William Liberalman (not his real name) is a former Texas Congressman and now a financial advisor. Last year he had a couple come to him with the following problem. They had over $300,000 in debts, including house, car and credit cards. The credit cards alone were in excess of $60,000 and rising daily. But wait, it gets worse. Their monthly outgo with these payments, plus retirement accounts, insurance, food, and taxes was right around $12,000 per month and their take home pay was just under $10,000 per month. They were running a $2,000 per month deficit each month and they needed help fast.
After careful analysis, Liberalman laid out a plan for them and told them what they should do. “First of all, your income is too low to meet current obligations so you have no choice but to borrow more money” he told them. He explained that if they could access their current credit cards and borrow $2,000 per month, this would get them on an even keel. They argued with him that their debts were already too high and the minimum payments barely covered the interest each month. He told them not to worry because as long as they kept borrowing money and paying their bills on time, their credit rating would stay good and they could just keep borrowing. And besides, if they don’t do this they are going to get behind in their bills and soon will lose their good credit standing. “Then what are you going to do?” he asked. They took his advice and he was glad he could help them.
A year later, they returned to Mr. Liberalman’s office for their annual review. He could tell by the look on their faces that things had gotten worse. Not only were the credit cards now over $75,000, but they had been hit with some medical expenses that weren’t covered by insurance, plus a daughter who was going to college that was costing them another $20,000 per year. The college problem they had solved by borrowing more money for her and also allowing her to get student loans. Maybe they were in debt but they had a very good credit rating. Their monthly deficit had climbed up to $2,700 per month and they saw no end to this nightmare. “What are we going to do?” She asked with tears in her eyes. “How are we ever going to get out of this mess?”
The husband comforted his wife and looked at Liberalman and said, “We have reached our debt ceiling. We can’t possibly borrow any more money. And if we default on our loans, or stop paying the payments, they will reduce our credit rating, then where will we be?”
Liberalman felt their pain and knew exactly what needed to be done. He smiled, looked them both in the eyes as he took their hands, “Look, we’re going to get through this. There is light at the end of this dark tunnel.” His voice was soothing and comforting, “All we need to do is to raise your debt limits higher so that you can borrow more money.”
With a puzzling look on both of their faces, they asked, “How do we do that?”
“Easy”, he replied. “You are going to go to your bank and get a home equity loan for all of your credit card debt. You have plenty of equity. Once you do that, and pay off all those credit cards, you will then have $75,000 worth of credit available to you that you can borrow if you need to. Now, we hope you don’t but at least it will pull you out of this hole and set you free. Now, to make sure you don’t use the credit lines, I also want you to stop putting money into your 401K at work and instead begin borrowing from it each year. This is basically tax free money just sitting there so you might as well use it now to get your heads above water. How does that sound?”
Looking confused and perplexed, the husband wanted clarification, “So what you are saying is that by increasing our overall debts, we are actually setting ourselves free of this pile of credit card debt. And by depleting our Retirement savings now, we can use this money to pay our current bills and maintain the lifestyle we have grown accustomed to. But what about the increase debt on the house and then the lack of retirement money when we get older, how will we survive in retirement?”
“Oh, that’s easy,” Liberalman replied laughing. “You have four children who can take care of you and if you die, you will just be passing the debt on the house on to them and let them take care of it. Trust me, I had eight years in congress and this is how we fixed the national debt crisis and it worked.”
He could see from their expressions that they were very happy with this solution. They could maintain their lifestyle, not make any sacrifices and all they had to do was to increase their debt limits, borrow more money and use their retirement savings now instead of in the future. It sounded like a fool proof plan. After all he was experienced at this.
If this seems absurd, that’s because it is. No financial advisor would ever offer such ludicrous advice and yet that is what our folks in Washington have been doing and both parties are responsible. If it doesn’t work for a family’s budget, then why does it work for the United States budget? Like a house of cards, one day, it’s going to all come tumbling down. Be sure to vote in the next election.
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