October 25, 2014 · Getting A Mortgage · (No comments)

After a year of looking for and preparing to buy a home, Nick and his wife finally found a place they wanted. They were in the middle of filling out mortgage pre-approval paperwork when Nicks wife stopped him. She had never mentioned it before, but now that they were applying for a loan, it wouldnt be a secret much longer: She had about $4,500 of credit card debt.

Of course he was frustrated, but he was concerned about getting the home they found, and he also wanted to make sure the problem was a one-time thing.

I’d never considered her spending habits, said Nick, who agreed to an interview on the condition we use only his first name. He and his wife didnt share this story with friends and family, and he didnt want to jeopardize their attempts to buy their first home. I always assumed she was within her realm of what we set for our budgets.

The credit card that carried the debt was hers from before they married. In the year since they tied the knot, theyd slowly combined finances, setting overall budgets that applied to individual and joint accounts.

She never brought up to me that she had any debt sitting out on a credit card, so we’re sitting out there talking about how everything gets allocated — it just never came up, Nick said.

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Balancing Debt and a Mortgage Application

The debt itself shouldnt impact their ability to qualify for a mortgage, Nick determined, but he didnt want the balance sitting on the credit card with an 18% APR anymore. At the same time, they were going for pre-approval the next day, and he didnt want to mess with their finances after theyd already started the loan process.

In the end, it didnt matter. The owners accepted another offer on their home, so Nick and his wife are still looking. As soon as they found out their offer was rejected, Nick used some of their savings to pay the card balance, allowing them to save money on interest and get the debt off their minds. Not everyone with credit card debt has enough saved up to pay it off (or they dont want to pull from savings at all), but you can still make a plan for paying off debt by a certain date (heres a calculator to help) and save a lot of money.

Nick said they still have plenty saved for their dream of owning a home, though losing $4,500 they had saved for a down payment affects the price of home they can consider or what their monthly mortgage payment will be. (Heres a home affordability calculator to help you figure out how much home you can afford and an estimated monthly payment.)

Going From Single to Married Finances

Even though he wasnt happy about what happened, Nick empathized with his wife. He had trouble with credit card debt before and knew how easy it was to fall behind. (His wife told him the trouble started after some friends didnt pay her back for a party she organized.) These sort of things happen, but they shouldnt turn into huge problems, Nick thought.

Going forward just tell me about them, he said he told his wife. That way we can fix things early on, and we don’t have to worry about it at the end of the day.

Nick said theyre much more focused on their finances as a unit, and theyre planning on checking their credit regularly in the future — you can get free credit reports through AnnualCreditReport.com, and you can see two of your credit scores for free every month on Credit.com. That approach should help them as they continue to look for their first home, because getting a mortgage can be complicated, and its a lot easier if youre confident in your finances and credit standing when you apply.

We’re a little more keen on that now, Nick said. It’s not just her and I — it’s definitely a we scenario.

More on Mortgages and Homebuying:

  • Why You Should Check Your Credit Before Buying a Home
  • How to Get a Loan Fully Approved
  • How to Search for Your Next Home

Image: Wavebreakmedia Ltd

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October 25, 2014 · Fundings · (No comments)

New Delhi: Seeking to provide a level-playing field for parties in elections, the Election Commission has proposed making paid news an electoral offence to provide a strong deterrent in a bid to stamp out the menace.

It also wants a ceiling on the campaign expenditure of political parties that is used as a ruse to pump in unlimited resources.

Chief Election Commissioner V. S. Sampath says that if paid news is made an electoral offence, then it will serve as a deterrent on those violating the law.

Paid news is really a matter of serious concern for the Commission…it is not an electoral offence. We have proposed to the Law Ministry that paid news should be made an electoral offence, Sampath said.

He said once paid news is made an electoral offence, then it can be a ground to take action against the guilty candidate under election petition. The ECs proposal in this regard to the government is pending for two years.
Action will be more deterrent. Action now is without backup of law, he explained.

He said political parties in various states the EC has visited have expressed concern over the issue of paid news. The CEC was of the view that organisations such as the Press Council of India and News Broadcasters Association should also use their powers to curb the practice of paid news.

Responding to questions on whether the poll watchdog plans to put a limit on spending by political parties in campaigning, the CEC said that there should be a ceiling.

There is no limit on expenditure for party. But there is a limit for candidates…there should be a limit for political parties also, Sampath said.

Asked whether the EC has proposed the ceiling amount to the government, he said there should be an agreement on the principle of limit.

Lawmakers can apply their minds (on the maximum amount a party can spend on campaigning). He said a lack of ceiling disturbs level playing field.

He said parties use paid news as a means of campaigning and the EC can do little in this regard. The CEC informed that ECs monitoring committees found 80 confirmed cases of paid news during Maharashtra and Haryana assembly elections. Haryana reported 67 cases, while the rest were from Maharashtra.

