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Plenty of alternative ideas for getting out of this mess
I'm looking forward to posting a few thoughts each day about the financial crisis. This is a trying time, but we will get through it. The question is, how?
I think the House vote against the bailout was a blessing, whether or not you support an intervention. I understand the sense of urgency, but we have to get the plan right. It does no good to rush a bill and then find out it was the wrong solution. Can you imagine the outrage then?
Based on my conversations with people across the spectrum, I'm pretty convinced we have to do something. It's easy to say "let them fail," and in fact, I've said it! But the banks have us by the you-know-what. There are just too many jobs at stake, and that's the bottom line. Not just jobs in the financial sector, jobs all over the economy. There are good arguments against a "bailout," but I'm not sure we really want to live with the consequences of doing nothing.
However, I'm not convinced Paulson's plan is the best way to go - buying up the toxic assets. Two other solutions intrigue me more. One is: spend the taxpayer money on buying equity in the banks. The banks need the capital and this seems a better way for taxpayers to benefit in the long run. Determine which banks can survive and invest the money in those. Idea number two: hand the money to the FDIC and let the FDIC do its thing. So far, it's done a great job brokering deals to salvage assets and banks going under - Washington Mutual and Wachovia, for example. Give the FDIC the financing to backstop the bank depositors (the people!) as opposed to bailing out the banks by buying up their bad assets.
We're also getting a lot of e-mails from people wondering why this can't be more of a bottom-up solution. Get the money to the people in default, for example. I've asked this question a couple of times on air and still haven't gotten a satisfactory response. The consensus seems to be: We've passed a mortgage relief bill. We've done all these other things. We're down to last resort.
But I don't buy it. There are plenty of good ideas out there.
Here is a bottom-up solution: put the money into the hands of those of us who are NOT in default on our mortgages. We've proven that we can make good decisions with it. We'll spend it paying off our mortgages (thereby giving much needed cash to our mortgage companies) and other responsible endeavors:-)
According to Austan Goolsbee in a speech at Reed College last week, the reason we cannot get the money to the homeowners in default (besides the fact that it will infuriate those of us not in default, including me, despite my sub-prime loan) is simple: not enough time.
After all, it has taken four months since the passage of the mortgage relief bill, and that just went into effect.
Sounds reasonable to me. I agree, however, that it would be a better solution than "giving away" money to big banks.
Hey Brad - I like it! Actually, quite a few listeners have suggested something similar, so you're not alone in thinking that way. It sounds good in theory, but we both know the chance of it happening is only slightly better than the chance of President Bush getting elected to a third term.
That won't work. giving money to the "elite" homeowners. Foreclosures will still happen. Giving banks a blank check isn't going to stop the foreclosures either. Those mark to market will just hammer it down as you try to prop it up.
The bailout/rescue is not a perfect solution. It may benefit the less deserving, but without this, without taking away these toxic mortgages away from the banks, they can't do their job. In a perfect world, the toxic mortgages will be in the bad banks only while the good banks continue to operate and make our economy liquid. We don't have that yet, but we can make one with this rescue plan. The government will take the toxic assets and wait it out while banks do what we need them to do. Liquefy the economy.
I have to disagree vehemently with chowsquid's comment (and others who feel the same way). The lending/credit crisis that we're experiencing isn't because banks CAN'T do their job, it's because they WON'T do their job. They have the ability to lend, but are not doing it. I would be much more in favor of the same bailout proposal if there were anything remotely resembling a requirement for lending institutions to pass on the bailout to consumers and businesses, but there isn't! You can't take out a $300,000 mortgage and then turn around and use the money to buy a Ferrari instead of a house, why can't the legislation include similar safeguards?
I also have to agree with Brad's 'trickle up' approach, at least to some degree. In fact, I'll go a step further and say that a quick and effective temporary measure (until a reasonable long-term solution can be drafted) would be to simply temporarily suspend the federal income tax, thereby IMMEDIATELY giving everyone a 20-50% raise. Mathematically, that same $700B (although it is now much more than that) is the equivalent of no one in the entire country paying personal income taxes for almost an entire year.
