Fiscal Cliff- We Survived the Fall - Now What??

If there was a real "fiscal" Cliff, at least three-quarters (¾) of Congress would have been thrown over into the abyss far below. Sorting out the facts from the political rhetoric and greed, we are quick to discover that this entire issue was created by Congress itself in 2012 because of a basic moral disconnect within Congress and a desire to stop the President’s re-election.

Congress was deadlocked within itself and with the President on the National Debt-Ceiling (IT'S BACK - NEXT POST - TRILLION DOLLAR COIN?) – that is the amount of money the Country is authorized to borrow; right now it’s about $16 trillion or $16,000,000,000,000. We had hit the limit a year ago when it was nearer to $14.5 trillion and the Republican controlled House of Representatives would not go along with raising the ceiling. The argument is that we, as a nation, already owe too much – that we are mortgaging our childrens’ futures. Congress with the White House decided to pass a law that would force a minimum of $1.2 trillion in cuts to Government agencies’ budgets across the boards. At the same time there’d be an increase in taxes for almost everyone, but especially the highest paid and wealthiest, unless an agreement was reached before January 1, 2013

The idea was to create such a nightmarish picture that Congress and the President (all being reasonable people) could come to a quick agreement to strike a balanced program. If there was no agreement, the law would go into effect and automatic cuts to Social Security, Food Stamps, Unemployment and other so-called Entitlement Programs would take effect and there would be an equal cut to defense and related spending. And there would be those tax increases. The technical term for this is Sequestration.

No wonder that for the sake of easy reference someone called the failure to reach an agreement a “Fiscal Cliff” because we would “fall” into a financial crisis that no one wanted nor about which anyone could predict the outcome. So the term FISCAL CLIFF was just shorthand for a very complex set of spending cuts and tax hikes that would go into effect at the stroke of midnight as the Times Square Ball dropped on 1/31/2012.

THE DETAILS (most of them anyway)

Enough background and theory: What does the agreement that was reached at 3 A.M. on Jan 1st and signed by the President, really mean to us – the rich, the poor, and the few in the middle?

1. Tax cuts, that had been passed in George Bush’s term will stay in effect except for persons earning more than $400,000 (couples $450,000) who will have those income tax cuts disappear. The top tax rate will jump from 35% to 39.6%. This is supposed to bring in $600 billion over 10 years **

2. The spending cuts to all of the entitlement programs and the defense industry won’t happen

3. Capital gains taxes, the tax paid on profits from the sale of stocks or any other investment will go up 33% from 15% to 20% if income is above the $400,000/$450,000 “safe” level. (I have yet to see the tax effects on business capital gains)

4. The Child Tax Credit, which would have expired will continue another 5 years

5. The Alternative Minimum Tax (a tax that’s calculated to be sure you don’t have too many tax breaks) will be adjusted so middle-middle class and below incomes won’t be affected**

6. UNEMPLOYMENT BENEFITS will be extended for the long-term unemployed for 1 year

7. The amount doctors are paid under Medicare WILL NOT be cut THIS YEAR by the threatened 27%. That would have caused many docs to stop taking Medicare and therefore Medicaid patients

8. The estate tax exemption, the level at which estates start to get taxed, will stay at $5.12 million but it will have an inflation adjustment in the future. Also, the top rate will move from 35% to 40% **

9. Itemized deductions will be limited for taxpayers making $250,000 or more ($300,000 for Joint Filers)

10. Businesses developing wind projects and doing certain research and development programs will receive the same tax credits they have had for an additional two years

11. Businesses, and this affects even small business, will be able to obtain bonus depreciation. Simply put , instead of being able to deduct 1/7th of the cost of a truck (depreciating value) each year for 7 years, the law may allow a two (2) year period which makes short-term investment in equipment more attractive.