Asked about the case of former Maharashtra chief minister Ashok Chavan, CEC pointed out that the case related to election expenditures and not paid news.

When asked about the delay in deciding the case, the CEC said it was the first case of its kind. He said there could be delays in at least first one or two cases till legal precedents are set.

He said in the Chavan case, initially ECs jurisdiction was questioned. But as soon as the poll body issued orders asserting its jurisdiction, the first round of litigation started and the matter went to the High Court and then the Supreme Court.

It was not an everyday case before the HC and the SC so they took time. Again it came back and we issued a show cause notice. The matter then went to the High Court– earlier a single bench and now it is with a Division Bench…which case relating to any legislator in this country is decided at any level except the Supreme Court, Sampath said. He said this is the process allowed in the law.

On transparency in fundings of political parties, he recalled that Election Commission guidelines making it virtually mandatory for political parties to deposit their funds in banks and not to exceed ceiling limits in financial assistance for candidates to ensure transparency and accountability came into effect from October 1.

The Election Commission order of August 29 in this regard under Article 324 of the Constitution (superintendence, direction and control of elections) was part of a set of comprehensive guidelines on transparency and accountability in party funds and election expenditure.

Under the guidelines, the treasurer of a political party is now required to ensure maintenance of accounts at all state and lower levels and consolidated accounts at the central party headquarters.

October 25, 2014 · Getting A Mortgage · (No comments)

NEW YORK (TheStreet) — Access to home loans may soon become easier, with bankers and regulators optimistic they will soon have an agreement intended to ease lenders concerns.

October 25, 2014 · Small Business Loans · (No comments)

Related:
Press Release, News

Agoura Hills, CA

Finical, Inc., announced today that due to overwhelming demand for business capital, the company has launched its merchant advance, and alternative funding division for small businesses serving all 50 states. We are always listening to the needs of our clients as we continue to add to our service offerings, said Aaron Nasseh, CEO of Finical Inc.

According to SBA since the financial crisis, anecdotal evidence suggests that small businesses, which largely rely upon banks for credit, were especially hard hit by the financial crisis. In addition, the Federal Reserve Systems quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices found evidence that lending standards for small-business loans tightened as lenders tolerances for risk decreased following onset of the crisis.

We recognize the challenges that our fellow entrepreneurs are faced with in todays economy, so we are thrilled to be able to offer our business clients an easy solution to obtain business capital up to $2.5 Million in as short as 24 hours without assessing their credit score, said Aaron Nasseh, CEO.

Finical is one of the fastest growing providers of business services. Finical enables its customers to offer various forms of electronic payments including credit card processing, consumer financing, business loans, ACH services, Electronic check conversion, loyalty programs and much more.

October 25, 2014 · Manage Debt · (No comments)

Anderson, who works as a member of the emergency management team at the University of California, Santa Cruz, couldnt afford her monthly loan payments, so she entered into a series of deferment options with the Department of Education.

Today, she owes $128,000 and is hoping to get additional help from the government in reducing that amount.

The vast majority of older borrowers took out their loans in order to pay for their own studies, although a small percentage used the loans for their spouses, children or grandchildren.

Many borrowed money to pay for mid- or late-career retraining, or may have acquired loans with a very long repayment term. Others defaulted at a younger age, were unable to dig themselves out of the problem and carried it through into retirement.

The Department of Education says it is committed to working with older borrowers to help them understand and manage debt, as William Leith, chief business officer for federal student aid, explained in a recent Senate hearing where different measures were discussed.

A department spokesperson told the BBC that there are many repayment options available, including those based on income, as well as forgiveness programmes.

Meanwhile, Rosemary Anderson is worried. She says she never imagined that she would have this problem at her age.

She feels fortunate to have a job but recognises that she will have to continue working as long as she is physically able to.

Retirement is not part of my vocabulary, she says.

I will never live long enough to pay off my loan.

But it wasnt always this way.

Until World War II, less than 15 percent of high school graduates went to college. It was a path largely reserved for the privileged few, mostly white men and mainly families wealthy enough to afford it.

But the GI Bill, aimed at helping the roughly 16 million veterans returning from World War II to re-enter American society, transformed the higher education landscape.

Under the GI Bill, passed in 1944, veterans got free tuition and fees, free books, credit for their wartime experience and a monthly allowance.

It was hugely popular, according to John Thelin, a professor at the University of Kentucky and author of A History of American Higher Education.

In the peak year of 1947, veterans accounted for 49 percent of college admissions. By the time the original GI Bill ended in July 1956, 7.8 million veterans had participated in an education or training program.

Colleges went into growth mode, hiring and building facilities to accommodate all the students. Another boost to higher education came in 1947, when a presidential commission issued a report calling for sweeping changes to it – in particular shaping the narrative that an educated citizenry was critical to a democracy.

