

Yeah, the capital gains tax in particular did NOT make sense to me. Yes, it would encourage short term investment (of course it would; people could flip houses without gains…well, assuming that they can turn a profit of course!). But in the long run, it certainly does cost tax money.

I’m not sure that Ramsey knows nothing whatsoever though. Anyway, I figured it was a bad plan somewhere in there. Thanks for explaining it to me. It seemed way too simple to work given the complexities I’ve been reading.

The “common sense” solution looks remarkably like what a certain set of persons owning bad assets would want.

His solution is just to go back to the good times. It is, in a sentence, “Pretend that nobody ever realized that those assets were worthless, and eliminate the capital gains tax for good measure.”

Offer them for sale and when you finally get a serious bidder, tell him “psyche!” and use his bid as the current value.

Ramsey is the poor man’s Clark Howard.

He’s a Real Estate shill. No.