** (These items are permanent changes, not needing further action)

THE “BACK-STORY” – Why this really happened

In the first paragraph there was a reference to a “moral disconnect” in Congress. The comment was not a slur but rather the key to most of the fighting. There are those who truly believe that as a Country we should always run with a balanced budget, like a business or a family would do. There are others who are as firm in the philosophy that it’s okay to incur debt that will take a long time to repay. That is the basis for one of the most basic on-going debates in economics.

In a deep recession, one caused by a collapse of a major segment of the economy (housing this time), you may not be able to reach a balanced budget. Even though it might be the best resolution, austerity, not spending, will dry out any ability for employment to get better, for purchases of goods to increase etc. Imagine asking everyone in your family to have a balanced budget within a year. That means that everyone would have to balance at essentially the same time. Well, so much for getting a short-term loan from Mom or Auntie or your favorite Uncle! Now imagine having every family and business in the Country to accomplish a balanced budget in a year – the same year.

There are others who believe that in financially dire times (now), to keep things from getting worse, the Government is equipped to borrow huge sums by selling bonds and spending money on projects to create jobs, to make lending/borrowing easier (thus the low interest rates) and a host of other measures. It’s like a “Texas Steel-Cage Death Match” between the two extremes. That is the real genesis of the dilemma. Well, and the politics of trying to win the presidency.

BUT WAIT, THERE’S MORE!

It doesn’t really matter in the short run which side you are on – spend our way out and pay the bills later or cut spending to the bare bones and enter a true austerity program to pay everything faster. There is no ANSWER, there is no TRUTH in a social science which is what Economics really is. There are many views but we have to settle on a path to recovery, to solvency. If there is no agreement in two months, we get to go to another Fiscal Cliff or sorts but with an unimaginable drop-off: The DEBT CEILING. Will we pay our national debt and keep things running here at the same time, or will we default and become a deadbeat Country?

Author's Copyright by Richard I. Isacoff, Esq January, 2013
www.isacofflaw.com
isacofflaw@msn.com

Bankruptcy; Not a Four-Letter Word

Bankruptcy has had a bad reputation over the decades for some good and some bad reasons. The good reasons for a bad reputation all boil down to the issue of fraud: people who have assets and are hiding them from creditors, or people who went into business and ran up debt they could not afford, or consumers who bought "stuff" with credit (cards) with no ability to repay. In the later case, it's rather hard to repossess a vacation cruise, and in the former, if the money from profits is spent, it's gone for good. Unless intent to commit fraud can be shown, normally a Bankruptcy will wipe out debt.

Let's take a step back and discuss what a Bankruptcy does. Quite simply when a bankruptcy is filed, it protects the debtors from creditors. The are two main types of PERSONAL BANKRUPTCY - Chapter 7, where you eliminate debt without any repayment but surrender personal property and real estate that is not protected by law for the benefit of the creditors. A Chapter 13, requires that you have money left over every month AFTER paying REGULAR LIVING EXPENSES, and from the money remaining each month pay creditors on a pro rata basis.

The primary reasons for filing a bankruptcy are not voluntary at all: 1. Medical bills and illnesses 2. Loss of a job or substantial reduction in hours 3. A birth or death in the family 4. A two income household becoming a one income family 5. Bad money management. A DISTANT 6 is fraud - maybe 5%, although some experts will claim 10%.

For whatever reason, people have a negative opinion of bankruptcy - yet people would be surprised to find out about friends and neighbors have filed for protection.

Going to a different reason to have a more moderate opinion of bankruptcy filings is that THE OLD AND NEW TESTAMENTS, AND THE QUR'AN all encourage a forgiveness of debt to those truly troubled by debt. That is for the CREDITOR to FORGIVE the DEBTOR.

It makes no sense for a retired person on a fixed income to have to make a decision between food or medicine; or for a family to have to deny a child the presence of a parent so that parent can work 3 jobs to just pay basic bills. Please do not misunderstand: it is not suggested that filing a bankruptcy is the first course of action to think about, but it should not be the last, after losing everything.