The Truman Commission Report was a blueprint that called for a vast expansion of the community college system, and laid out the role of the states and the federal government in expanding the existing system and how to handle financial aid.

Thelin said the report became a working guide of sorts for higher education leaders in the 1950s, and had support from both Democrats and Republicans.

It really was an optimistic and buoyant time, he said.

The Soviet launch of Sputnik in 1957 influenced federal aid for college students. The National Defense Education Act of 1958 provided low-interest loans for college students, with debt cancellation for those who became teachers after graduation. The law also established graduate fellowships to encourage students in the sciences, mathematics, engineering and other strategic fields.

The Civil Rights Act of 1964 and the Higher Education Act of 1965 also expanded access – by increasing the amount of federal money for universities and providing scholarships and low-interest loans for students – and by the end of the 1960s, more than half of all high school graduates were enrolling in either two-year or four-year colleges.

As the Higher Education Act was renewed over the decades, the federal government added other incentives and benefits for college students, such as the federal Pell Grant system and tuition tax credits.

During the 1960s and 70s, there was a psychological shift toward imagining that any American should be able to go to college, Thelin said.

But tuition started to increase significantly in the 1980s and 90s, leading to new pressure on the federal governments student loan program. The volume of student loans ballooned in the 1990s, when Congress increased loan limits, introduced unsubsidized loans, and increased access to include more middle-class families. Borrowing increased by almost $10 billion from 1992-93 to 1994-95, nearly a two-thirds increase in just two years.

The expectation that high school graduates should go on to college was fueled by the 1983 A Nation At Risk report, which said the United States had to be better prepared to compete economically on a global scale – a shift, Thelin said, from the earlier focus on college as a way to instill democratic virtues in the citizenry.

The technology boom in recent decades has only added to the drumbeat emphasizing the need for US students to compete on a global scale with a better educated workforce. Beyond that, studies have shown for decades that workers with college degrees earn higher salaries, are less likely to be unemployed and have more career mobility.

That pressure to get a college degree comes with its own backlash. This year, the Portland School District, the largest in the state, tried to make applying to college a requirement for getting a high school diploma. After strong objections from parents, the school board removed the language from the final requirements.

Today, 66 percent of high school graduates nationwide go on to college, according to federal labor data. In Maine, that percentage was 62 percent for the class of 2013, up from 57 percent for the class of 2006, according to the Mitchell Institute.

October 24, 2014 · Small Business Loans · Comments Off

Prime Meridian Capital Management, specializing in online peer-to-peer (P2P) lending, launched its new fund, Prime Meridian Small Business Lending Fund on 7/1/14, giving investors the opportunity to invest in the growing sector of P2P small business lending. PMCP states, Prime Meridian’s Income Fund was one of the first P2P lending funds in the United States, with over 29 consecutive months of profitable returns without a single drawdown, and has a well-established track record. Building on this success, Prime Meridian, an affiliate of Novus Investments, has expanded its offerings by moving into the small business P2P lending space.

Prime Meridian defines P2P lending: [T]he practice of lending money to unrelated individuals (ie, peers) without going through traditional financial institutions such as banks or funding mechanisms such as venture capital or investors. There are four major categories of P2P lending: consumer credit, small business, student loans, and real estate. The Prime Meridian Small Business Lending fund was established specifically for targeted investments in small business P2P lending. Its flagship fund, Prime Meridian Income Fund, covers consumer credit P2P lending.

“Banks aren’t really interested in making smaller loans of less than $500K to small businesses. As a result, most small businesses are looking for alternative methods of borrowing capital to fund future growth,” said Don Davis, managing partner of Prime Meridian. “As witnessed by the fast growth of P2P lending overall, I believe the small business lending category is the next big area for growth in P2P lending. We developed the Prime Meridian Small Business Lending Fund specifically to invest in collateralized small business loans backed by prime and super prime personal guarantees, which we believe carries much lower risk than other segments of the market.”

In 2013, two of the largest P2P lending platforms in the United States (Lending Club and Prosper) issued $2.4 billion in loans–nearly triple the $871 million issued in 2012 and is anticipated to more than double in 2014. Lending Club is planning an IPO which many believe will happen before Thanksgiving.

The Prime Meridian Income Fund was an early mover in this burgeoning space by allocating to P2P loans using proprietary automated technology. Prime Meridian developed computerized algorithms designed to identify opportunities, assess risk, and capture attractive opportunities for its investors to participate in the innovative, fast growing P2P lending space, contends Prime Meridian. Now, Prime Meridian brings that same knowledge, experience, and technology to P2P small business lending with the Prime Meridian Small Business Lending Fund. In its first three months, performance is averaging an 11% annualized return to investors, net of accrued defaults and fees. The Prime Meridian Small Business Lending Fund is currently open to accredited institutional and individual investors.

