Through today, GMAC has received government bailout funds totaling $12.5 billion. The company is asking the Obama administration for $5.6 billion more. One might say that in a true democracy, GMAC would need to ask permission from each taxpayer whose funds would go towards shoring up the company’s balance sheet, a move that would make GMAC appear more stable on paper. But we have a representative democracy, where Congress makes decisions that occasionally reflect the will of the members’ constituents.
GMAC might receive their third bailout. Industry analysts agree that the failure of GMAC would have a devastating ripple effect throughout the rest of the economy. If GMAC fails, so would the companies who depend on GMAC to offer loans to customers, General Motors and Chrysler. The failure of these companies in turn would result in the failures of suppliers and dealers. The government has already pumped so much taxpayer money into these companies that their failure would signal a broader failure of the entire bailout process. Also, GMAC’s total bailout is still less than the financial injections Citigroup and Bank of America have received.
In personal finance, an additional bailout for a failing company would be similar to throwing good money after bad. For example, if one makes a poor purchasing decision while buying a car, costly repairs might be necessary. Rather than cutting the losses and getting rid of the car, one might continue putting money into the black hole, and after time, the money that you spent on the purchase and repairs could have purchased a nicer car that ran without problems.
There is no guarantee that another bailout will save GMAC in the long run.
GMAC is the parent company of Ally Bank, formerly known as GMAC Bank, an online bank that has drawn in more customers with a savvy advertising campaign and high interest rates. The American Bankers Association forced the FDIC to request Ally Bank to lower its rates because other banks couldn’t compete with Ally’s new strength acquired with the help of taxpayers.
If GMAC were to fail, Ally Bank depositors should be safe as long as they have stayed within FDIC’s coverage limits.
I think it may be time to start allowing companies like GMAC, those who require funding from taxpayers to improve their balance sheets and who have little prospect for paying taxpayers back, to fail. There are signs the economy is recovering. Maybe it is time to let the market and capitalism work itself out. Those companies who remained conservative will survive and those who chased bad loans and complex derivatives without sufficiently considering risk will step aside.
Do you think GMAC should receive another bailout?
Photo credit: jim.greenhill
3rd Rescue Considered for GMAC, Eric Dash, New York Times, October 28, 2009
The $8,000 tax credit for first-time home buyers is set to expire at the end of November, but lawmakers don’t want this benefit to end. While there have been some positive signs in the real estate market, the current credit hasn’t done much to stimulate house prices or the economy overall. All year, some senators and representatives have been suggesting improvements designed to further jump-start the real estate industry, none of which have been passed yet. Here are some of the enhancements they have been considering.
- Extending the deadline from November 30, 2009 to May 30, 2010 or November 30, 2010.
- Expanding the credit to all home buyers rather than just those who have not owned a house in the past three years (otherwise known as “first-time” home buyers).
- Increasing the credit from $8,000 to $15,000.
- Eliminating the income cap for qualification of $75,000 (or $150,000 for married filers).
These changes, if signed into law, would redirect the focus of the credit from the average consumer who needs a little boost to purchase a primary residence to investors and speculators. Flippers would still be discouraged because the bills currently under consideration in the House and the Senate both call for paying back the credit if the house is sold within two years or if the purchaser is not a primary resident sometime within two years.
For many people, $8,000 is not a big enough incentive to buy a house if they aren’t financially ready to do so. I don’t think increasing this to $15,000 would change much. This credit, if the changes become law, is a bailout of the housing industry, just like Cash for Clunkers was a benefit for the auto industry.
Update: The first-time home buyer tax credit has been extended and expanded. Click here for the latest details. The information below is now out-dated.
The Senate is considering a number of changes to the $8,000 first-time home buyers credit. Spurred on by Sen. Johnny Isakson from Georgia, the adjustments being considered seek to expand the credit to spur the real estate industry.
Here are the changes some Senators would like to make to the original law.