Simple tips, some repeated some not:

1. Don't solicit credit cards or get as many as you can. Determine how much credit you need and only borrower that much.

2. If you find yourself using credit for living expenses, seek a credit counseling service such as Consumer Credit Counseling or Money Management International - just be certain that it is a true not for profit agency, not a scam. If you have to pay a big up front fee - stay away.

3. If you have a bank where you are known and are comfortable at a branch, ask if the bank has someone to help you budget your money.

4. As soon as you find yourself ready to get a second card/loan to make payments on the first, consult an attorney who handles bankruptcy as she/he will also deal with basic debt counseling.

5. Don' let pride get in the way of keeping your peace of mind or all you have left is a piece of mind.

For more in-depth information visit my website http://www.isacofflaw.com or other resources like the National Association of Consumer Bankruptcy Attorneys, or the American Bankruptcy Institute.

Author's Copyright by Richard I. Isacoff, Esq, September,2011

rii@isacofflaw.com
http://www.isacofflaw.com

"Danger Will Rogers...Danger" *

Steven Pearlstein, a columnist for the Washington Post wrote about the "Global Economy Comes To The End Of Its String" and went on to explain, quite "readably" why it's happening. The column, in the 8/6/11 online edition, discusses the fact that we are cycling back to 2008 levels (maybe), because we never fixed the underlying problems with ours and the global economies. The only issue I would have with the characterization is that we are finding it increasingly difficult to separate our economy from the global economy.

As was written in the prior post here, the U.S. has been spending more than it's been making. We have relied on foreign countries, like China, to continue to buy our Treasury Bonds, which is just lending us money. That's what the whole "Debt-Ceiling" debate was all about. It took Congress 3 months to decide if we would be allowed by law to borrow more so we could keep operating our Country without a DEEP cutback in services, like Defense, Medicaid, Parks, EPA protections, Federal Aviation Admin., and on & on & on.

Brian Wolfman posted a short piece of the article on the Consumer Law & Policy Blog and asks at the end "So, what's the chance that will happen given what we've just seen in Congress?" Here is my response:

"You ask, somewhat rhetorically, about the chances for Congress to adopt policies like those Mr. Pearlstein outlined and accept his analysis of the "how we got here". If you know how to bring back from the un-living (on earth anyway) Sam Rayburn, Tip O'Neill, Dwight Eisenhower, Louis Brandeis, Earl Warren, Hugo Black, Ronald Reagan, and Gerald Ford, we might have a chance. As partisan as some of those folks were, they put the Country first when the chips were down (don't really know what that expression means but...).

The current Congress is so ideologically focused and unyielding in their world view, that they belong back to a time when the "world was flat". Common sense tells them that if you go to a beach and look out to the horizon, you can see that the world is flat. That was the prevailing common sense. Oh, and, of course, from Wasilla, AK you can see Russia (I tried with military issue binoculars, from the highest point in Wasilla, in March of 2010, on a clear day, and could NOT see the "Hammer and Sickle").

We are truly at a turning point for the Country and the world. The EU (European Union) is as divided as our Congress, so they will be no help. At least here, the big issue for BOTH Congressmen and Senators is GETTING RE-ELECTED in the same country. The pandering to lobbyists and ideologues must stop. The hard core Tea Partyists are at least true to their beliefs, but remember the flat world.

The future looks grim. Voters cast out the evil-doers in the mid-terms. The world economic crisis was only in part our fault. We allowed the most selfish politicians and "bankers" to run us into the ground. No regulation, no brakes, no-mind to the constitutional interpretations of the past, and a skilled manipulation of the concepts of a "free-market economy" ruled for 8 years. But, this coincided with Europe deciding to try getting along. No one hired a Cat Herder.

Maybe if we remember Peter Pan's plea that we all believe in Tinker Bell (metaphorically only) our economic system will survive. If it doesn't and we don't begin to rebound quickly, we are facing a future that we have fought 2 world wars, our own revolution, a civil war, and the "baby-boomer wars" for nothing.

*from the CBS Show -"Lost in Space" - fitting!