October 24, 2014 · Manage Debt · Comments Off

By Philip Soos and Paul D. Egan

A perennial and divisive issue in politics and economics today is the matter of public debt. It is commonly asserted that rising public debt threatens the economy and needs to be reined in. Governments are often portrayed as ‘irrational’ actors when they incur a fiscal deficit, causing unnecessary inflation and interest rates to rise by borrowing to meet the shortfall.

Private sector lending is supposedly ‘crowded out’ by lifting the cost of money and limiting access to a finite lending pool by government actors. A large stock of public debt and chronic deficits are considered economically harmful, due to increasing the interest payment burden on taxpayers. A centrepiece of the Abbott government’s economic policy platform is its strident warnings about growing public debt: Australia’s ‘budget emergency’.

This specious claim remains unchallenged, for commentators are generally unfamiliar with the long-term trends in debt and its composition. This analysis fills that void by examining the long-term trends in public, private and external debt. Unsurprisingly, the conclusions arrived at are diametrically opposed and differ sharply to those stemming from the established political and economic narrative.

Public Debt

Public debt is composed primarily of outstanding bonds, although there are other liabilities which tend to be comparatively small by value. The most common method of measuring debt is to compare it to the size of the economy: the debt to GDP ratio. Other similar measures include the net debt and net interest payments to GDP ratios, though the simple comparison of gross debt to GDP allows for long-term assessments.

Public debt relative to GDP was much greater pre-WW2, and today it has fallen to a mere fraction of its former size. The federal debt ratio peaked at 104.2 per cent in 1946, funding Australia’s involvement in WW2, while the state and local gross debt ratio peaked at 123.6 per cent in 1932. The rapid increase was caused by both an absolute rise in debt and the collapse in nominal GDP during the Great Depression of the 1930s.

In the post-WW2 era, both forms of public debt fell swiftly due to persistently strong GDP growth and the rise in taxation revenue offsetting the need for debt to fund public expenditure. The federal and state/local debt ratios fell to a low of 5.1 and 7.4 per cent in 2008 and 1987, respectively. In 2014, the ratios are 20.1 and 16.2 per cent respectively, with government corporation debt at only 0.4 per cent as of 2014.

The total federal and state/local debt ratio is 36.4 per cent as of 2014, having peaked at 170.9 per cent in 1932, before falling steadily across several decades to a low of 13.5 per cent in 2008. If the incomplete government corporation debt series is added, total public debt peaked at 239.7 per cent in 1932, falling to a low of 13.7 per cent in 2008.

Federal government net debt is lower than gross debt, turning negative between 1972 and 1976, and later on during 2006 to 2009. In 2014, net interest payments were 0.6 and 2.4 per cent of GDP and revenue, respectively; well within the margins of safety. Lower interest rates have translated into lower net interest payments.

The consolidated balance sheets of all levels of government (federal, state, local and multi-jurisdictional) provide the most accurate overview of public finances. In total, the public sector is comprised of the non-financial public sector and public financial corporations. The non-financial public sector is, in turn, composed of general government (by far the largest component) and public non-financial corporations.

As of 2013, total government assets were worth more than outstanding liabilities, with net worth equivalent to 55 per cent of GDP. Total net debt is only 15 per cent, though the net financial worth ratio was -47 per cent. Overall, the total public sector balance sheet data demonstrates Australian governments are in a strong fiscal position.

By international standards, Australian federal public debt is relatively small. Even if the public gross and net debt to GDP ratios were to rise moderately, this does not necessarily translate into higher net interest payments if the RBA cuts interest rates and purchases government bonds itself. Given the weakness of the Australian economy outside the FIRE and mining sectors, another cut in interest rates is a distinct possibility.

Private Debt

Private debt is composed of loans issued by lenders to the household, non-financial and non-banking financial sector. It grew exponentially between 1964 and 2008, fuelling the mid-1970s dual commercial and housing real estate bubbles, the early 1980s Sydney housing bubble, the late 1980s dual commercial and housing bubble, and today’s colossal housing bubble and associated commercial property bubble.

The historic peaks in the non-financial business debt ratio match the commercial bubbles of the 1880s, 1920s, mid-1970s, late 1980s and 2008. Non-financial business debt has yet to reach the previous peak of 70.2 per cent set back in 1893. After WW2, accelerating household debt financed housing bubbles during the same periods. The household debt ratio has experienced a remarkable rise over the last two decades, driving the largest housing bubble in Australia’s recorded history.

In the lead-up to the GFC, non-banking financial sector debt rapidly increased, reaching a peak of 116.1 per cent in 2008, before deleveraging. The consolidated private gross debt to GDP figure shown below is a new and novel insight, as it includes for the first time the previously-unexamined non-banking financial sector debt. Unfortunately, this series only begins in 1989.