Expand the maximum credit from $8,000 to $15,000. When the first-time home buyer credit was first suggested as an amendment to the Senate’s 2009 Stimulus Bill, home buyers would stand to receive a credit worth 10% of the purchase price of the house up to $15,000, and the credit would be distributed over a course of two years. This amendment did not end up in the final law. The limit was reduced to $8,000.
Eliminate income limits for the credit. In the current law, the amount of the credit phases out when the taxpayer’s modified adjusted gross income is over $75,000 (single) or $150,000 (married) and fully eliminated when income reaches $95,000 or $170,000.
Make the credit available to all home buyers. Home buyers qualify within the “first-time” label if they have not owned a home in the past three years. The current credit is limited to the first-time home buyers, but the new legislation making the rounds would change the rules so any home buyer would receive the credit.
These changes will benefit many people who are deciding whether to buy a house in this market. It should continue to increase activity in the real estate industry and provide more work for real estate agents. It could, however, encourage buyers to spend more for a house than they believe it is truly worth.
Real estate investors (speculators) will also like these new rules for the tax credit if they become part of the law. Overextended consumers and real estate speculators led us to overpriced real estate values, a bubble was formed, and eventually deflated or collapsed. Will these changes to the law, if enacted, just put the real estate industry back into a precarious position or will they put is back on the right path?
As a result of the American Recovery and Reinvestment Act of 2009 (see our roundup of ways to take advantage), 2009 and 2010 are good years to make some of the “green” home improvements you may’ve been considering. I’ve had a little trouble, however, navigating and understanding the many tables and footnotes, so I’m condensing the basics here for our mutual benefit.
Tax Credits for Smaller Improvements
I’m sure we all wish we had geothermal energy and solar roofs and that we were selling our unused energy back to the electric company, but installing those things is still a huge initial investment. Here are the more likely things we can do in the meantime, and get a special benefit when it comes time to do our taxes, not to mention saving money on monthly electricity bills.
Get back 30% of the cost of any of the following. You can implement any combination of this list, but your total tax credit won’t exceed $1,500. Also noteworthy: these don’t apply to building a new house (there are separate tax credits for new home builders as well as commercial buildings and cars).
Be Prepared and Pay for the Right Things
Don’t get caught without the right equipment or paperwork. Here’s what you need to do in order to benefit for the next two tax seasons.
- Equipment must be able to last for at least five years – a two-year warranty is sufficient to prove this.
- Not every equipment model qualifies – and if it was placed in service before Feb. 17 2009, the qualifications are different. Click an option in the list above for more.
- Save your receipts and warranty
- Improvements made in 2009 will be claimed on your 2009 taxes (filed by April 15, 2010) — use IRS Tax Form 5695 (2009 version) — it will be available late 2009 or early 2010
Smithee has been keeping me up-to-date with a major part of the 2009 economic stimulus, the $400 for individuals or $800 for couples tax credit. Here are some things to keep in mind about this stimulus going into effect today, called the “Making Work Pay” credit in the law that established it. Smithee says the $400 or $800 credit could have been dumber, but I find it smart and dumb for different reasons.
This variation of the economic stimulus is taking the form of a small bonus in each pay check from April through December. The increase will occur thanks to an automatic change in tax withholding put into effect by your employer.
A small increase in each pay check is “better” than receiving a lump sum payment. I suppose this depends on the definition of “better.” First of all, the lump sum payments to taxpayers in 2001 and 2008 did little to stimulate the economy directly. Surveys suggested that recipients used the lump sum as “found money” or an increase in wealth and directed the funds towards savings accounts and debt repayment. In normal circumstances, adding a lump sum to savings on a large scale should boost the economy, though not as much as spending. The theory is the banks will take the deposits and turn the money around by lending money to businesses. But thanks to the “credit crunch,” that didn’t happen in 2008.