Author's Copyright by Richard I. Isacoff, Esq., August, 2011
rii@isacofflaw.com
http://www.isacofflaw.com

We Have Been Sent To The Minors

I work in the private practice of law dealing daily with the economic realities of average people who have average problems and with those who have extraordinary financial problems. Having had the responsibility for the investment of as much as $145M, I continue to pay attention to the financial markets on a daily basis. This posting is to try to explain what has happened in the lowering of the credit rating of the Country's "sovereign" debt (meaning money the Country itself has borrowed - think Treasury Bonds) from AAA to AA+. Just like in baseball, we have been sent down to the minors.

By now, the entire world, knows that the United States has lost some of its credit-worthiness. Standard and Poors, known better by "S&P", in its role as a debt rating agency (a company that determines what debt is safe for investment and what is risky and how risky). The fact that the other two major raters have not taken any action "against" the U.S.'s risk seems to be of no importance.

In the world of investments PERCEPTION IS REALITY. That's true in many areas of life but especially in this one

The downgrade was apparently caused not by economic factors but rather the dithering of the Congress in deciding to do anything about the debt-ceiling and deficit reduction. With the complete polarization of the 2 ½ parties currently "in charge", little was done to address the systemic problem of our growing debt and its root causes.

It's easy to state that the Obama administration did or didn't do this or that, or that Bush allowed deregulation to go too far (think SEC and securitization). But, in reality should that have affected the credit worthiness "rating" of the sovereign debt of the U.S.? Probably NOT.

The Congress, through a myriad of laws and regulations wanted/tried to rein-in the Rating Agencies and hold them accountable for the financial meltdown. Remember it was these same agencies that rated Mortgage Backed Securities as AAA paper. That they were/are paid by the "investment banks" who did the securities to sell bonds to make $$billions has escaped the review of the markets now in panic over our AA+ rating. Rather than this being an assault on the problem with our deficits and trade imbalance, it seems more like S&P trying to exert enough pressure to get Congress here, and Parliaments in the EU to back off assigning liability to Credit Rating Agencies.

S&P was the only agency to downgrade. S&P was the agency most involved in giving the "seal of approval" to the MBS and CMBS bonds. S&P stands to be the biggest target if liability is established for the incorrect/negligent/disregard for underwriting standards rating of those bonds. It's worth repeating that the securities firms securitizing the loans and selling them for huge profits paid the rating agencies large fees to rate the bonds.

Michael Shemi wrote an excellent column in the August 4, 2011 edition of American Banker's blog "BANK THINK" ( http://tinyurl.com/3s4tn7n ) where he discusses the moves to lessen the restraints and assignment of liability to and on the credit rating agencies. As he put it "Lastly, the continuing crises surrounding sovereign debts and national deficits from Greece to Portugal to the United States are affording rating agencies another opportunity to boost their own importance. By threatening the imminent downgrade of the ratings for these countries, the rating agencies keep their names in the news and constantly rattle the chains of issuers, regulators, and investors."

Of note is the matter of the probable divestiture of S&P by McGraw-Hill which owns it - "spin-off" because of S&P's enormous profitability. It needs publicity. It needs a crisis to show its importance and absolute need.

The U.S. economy has problems but also the capacity to overcome those issues if Congress can stop the "Texas steel cage death fight" over ideology". It's almost as if each political party and each faction thereof wants credit for causing the next recession. The rating agencies need to be held accountable - but so does Congress; and so do WE the people. We desparately need a coherent plan to reduce the deficit over the next decade by $4trillion and then another $10trillion in the decade following. Budget cuts? Social Security cuts? NO!! Tax reform - so rich folks pay a share commensurate with their annual income. Raise the age for Social Security benefits starting in "X" years - maybe from 62 (early)and 65/6 (regular-full) to 63 and 67/8 respectively.

If the WORLD saw us with a plan to eliminate the deficit totally in 20 years with a big push in the first 10, all would be well again.