Household debt is overwhelmingly composed of mortgage loans, with a small component of personal debt. The mortgage debt to GDP ratio has risen exponentially from 15.9 per cent in 1988 to a record 86.9 per cent in 2014. Investor debt has surged from 2.8 to 29.3 per cent between 1990 and 2014, demonstrating the speculative mindset of Australians. While personal debt peaked at 13.7 per cent in 2007, more conservative spending habits have resulted in the ratio falling to 9.0 per cent in 2014.

External Debt

External debts are the liabilities that Australia owes to the rest of the world, usually subdivided into the public and private sectors. A long-term net foreign liabilities series is unavailable; therefore, the cumulative current account deficits to GDP ratio is used instead as a proxy.

This ratio peaked in 1895 at 174.2 per cent, fuelled by an influx of British capital that turbocharged real estate speculation in the 1880s, culminating in a massive land market bubble. It fell away sharply, rose again during the late 1920s, and then rapidly declined thereafter. As private debt boomed in the post-WW2 era, the FIRE sector once again borrowed heavily offshore, though the rise in the ratio has been modest in comparison to earlier periods.

It is disconcerting that Australia had around four decades of current account deficits in the lead up to the worst depression on record in the 1890s. It is therefore alarming that Australia has run a current account deficit (CAD) since 1973 (on an annual basis) or since 1975 (on a quarterly basis). This result is due to a persistently negative net income balance, rather than a poor trade balance. The net foreign debt ratio is 54.6 per cent as of 2014. Public foreign debt is quite low, while private foreign debt is far greater.

Overview

The following table outlines the different types of debt in the economy, for the latest year available. There is an important difference between consolidated and unconsolidated debts. Consolidated debt reports debt that is netted out within the sector, and only records the debts owed to other sectors, whereas unconsolidated debt is the actual debt a sector owes, irrespective of to whom. Unconsolidated debts are typically larger than consolidated debts. Caution must be taken when using measures of consolidated debt as it assumes intra-sector solvency; an assumption the GFC revealed to be precarious.

Consolidated debts disguise the risk of intra-sector debts that can metastasise and threaten financial stability. In 2013, the difference between consolidated and unconsolidated household and non-financial business sector debts was 18.9 and 24.5 percentage points respectively; a considerable difference. Unfortunately, data on unconsolidated non-banking financial sector debts are not available.

It is clear that public debt has fallen to very moderate levels, while private debts have boomed. The total consolidated household, non-financial business and non-banking financial business debt ratio peaked at an incredible 273.4 per cent of GDP in 2008. In that same year, the unconsolidated ratio would have breached the 300 per cent barrier. Data on public financial and non-financial corporations are not available after 2005 due to confidentiality concerns.

After the onset of the GFC, the non-financial business and non-banking financial sectors sharply deleveraged, but household debt continued rising. Mortgage debt reached a new peak in 2014, narrowly edging out the previous peak established in 2010, which coincides with the latest housing price booms in Sydney and Melbourne.

The following figure compares consolidated federal and state/local debt to consolidated household and non-financial business debt, where consistent long-term data are available. Clearly, the problem is not public debt, but private – and this departure is without precedent.

History indicates there are two major causes for increases in public debt: World Wars (1914-1918 and 1939-1945) and responses to economic recessions and depressions caused by private debt-financed speculation: the 1890s, 1930s, mid-1970s, early 1980s, early 1990s and the GFC in 2008. Therefore, the key to preventing onerous levels of public debt is to thwart the state from committing to wars, and to eliminate parasitic rentier capitalists from the private sector.

Unsurprisingly, such advice is conspicuously absent from mainstream political and economic commentary, whom ironically advocate increased expenditures for state aggression and rentier capitalism, but simultaneously maintain steadfast in explicitly opposing increasing public debt. Consequently, cuts to social welfare are advanced to further an agenda to enlarge the military and intelligence industrial complex and further subsidise the FIRE sector.

The Heterodox Perspective

There is a reason why mainstream economists ignore private debt while focusing intently upon public debt. Neoclassical economic models assume markets operate in a static state of equilibrium, but these models are based on a slew of preposterous assumptions which are never met in the real world. The banking and financial system is modelled by assuming that money, debt and banks do not exist! The element of time is also removed, making it difficult for economists to understand the inter-temporal allocations of debt.

This is like an astronomer or astrophysicist building a model of our solar system absent the sun, moon and gravity – an inadequate framework that will inevitably produce glaring mistakes. By using a circular form of logic, private domestic and external debts are assumed to be the outcome of rationally-derived contracts, so the level of debt is deemed to be efficient by definition. In contrast, public debts are considered to be managed by ‘irrational’ government planners, who cannot make optimising decisions; a clear fallacy based on stereotypes of the competency of financial actors within the economy.

In the post-1970s era, neoliberal economic policy has dominated mainstream perspectives. A major goal of government has led to an unyielding mantra that public debts must be reduced by running surpluses where possible. The obsession with public debt and deficits has blindsided policymakers to the rapid accumulation of private debts. For instance, the severe mid-1970s recession was caused largely by the collapse of the dual commercial and residential real estate bubbles, inflated by sharply accelerating private debts, but the economics profession failed to take notice.