Also, when lump sums do encourage spending, it’s usually for large purchases. If you buy an electronic device, clothing, a car, or most other large purchases, you aren’t necessarily boosting the local economy. When stimulus is presented in small bits over time rather than one lump payment, is is perceived as an increase of income rather than wealth and it encourages a gradual incorporation of the extra money into daily spending. Tax payers are more likely to spend the extra stimulus, even if it is only about $10 to $20 a week. Perhaps this increase will mean one more dinner at a restaurant, contributing to the health of local businesses.
While the form of the credit is good, I expect more problems a year from now when it’s time to file 2009 income taxes based on the fiasco that was the 2008 economic stimulus credit.
The Making Work Pay credit is a new tax credit that will be claimed on 2009 and 2010 income tax forms. In 2008, millions of tax payers received an economic stimulus payment, essentially new money to be spent or saved. But when the time approached for filing 2008 income taxes, the Recovery Rebate Credit appeared on 2008 income tax forms. Much confusion ensued. The 2008 economic stimulus payment was simply an advance of this new Recovery Rebate Credit. So those who already received the economic stimulus payment could not claim the Recovery Rebate Credit. If they could, they would have been receiving the same credit twice.
The confusion that this created is bound to return in the form of the Making Work Pay credit. The extra tax withholding starting today is an advance of the Making Work Pay credit, which will likely appear as another line item on the 2009 income tax forms, just like the Recovery Rebate Credit.
Many people will have the correct amount of tax withheld. Your employer makes a number of assumptions. First, your employer knows about only the income they provide you. If you earn $60,000 from your day job, your employer will adjust your withholding because based on the information they have you qualify for the tax credit. If you earn an additional $40,000 outside of your primary job from your investments or from a second job, your total income disqualifies you from receiving the Making Work Pay credit. If you don’t instruct your employer to adjust your withholding, you will have to repay the credit to the government when it comes time to file your tax return.
Second, if you are married, filing jointly, and your spouse works, both employers may reducing withholding enough for the entire couple. In this situation, similar to the above, you could end up owing the government money for receiving too much in your pay checks.
Some employers began offering the reduced withholding early. The new withholding formulas are based on calculations assuming the adjustment occurs on April 1. Some employers have opted to adjust the withholding early. As a result, the employer will be offering employees a larger credit than they are entitled to. Any under-withholding as a result will be sought by the IRS when tax payers file 2009 income taxes. If an employer applies the new withholding formula late, then the employee may be entitled to an additional credit when he or she files the return.
Economic stimulus payments, to be effective rather than to be seen as “bread and circuses” or politicians buying votes from the public, should be incorporated into income as much as possible, but shouldn’t be buried in the tax code, creating confusion and frustration among taxpayers.
A few weeks ago I wrote a short piece explaining that while even if you think the “Making Work Pay” tax credit of $400 is a bad idea, at least we’re saving money this time by not sending out two letters and a check to every household in America. In short: the stimulus process could’ve been dumber.
In the comments of that article, Laura said:
Yes but now the government will have to reprint and mail out the employee withholding schedules that small employers use to figure up those weekly paychecks. This is why it will take a few months to see that $13. It goes both ways.
I wasn’t sure if Laura was correct about that. I work for a small company, so I figured I’d wait and see.
This morning, my co-workers and I saw our Federal Withholding decrease for the first time as a result of the “Making Work Pay” tax credit. My personal take-home pay is $33 more (we get paid twice a month).
So I asked our Accounting department about the process, and I got this in reply:
It’s actually a change in the Withholding Table. The Table is downloaded from the IRS electronically and then based on your W4 elections and pay scale, the amount will automatically adjust.
Granted, there are probably some companies who don’t do everything electronically, and as a result might need a paper form to be sent, but in our case, and I suspect most other companies, this process didn’t cost anything.
So, in short: the stimulus process could’ve been even yet still dumber.
(More about the Tax Credit from the IRS.)
Our financial crisis is being combated on many sides, with a seemingly endless series of opportunities for people facing serious hardships. I thought it would be helpful to summarize all the options created as a result of the American Recovery and Reinvestment Act of 2009 and give you just the facts that you need in order to consider pursuing one or more of them.