Author's Copyright by Richard Isacoff, Esq, August 2011

rii@isacofflaw.com
http://www.isacofflaw.com

We Got A Credit Line Increase

The Country is Saved. We Won't Default. We Won't Need the EU to Bail US Out! Hooray!!!

As I noted in a Tweet, if the U.S. defaulted and ended up in Bankruptcy, who would be the Trustee, the guardian of creditors like China? Luxembourg???

The entire situation is ridiculous. But, it wasn't so far-fetched (a default). Everyone was buying gold and platinum and silver and... As posted here earlier "How Many Grams of Fat Are There In An Ounce of Gold?", the idea being that gold is only worth what someone will trade for it. Well, we will not have to worry about that anymore. The Congress, meaning the Democrats, Republicans, and Tea Partyists, in both the House of Representatives and in the Senate, and the President have come up with the master-plan to avoid not being able to borrow. The amount the United States can borrow will be increased.

Foolish as it appeared (because of all of the 2012 election campaigning and "holier than thou" Tea Party drinkers; I mean why have a Tea Party and drink coffee? But they did forget the crumpets!), there was exposed a huge problem with our financial system.

Some basics and answers to questions:

1. How could we run out of money to pay bills? Well, we already have. We have used the equivalent of an home equity loan to get money for all of our annual needs. The difference is that we "sell" Treasury Bonds. That is a nice way of stating that we will agree to pay "X"% interest if someone/country lends us money. Granted the amounts are larger than you would need for siding on your house, but the concept is identical. The "Treasury Bonds" that you hear/read about are nothing more than IOUs given to whoever buys the bond.

2. What is the Debt Ceiling and how high is it. It is $14.7 trillion; that is $14,700,000,000,000. It is the amount the Country is allowed to "borrow" from other countries and "all of us". It is a constitutional matter. The Congress has to agree on the amount and then get the President's approval for the MAXIMUM amount of our loans. Congress is acting like a Bank's Loan Committee deciding whether the Bank's Customer (the Country) can repay it's loan.

Were did all of the money go? No one knows for sure and no one, even the GAO (General Accounting Office) can trace it. But we know that we spent money on several wars (2 still on-going); we STOPPED a world-wide depression by enacting the "Stimulus" packages; our States, cities and towns had their tax revenue supplemented by some of that $14.7T for schools, bridges, roads, housing (especially for the elderly); the world wide stock and securities markets did not crash because we paid to offset losses -AIG, Lehman, Ford, Chrysler, GM et al.

IN REALITY, WE SPENT MORE THAN WE EARNED. Tax revenues were too low, the wars were/still are sooo expensive, and we have been spending like we could just print more money (oops, we can and did!)

3. What is the "Deficit" - over-simplified but not by much - just as in any household, or business, the deficit is the NEGATIVE difference between what we spend and what we earn. The trade deficit is a bit different - that is the NEGATIVE difference between what we sell to foreign countries and what we buy from them. For a long time we have bought more than we have sold. WE ARE A NATION OF CONSUMERS.

Coupled with our penchant for buying is the fact that our "DOLLAR" has been strong for a long time in comparison to other countries' money. Simpler - our dollar was based on a stronger economy; more output and capability of manufacturing, inventing, building more than nearly all other countries. We were perceived as having the ability to produce 10, 15, 20, 50% MORE IF WE WANTED TO, AT ANY TIME - like right after the start of WWII. Doesn't do much good if no one is buying!

4. Why did it take so long to set a new limit? POLITICS - RE-ELECTION in 2012. That simple? YES. That doesn't mean that some of the 535 people in Congress did not really believe that our "bill" to others will cause the ruination of the Country. It could, but most likely won't. As these things are measured, we have a bill that is 62% of our Annual GROSS DOMESTIC PRODUCT(GDP). That means that we OWE 2/3 of our county's TOTAL output of goods and services for a year.

Just think about paying 62% of your net/take home income for loans. That doesn't take into account food, utilities, cable, gasoline etc - all of the things that are monthly or annual expenses. For the Country, it's like only having 1/3 of the total amount the United States collects, for the payment of Medicaid, Food Stamps, Unemployment, Military pay, other government employees' pay, expenses for things like the Gulp/BP clean-up, and all other programs big and small.