Unfortunately, this made no difference, with the 1981 Campbell Report advocating further deregulation of the banking and financial sector. By the time of the 1997 Wallis Report, neoclassical economists had the benefit of hindsight when examining the mid-1970s dual commercial and housing bubbles, the 1981 Sydney housing bubble, the 1987 stock market bubble and crash, the late 1980s dual commercial and housing bubbles, and the lead-up to the largest stock market bubble in Australian economic history, the Dot-Com era.

With Australia’s economic history littered with asset bubbles, irrational exuberance, recessions and depressions, what were the recommendations of the Wallis Report? More financial deregulation! Mainstream economists in Australia (and elsewhere) are wilfully blind to countervailing evidence which demonstrates the harms caused by financial deregulation.

The reason that financial deregulation is advocated becomes obvious: booming private debts enhance the power, profit and authority of the horde of private monopolists, usurers, speculators, rent seekers, free riders, financial robber barons, control frauds, inheritors and indolent rich.

Another widespread economic fallacy is that government should manage debt as if it were a household or firm. This is a false analogy as the latter cannot print money and/or increase income at will. Governments that issue their own currency with a central bank do not need to operate as if they are constrained like a household or firm. Under this arrangement, a government can almost indefinitely fund deficits without fear of bankruptcy – though whether it should is another matter.

Interestingly, this analogy raises a contradiction. If government were to manage its debt like Australia’s households and businesses, then the immense private debt to GDP ratio suggests the government should embark on a mission of out-of-control spending and pork-barrelling to raise the public debt ratio considering how high the ‘rational’ private ratio is. Clearly, this is not what supporters of the analogy are advocating, even though it is a logical consequence of their logic.

More realistic and dynamic models of the banking and financial system suggest that a government dedicated to persistent surpluses will eventually cause a breakdown in the economy. The reason for this is as follows. There are three ways for income or demand to increase in a capitalist economy: a current account surplus, a budget deficit and/or increased private sector indebtedness. If government runs persistent surpluses in the face of CADs, then the only way for an economy to grow is via increased private sector indebtedness.

The dynamics of rapid and toxic private debt accumulation caused the GFC, precisely as the exponential rate of growth ended around 2008. The Howard government provides an obvious example of this trend. From 1996 to 2007, ten out of twelve annual budgets produced a surplus, while the current account remained in persistent deficit. The result: private debts ballooned, particularly in the household and non-banking financial sectors, though more slowly in the non-financial business sector.

While Howard and Costello bestowed themselves with the gratuitous titles of ‘good economic managers’, their management of debt was in fact appalling given the exponentially-growing private debt juggernaut they presided over. This runaway debt train continued under Swan and Hockey, indicating they are no better than each other regarding the issue of debt. Both sides of Australian politics have really been managing a bubble, not an economy.

A more sensible approach is for government to engage in moderate and persistent deficits of around 3 per cent of GDP. Over time, the level of public debt remains relatively constant to GDP as the economy becomes progressively larger. This helps reduce reliance on increased private sector indebtedness to grow the economy and wards off the threat that accelerating private debt could cause further asset bubbles.

Research indicates there is no evidence for a specific public debt to GDP threshold that undermines economic growth. The revelations coming out of the ‘Excelgate’ scandal have confirmed this. Unfortunately, the prevailing belief is the opposite: in an attempt to curb rising public debt and address falling tax revenues, politicians often implement austerity measures – raising taxes and slashing expenditure – which worsens any economic downturn as government and private sector demand falls in unison.

Economists advocating austerity misguidedly use equilibrium models to assert rising government debt will burden future generations and ‘crowd out’ private sector borrowing, following an alleged rise in interest rates. This view should be disregarded, as the endogenous creation of credit and the flow of causation from loans to reserves demonstrates the private sector is not limited by the scope of government borrowings (the falsified money multiplier model and commodity view of money).

If bank lending is not constrained (‘credit is created from thin air’), then it follows the standard balance sheet model asserting a dollar lent to the government is one less dollar available to the private sector is false. Further, significant lending to the public sector may ‘crowd-in’ private sector investment because the assessment of loan portfolio safety rises when it is composed of a greater proportion of government assets, typically in the form of government bonds.

If any crowding-out does occur, then it is the banks themselves that are to blame. They have chosen to lend immense sums to households instead of the more productive non-financial business sector, boosting profits from interest income and fees off a thinly-capitalised base. The result is less credit is made available to the non-financial business sector. Government is not forcing the banks to take this course of action; they have done so of their own free volition.

