Forum Post: Turn Wall Street inside out by making one simple change in legislation.

Sometimes the most complex problems have the simplest solution. What if there was a single, simple change in the rules that would completely turn the financial system inside-out? A change that would have a ripple effect of global magnitude? A change that would take away a huge piece of two of Wall Street’s biggest money-makers, and give that piece of business back to Main Street. A change that will cause the movement of trillions of dollars. Warning…if you have difficulty thinking out of the box, you probably should not read any further. But if you are a free thinker open to exploring possibilities, please read to the end.

The bread and butter business of banking is residential mortgages. People have been borrowing money from banks to pay for their homes since banks came into existence. I’m not a historian, but I would guess that goes back to the time of the Roman Empire. In other words…that’s the way it has been for a very very long time. In fact, mortgages have been around for so long banks just take them for granted. Well they dropped the ball big time, and their mismanagement of residential mortgages is the prime reason the global economy is where it is today.

Question: What is another bread and butter business of the banks?
Answer: Our retirement savings…our pensions, our 401ks.

In the early 1980s the 401k came into existence. Ever since, retirement savings plans have moved away from defined benefit and more into defined contribution. In a defined contribution plan like a typical 401k, all the risk is taken by the individual…not the employer, not the financial institution. Yet the rules that govern 401ks are very restrictive and favor the banks. We have very few 401k investment options. Most of us can only elect to invest our retirement savings into a handful of mutual funds controlled by…the big banks

So we just accept these two fundamentals of the financial system without question. Mortgage with the banks, save with the banks. But who says that’s the way it has to be?

Ready for it? Here is the simple rule change:

Change the rules that govern 401ks so that your own residential mortgage is an eligible investment for your own 401k.

Let me make this clear. Your 401k is not buying your house. Let me say it again because is important. YOUR 401K DOES NOT BUY YOUR HOUSE. Your 401k buys the mortgage to your house. Everything else remains the same. You buy the house and you still make mortgage payments. But instead of making mortgage payments to the bank, you make mortgage payments to your own 401k. I know what you are saying. “What if you don’t have enough money in your 401k to pay for the mortgage?” I will discuss that below. But for now let’s assume that we do have enough money in our 401k to buy the mortgage. Now, instead of being forced to invest your 401k savings into financial institution controlled mutual funds, you invest in yourself. Now as you make mortgage payments, your 401k grows at a steady predictable safe rate. Interest that you were previously paying to the bank now becomes growth in your pension. If your 401k invests $200,000 in your mortgage, 20 years from now that $200,000 has grown to $350,000 or $400,000 or whatever...depending on the interest rate you decide to charge yourself. To a bank, a mortgage is an investment…an asset. Why can’t it be an investment/asset in our 401k? Given this as a choice, how many Americans do you think would take advantage? I know I would. If enough do, think of the impact on Wall Street!

This change would have a multitude of macro and micro effects, and this is where your free thinking and thinking out of the box helps. The banks no longer control the residential mortgage business, and the mutual fund companies no longer dictate where you invest your retirement savings. The banks no longer hold the deed to your house; that is held by your 401k. The banks can’t foreclose because you don’t owe them anything. The vast majority of Americans make their monthly mortgage payments regularly, on time. Any payment you miss in effect becomes a taxable withdrawal from your 401k. If you fail to pay the taxes, then the matter is between you and the IRS, not you and the bank. There are many details that would need to be worked out, but it could be done.

How would this change affect the housing market? How would it affect foreclosures? How would it affect the stock market. A lot of money (trillions perhaps) will be pulled from the stock market as 401ks buy mortgages with the money they take out of mutual funds. A lot of questions. But the key is Wall Street loses a great deal of control and Main Street gains control.

Getting back to the question of what happens if you don’t have enough money in your 401k? Banks will never go away. We will always need them. The smart ones will adapt. If the rule is changed, banks will develop new products in order to keep a piece of the mortgage business. One solution might be a joint mortgage held by both the bank and the 401k. If you only have $20,000 in your 401k, but want to get a mortgage of $200,000, your bank and your 401k could jointly own the mortgage. Initially the bank would own 90% and the 401k would own 10%. Every time you make a mortgage payment it is split proportionally between the bank and the 401k. The 401k could then take its share of the mortgage payment received and reinvest it into the mortgage by buying back additional share of the mortgage from the bank. Also, with each monthly contribution you make to your 401k, those funds could also be used to purchase additional share of the mortgage from the bank. Eventually, once the amount owing on the mortgage is equal to the amount of mortgage owned by the 401k, the bank has effectively been bought out. So instead of making mortgage payments to the bank for 20 years, the bank is bought out much sooner. For the rest of the 20 years, your 401k is the only owner of the mortgage.

For some of you this logic is probably very difficult to follow. I am an accountant, I think in numbers. It can be done. The point is, if you change the rule first the free market system we live in will figure out ways to make it work.

It’s easy to say we should live in an ideal world, but how is this OWS movement going to make any of that happen? If our current state is point “A”, and an ideal state is point “B”, how are we going to get from “A” to “B”? I’m sorry, but preaching ideals, pitching tents and making the evening news has not been very effective. What has changed?

If we want to change the system, we have to do it within the system that currently exists. We need to develop a platform that proposes specific changes to rules, laws, and regulations. If the platform has merit and mass appeal, then there will be political candidates who will hitch their wagon and take up the fight. Then this movement can become effective by mobilizing the masses to support those candidates. But the first step is to get off the streets and come up with a platform with specific, tangible changes to laws, rules, and legislation. Otherwise this movement will never be taken seriously.

What’s our biggest beef? What do we really want to change? Well the name says it all. “Occupy Wall Street.” We want to change the American banking system…right? The banks (I use banks as a generic term that refers to all financial institutions and regulators like insurance companies, mutual fund companies, hedge funds, Fanny, Freddy, the Fed, the SEC etc.) have all the power and control; we the people have none. All the rules are in their favor and we as individuals have little choice. But what have they done with that power and control? Through their greed they have brought the world to the brink of financial collapse. We want to take some of that power away from the banks and give it back to the people…right? Doesn’t that really describe what this movement is all about?

Thanks for reading this far. I hope this generates some discussion. I firmly believe that any politician that suggests this change will win his/her election by a landslide, and we will be on the way to making a real, tangible change.