1. Mortgage Refinancing and Modification
You may be having trouble making mortgage payments (either your rate went up significantly, or your income decreased, or maybe both), or you’ve been paying your mortgage on time but your home value has decreased, so you can’t take advantage of lower interest rates. Help is available for both groups.
Visit MakingHomeAffordable.gov, and find out if you are eligible.
Also worth pointing out on that site is the special Beware of Scams page. The idea of losing your home is one of the more frightening ones I can think of. People may not always make sound decisions.
Earlier coverage of this from Consumerism Commentary
2. Tax Reduction for 95% of Working Americans
You don’t have to take any action to benefit from this. You’ll either notice your regular paycheck increasing, or you won’t.
Earlier coverage of this from Consumerism Commentary
3. $250 for SSI or Social Security Recipients
There’s a one-time payment of $250 that should be made by the end of May 2009 for people on Social Security, a veteran with a pension, or people with disabilities. You don’t have to do anything special to receive this, either. More information at Social Security Online.
4. Tax Credits for Making Energy Efficiency Improvements
The Low Impact Living blog has a great summary of the different ways you can save in 2009 by making specific “green” improvements. I’m seriously considering a few of these.
5. Over $15 Billion for Medicaid
I don’t know much about Medicaid, except that many people rely on it, and if you were worried that you wouldn’t be covered, there’s a good chance you will be, now. Read the Press Release at the White House.
6. Tax Credits for Buying a House
There was a tax credit for buying a house last year, and there’s a tax credit for this year. They have different rules and Flexo did a great job explaining both, and how to act on either one.
7. Tax Deduction for Buying a Car
Trucks are included, too. If your income isn’t too high (taxable income of $125,000 / year or $250k for couples filing jointly), you can deduct the sales tax on a new vehicle. Read more (especially the first comment) at the Sound Money Matters blog.
8. More Money for Students
An additional $17.1 billion in Pell Grants means an increase of a maximum Pell award from $4,850 to $5,350. There’s also an additional $200 million for work study programs. Quite a lot more information at the U.S. Department of Education Web site.
More details about this, additional credits and 529 plans can be found at the Online Education Blog.
Summary
Whether you think the ARRA is a good idea or not, it’d be foolish not to take advantage of the opportunities that make sense for you and/or your family. Mostly, though, I hope the growth of our various tent cities slows down really soon.
So, I got this credit card that deposits 2% cash back into a brokerage account. I started using it for all my daily purchases, paying off the statement balance each month. At the end of January, my points on the card were redeemed for the first time, and a few impatient days later, I had $38 dollars to start investing.
I could just set up a transfer from the brokerage account to my regular checking account and use this free money for other purposes, but I’ve always wanted to try investing in the market, and because it’s free money, I’m allowing myself to do so.
I figured that I could buy 3 shares of an ETF called PBW, which is a collection of companies specializing in renewable energy, which seemed like a good fit because:
- I didn’t feel like I have the time needed to do the right amount of research to buy shares in only one company
- I’m an aspiring hippie
- I knew that the American Recovery and Reinvestment Act of 2009 was in the works, and it set aside a serious amount of money for renewable energy projects
Here’s the funny part: that $38 dollars that Charles Schwab gave me for free? It was double the amount that they should have given me. So a few days later, I noticed in my portfolio that $19 was missing. It took me three tries to get the credit card and the free brokerage account linked in the first place, so this was extremely frustrating. I assume it was an honest mistake on Schwab’s part, but I had gotten myself in the position where I was investing with my own money, and not with free money, anymore.
I still think that this card/brokerage setup is a good idea, but if you’re setting this up for the first time, keep a close eye on the amounts being moved around.
Incidentally, I’ve only lost $17.66 on my investment so far, including the $12.95 commission. I can laugh about it, because it’s free money.
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