Reducing the Deficit

If the government was serious about reducing the deficit, it could be achieved in a far more efficient and equitable manner than is currently being pursued via cuts to social welfare and associated expenditures. Australia already has very low social welfare spending relative to GDP, relying the most upon income-testing and directing the greatest proportion of support to the poor, resulting in the most efficient outcome in terms of inequality reduction per dollar of expenditure anywhere in the OECD.

Theoretically, the deficit could be easily plugged in an efficient and equitable manner. Government should focus on reducing the scope of economic rents that are privatised,  estimated at a total of $340 billion or 23.6 per cent of GDP in 2012, and slashing tax expenditures, estimated at over 8 per cent or around $110 billion in 2010, much of it directed at superannuation, mining and housing. The $8.8 billion boost to the RBA could be reversed, which didn’t ask for or require it.

$9.1 billion was lost to the repeal of the carbon tax, and another $4.9 billion from cutting the corporate tax rate to 28.5 per cent. The refusal to reform taxation onto efficient bases combined with funding of the paid parental leave policy, roads, border security, education and the latest round of foreign adventurism in the Middle East, are set to cost taxpayers tens of billions of dollars more.

As Treasurer Hockey openly admitted while in New Zealand, there is no ‘budget emergency’. The government has simply fabricated panic over the budget to ram through unpopular measures, further skewing distributional effects to advantage the wealthy. The hysteria surrounding public debt is provoked, amplified and echoed by the FIRE sector, including its economists and political allies, for several reasons:

  1. It distracts the public from the threat of the massive private sector debt boom. The diversion is understandable, for the FIRE sector has fuelled an immensely profitable land market bubble enriching many.
  2. To fabricate deceptive ‘economic Armageddon’ scenarios, advocating further privatisation of public assets and services as a ‘solution’ to reduce public debt. The end result is the expansion of rent-seeking private monopolies, duopolies and oligopolies to maximise economic rent extraction and above-normal profits.
  3. To prevent government from funding infrastructure and other social concerns in a more efficient manner, given its borrowing costs and fees are significantly lower than that of the private sector. The difference is economic rent, eagerly appropriated by bankers, notably via noxious public-private partnerships.
  4. It provides a pretext for austerity policies that deliberately disadvantage middle and lower income earners: increasing individual tax rates, reducing employees’ bargaining power and widening income disparities.
  5. It ensures government has room to accumulate significant debts to fund a future FIRE sector bailout. Wikileaks cables reveal that the IMF was advising the Australian government in 2009 to limit its borrowing in case it needed to bailout one or more of the Big Four banks due to their inability to rollover short-term debts.

Conclusion

The wastes and inefficiencies of government are well-known, expected and predictable. In contrast, the wastes and inefficiencies of the private sector, especially the FIRE sector, are not properly understood, are unpredictable and can quickly cascade out of control. Policymakers and economists have provided a free pass to the toxic and rapid growth of private sector debts, an outcome which overwhelmingly benefits the wealthy.

There is no intrinsic problem with public, private or external debt. All forms need to be carefully managed to ensure efficient allocations into productive, rather than wasteful and speculative, activity. As history and recent international events plainly illustrate, the most dangerous form of debt is private, followed by external, with public a distant last.

The frenzied focus on public debt is an unfortunate distraction; an increase in public debt and larger deficits would be welcome, given the weakness in the economy outside of the FIRE and mining sectors, and the social returns to public investment. Concern over historically low public debt is misplaced, despite the claims of government, the FIRE sector and many economists.

At present, the public debt burden is certainly sustainable, even if interest rates were to increase. The fashionable but unsubstantiated assertion is that rising public debt and deficits pose a risk to the economy. Compared to the pre-WW2 era, governments of today are a picture of fiscal responsibility and prudence, regardless of their political persuasion.

Australia’s history provides a test of whether a relatively high level of public debt is damaging to the economy. Coming out of WW2, the economy experienced three decades of sustained and equitable growth during the social democratic period. Australia’s experience suggests high levels of public debt are not necessarily detrimental, and the much smaller levels today are benign.

The case against public debt and deficits are based upon pseudo-scientific economic theory which has not progressed since the 19th century, political point-scoring and rank opportunism. Australia certainly does not have a ‘budget emergency’, is not ‘running out of money’, and is not headed towards ‘peak debt’ or ‘bankruptcy’. In conclusion, “Australia does have, however, a surplus of government hypocrisy and a deficit in truthfulness and competence.”

October 24, 2014 · Manage Debt · Comments Off

The Department of Education is loosening borrower qualifications for Federal PLUS Loans, which allow graduate students and parents of dependent college students to finance higher education. The updates, published Oct. 23, include a new definition of adverse credit history, potentially opening access to federal student loans for millions of families. The changes go into effect July 1, 2015.

Consumers receiving PLUS Loans cannot have an adverse credit history, and there are about a dozen things that meet the Department of Educations definition of adverse credit history. That definition hasnt been updated in 20 years, meaning it doesnt take into account the past several years of economic tumult and its impact on American consumers. Under the current requirements, PLUS Loan recipients cannot have unpaid collections or charge-offs on their credit reports within the past five years, and borrowers are ineligible for PLUS Loans if they have any accounts delinquent for 90 or more days.

