My Thoughts on the Downgrade

Recently, S&P decided the long-term outlook of the US's economic situation concerned the rating agency enough to move the US Government out of investment-grade status.  For the first time in US history, the credit rating of the US Government has been downgraded (to AA+, from AAA).  This should bring a host of concerns for everyday consumers, because this could ultimately affect interest rates in the future if the government doesn't get serious about significant debt reduction, and NOW.

From what I've read, the downgrade had as much to do with the "brinkmanship" policy making in Washington as anything.  The strategy for both parties seemed to be to wait for the other side to flinch.  This inability to collaborate on a long-term debt reduction that would have met the "requirements" set forth by S&P in essence triggered the downgrade.

Given the performance of the equity markets over the past few weeks, investors are already on edge regarding the global economic outlook.  The gains in the DJIA (Dow Jones Industrial Average) for the year have been wiped away.  The performance today has been especially sickening.  The Dow dropped over 600 points to under 11,000, down nearly 7% for the year. This has an effect on consumer confidence that, along with stagnant unemployment, will most certainly hurt the ability to pull out of this downturn.

The suprising thing is that, in spite of the move from investment grade, 10yr treasuries were still in demand, which tells me that the concerns are not just limited to the US government's potential to default.  There are still significant global concerns that are pushing the equity markets down as well.

When the details of the debt ceiling deal came out, I thought they were a bit underwhelming.  Apparently, Standard & Poor's felt the same.  The fact that Social Security and Medicare were off the table should have been an ominous sign.

(Here's a really good article on the debt ceiling negotiations, through the lens of "game theory":
http://www.businessweek.com/magazine/the-debt-ceiling-deal-the-case-for-caving-08032011.html?chan=magazine+finance+channel_opening+remarks)

Here's hoping our elected officials get the message sent by S&P and get serious about debt reduction.

Should the government subsidize home ownership?

Home ownership.  It's certainly an issue in today's economy.  Speculation, 100% financing, and predatory lending practices during the heat of the housing bubble certainly points to the cause of the crisis.  But this post is not about that.  What this is about is home ownership.  Certainly there is an emotional element to this topic.  But I propose that in a time when the government is on the brink of default, the federal debt is growing to unfathomable levels, should they be subsidizing America's financing of home ownership?

Mortgage interest, for the majority of filers, is the largest single deduction itemized each year.  I know it has been for me for the past several years.  I certainly enjoy getting that credit back from Uncle Sam for the money I've been paying into my home each year.  By getting credit for these interest payments, the US Government) are giving a discount on these interest payments, providing an additional incentive for someone to rent vs. own via mortgage financing.

Am I saying I want to give up this deduction, the largest personal deduction for me when filing my income taxes? On a personal level, of course not!  But, when thinking about ways the government can increase revenue to close the budget gap that is a serious mid to long term problem for our government, this "loophole" seems to make sense.  I, personally, would like to see a cap put on this deduction.  I think that's the best solution.  By capping, you are not eliminating the deduction for low and middle income homeowners.  At the very least, capping is a way to phase out this deduction (if that is what is ultimately decided by our legislators).  

I am sure this would have a short term negative affect on the demand for housing.  No doubt, as people rationalize and look at the pros and cons to buying a home, interest deduction is one of the benefits listed.  This would reduce the pool of already small buyers, further shrinking already slow demand for housing.  But the greater problem, in my opinion, is the inflated inventory of foreclosures on the market.

Would love to hear any of your thoughts/comments on this idea.

Currently Reading:  Fast Company, First Time Dad by John Fuller