I have not commented much on the disastrous events that have engulfed the global capital markets since the Bear Stearns debacle. In part, this is because I am opposed to bailing out institutions that take risk for profit and must assume the risk of loss. "Moral Hazard" is a very real problem, and is part of the underlying cause of these events. In part, it is because I believe responsibility needs to include the "borrowers" who also participated in this financial pyramid scheme. And, in part, it is because I have little confidence in the regulators and legislators who are also responsible for this morass. I am continually reminded of the analogy of asking the captain of the Titanic to steer us through the next iceberg flotilla. In the end, however, the problems were so deep that something was going to be done.
So, Treasury Secretary's announcement of a massive "Bailout" was not surprising; particularly when it came on the day his ex-firm, Goldman Sachs, seemed to be on its way to the gallows. A plan to inject massive amounts of capital into the financial system by taking "bad mortgage assets" off the balance sheets of battered financial institutions was not all that surprising; even if it had not been vetted by Congress. Better to have cornered our rather weak legislators into a corner, so they could not say no. Better to come up with an approach that primarily targets the Treasury Secretary's primary constituency. Details would be forthcoming.
However, the headlines this evening suggest just how broad and insidious the Treasury's plans are. And, understand, that these new proposals were probably planned before the first inklings of the plan were leaked to the press. They went unsaid because they would have been too controversial for the first pass. No longer is the "Paulson Plan" limited to buying "mortgage assets"; nor is it limited to U.S. assets. Having brought the markets back from the brink, fear of "disappointment" is everywhere; so why not go for the gold. Include all distressed assets. For example, include loans made to finance bad-acquisitions. Include distressed loans to non-American borrowers. If a bank does not like a loan, sell it the Hank.
Understand this. We are being railroaded into a plan that is well-beyond protecting the interests of this country and its' taxpayers. It is being foisted upon us by an administration that only weeks ago promised solutions that did not hurt the taxpayer. And it is being done in a way that preaches fear in order to stop dissent or comment.
So I am going to do just that by suggesting another approach. And, I believe, this "Plan" will achieve the same result at lower cost to the American Homeowner and Taxpayer; and it should help the economy far more.
Instead of buying bad debts from financial institutions at a relatively arbitrary price, I suggest we do the following:
(1) Forgive 10% of the "Mortgage Debt" owed by every American homeowner. The percentage could be raised to help debtholders who are experiencing more "financial distress" or lowered for those better placed to withstand our economic travails. This would have enormous benefits to the economy. It would "raise" the net worth of a large part of the population. It would lower debt service costs to all mortgagors. Since, mortgage debt seems to be the root of this crisis, this would certainly help those burdened with liabilities. It would also free up income for consumption that should help get the economy back on its' feet.
(2) Obviously, financial institutions can't afford this. This is where taxpayer money comes in. Dollar for dollar, all debt forgiven to borrowers will be replaced by the government in the form of new equity capital. Our lending institutions will be better capitalized; both by the injection of capital and by the immediate improvement in the debt-paying capability of all American borrowers. Furthermore, the American taxpayer will stand to benefit from the potential increase in the value of the equity investment in each of these financial institutions. Even recent investments in the beleagured FNMA and Freddie Mac might soon pay off.
(3) Without going into it, regulation is important. And this includes ensuring the regulators do their jobs. In this crisis, blame needs to be parceled out to the Treasury, the Federal Reserve (I still believe free money is still the root cause of this crisis) and the mortgage regulators (yes, they do exist...there are even acronyms. OFHEO and FHA being two).
(4) Finally, I want to propose an idea that warrants thought. "Too Big to Fail" has been a term bandied about as an excuse to intervene. Already, you hear talk of Bank of America (with it's potential acquisition of Merrill Lynch; which I think may require a higher price), JP Morgan and Citibank as being in this class. However, this means this country may continue to be buffeted by unwarranted risk. I would like to suggest precisely the opposite concept. "Too Big to Exist". Legislate or regulate size limitations that will mean we never have to worry about concentrated risk bringing down the system. It would encourage that most important of economic ideologies, competition.
Understand, we are in a crisis. Depression is a term that may describe this. There are other potentially disastrous outcomes. By opening the printing presses. inflation is a very real concern. So too is the Dollar. The Government's liabilities streams, enormous before this sequence of events got under way, has grown enormously. And our very Constitutional system has been assaulted. I like to say "Exigency is not a legal principle". However, it has served as an excuse to trample on our constitutional processes. However, let's not be rushed or scared into taking the wrong medicine.
Let's get this right.