The Big Changes

Delinquency: Borrowers with less than $2,085 (adjusted to the Consumer Price Index) of outstanding debt 90 or more days past due may qualify for PLUS Loans. Currently, any account more than 90 days delinquent was considered an adverse credit history.

Length of history: Debts in collection or charged off in the past two years will qualify as adverse credit history. The current requirement is five years.

Definitions: The Education Department will revise definitions of debt that has been charged off or is in collection, to more accurately determine whether an applicant has an adverse credit history, according to the announcement posted to the departments website.

Required loan counseling: Borrowers with an adverse credit history may now be able qualify for PLUS Loans if they can demonstrate extenuating circumstances. If they qualify under that provision, theyre required to undergo loan counseling before receiving the loan. Though its not required for everyone, loan counseling will be available to all PLUS Loan borrowers.

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Before taking out PLUS Loans, you should check your credit, because its possible you could qualify for better rates through a private lender. You can get two of your credit scores for free through Credit.com and check for updates each month. Keep in mind that federal student loans tend to be more flexible, are sometimes eligible for forgiveness and carry fixed interest rates, but that doesnt mean you shouldnt explore your options. A few percentage points could make a massive difference in how much your debt costs you over your lifetime, this calculator shows.

No matter your lender, you need to understand the weight of your decision to finance an education. Student loans generally cannot be discharged in bankruptcy, and falling behind on payments can wreck your credit scores, rack up a lot of fees and possibly lead to a point where the government can garnish your wages. Plenty of people responsibly finance their educations, but its crucial to plan ahead to make sure you can afford your loans.

More on Student Loans:

  • How Student Loans Can Impact Your Credit
  • How to Pay for College Without Building a Mountain of Debt
  • Strategies for Paying Off Student Loan Debt

Image: iStock

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October 24, 2014 · Getting A Mortgage · Comments Off

Some 39,271 approvals for house purchase were recorded last month with a total value of £6.4 billion, according to data released by the British Bankers Association (BBA).

This marks the first time since August 2013 that there have been fewer than 40,000 approvals made to home-buyers over the course of a month.

Richard Woolhouse, chief economist at the BBA, said : A year ago there were many of us who were concerned by the heady pace of property price rises.

Todays figures suggest we are now experiencing a steadier housing market and thats no bad thing.

Some experts have said that the housing market appears to be reaching the end of a cycle of strong price growth which has taken place as the economy has picked up and consumer confidence has shown signs of returning.

The Governments flagship Help to Buy scheme, which was put into action across the UK one year ago, helped more people with only small deposits saved to get access to a home loan.

But more recently there have been signs of fewer would-be buyers entering the market and a mood of greater buyer caution amid expectations that interest rates are likely to start rising at some point this year.

Toughened mortgage lending rules came into force in April, which force lenders to demand more evidence from mortgage applicants to prove they can truly afford their repayments.

The figures were released as estate agent Foxtons gave a profits warning, reporting a sharp and recent slowing of volumes in London property sales following an exceptionally strong performance in the nine months to June.

Mark Harris, chief executive of mortgage broker SPF Private Clients, said that while the market is taking a breath, now is a particularly good time for people to be getting a mortgage, as a string of lenders have recently slashed their rates to some of the lowest levels they have ever offered.

The mortgage price war which has broken out in recent weeks is said to have been caused by lenders looking to meet end-of-year targets, falling swap rates which lenders use to price their loans, and banks and building societies looking to play catch-up after disruption was caused earlier this year by the toughened mortgage lending rules bedding in.

Among the new mortgage deals unveiled within the last week, Nationwide Building Society, Barclays and HSBC have all announced products with rates attached which they say are some of the lowest they have ever offered.

The BBAs figures said that non-mortgage borrowing had grown by 2.1% annually, and that rising demand for loans continued to reflect an easier borrowing climate and improved household finances.

Net borrowing using personal loans and overdrafts is increasing annually after having shrunk for a long period.

Meanwhile, savers have ploughed £10.1 billion into their Isas this year so far, which is slightly lower than the £10.2 billion over the same period last year.

The flow of savings cash has been lower year-on-year despite a shake-up of Isas introduced earlier this year which means that people can put more money away tax free, with the annual limit increased to £15,000.

Some financial websites have pointed out that the Isa rates on offer have generally remained poor in the low interest environment, despite the increase to the Isa limit.

The BBA also said that borrowing by non-financial companies declined in the year to September by £8.9 billion. It said much of the decrease was due to the real estate sector, where companies have been reducing bank borrowing.

There has however been positive and sustained growth in borrowing by the manufacturing, wholesale and retail sectors, the BBA said.