Maybe now our elected officials can get back to business of running the Country - maybe they need a lesson in accounting - Remember Debits on the Left, Credits on the Right. Debits by the Window, Credits by the Door (from Accounting 101). OR we could buy 535 calculators and copies of Quicken

Author's Copyright by Richard I Isacoff, Esq, August 2011

rii@isacofflaw.com
http://www.isacofflaw.com

The Debt Ceiling: What Is It (and why do we care)?

As Congress argues over what to argue about, they are avoiding dealing with THE major financial issue that needs to be resolved now - not in 15 or 20 years. The Federal Debt ceiling, the total amount of money the Country is allowed to borrow as authorized by Congress. Currently it is $14.3 TRILLION and analysts predict that we have until July, at the latest, before we are MAXED OUT.

I use the term "Maxed Out" because it is a concept with which most consumers have dealt. Well, perhaps not with that much money, but the financial reality is the same: No More Available Credit. In consumer circles it happens when your no longer have any available credit on any credit card to make payments on the other credit cards. In Nations' budgets, at least where there is a body that manages finances, countries sell bonds - here, most commonly Treasury Bonds.

Buyers of these bonds are promised, by the Government, a certain rate of interest and payments at certain dates. Well, where the issuing country has more debt that cash coming in (taxes, tariffs, fees, leases, sales of rights to drill/mine/grab oil etc), that country has to sell more bonds to pay the interest owed on the earlier ones which were issued. Striking similarity to the credit card example above; borrowing to pay interest on borrowing.

Here is the difficult part - Congress has to approve additional borrowing - borrowing beyond that which they approved in the last round of borrowing authorizations. If we do not borrow more and cannot pay the interest when it becomes due and we default/fail to pay, the world economy will go into a tailspin. We have been the single country that the world turns to for stability - yes, even after the 2008 meltdown. If we default, the 2008 to present recession will seem like the "good old days" (why were any old days good?).

The issue before Congress, which the Federal Reserve and Treasury have to explain to them, is that we need to borrow more - a lot more; and, the lack of a decision on this matter is already starting to enter the "markets". There is no question that $14.3 Trillion is an overwhelming figure but when measured against the potential growth in our economy and growth of the country, it becomes manageable over time if we avoid spending too much more than we earn. Just like any household budget.

Unfortunately, one party wants to show the other that it stands for "deficit reduction" and will slash spending to fix the problem fast. The other party wants to fix it slower and not slash as much for fear of stopping the "recovery" and growth of the economy. Too many budget cuts and reductions in spending will leave the country with a more dismal future with regards to medical insurance, education, roads, etc. AND MIGHT STOP ECONOMIC GROWTH. Not beginning to balance the budget and to lessen the borrowing will put the country in a hole from which Alice (the Wonderland/Looking Glass Alice) couldn't get out.

We might wish to believe that Congress will compromise in time and everything will be fine, just as before. Maybe but maybe not. Members of both Houses are so locked into the mindset that compromise means the "other guy" won and that we must stand true to our core beliefs (pullease), that they might wait too long. Not to the point where we default, but to the brink where other countries and industry thinks we might actually default THIS TIME.

Jobs -gone. Savings - gone. Inflation or deflation - huge. Depression - there won't be enough business left to employ anyone. Gold (why I do not grasp) - to Jupiter We won't be able to borrow - sell bonds. There will be no lending going on in this country (or most others). Companies will just close their doors. No one will be able to buy anything not made here because our dollar won't be worth anything anywhere.

Why do we play the game? To get re-elected? Or to fix a problem, that took 40 years to create, in 12 months? To be sure that whoever is running a failed country is of the correct ideology? Well - you get the idea!!

Author's Copyright by Richard I. Isacoff, Esq., April, 2011

rii@isacofflaw.com
http://www.isacofflaw.com
Twitter: @riisacoff