Bold Action, eh? That’s what the economists say is needed to fix the global credit crisis and housing markets.
So far, bold action means spend a lot of taxpayer’s money. Not taxpayer’s today. No, these bailouts will be heaped on our children when they become taxpayers.
So far, the bold action has not been working. The markets continue to drift down, mainly because confidence in banks worldwide continue to slide, reports The New York Times. The housing markets are not only moribund, they are very likely to begin sliding again as another trillion dollars in mortgages reset and more Americans lose their jobs.
Rick Santelli, who reports from the Chicago Board of Trade, is so incensed over the bailouts, he launched a rant ala Jim Cramer – complete with audience cheering – during his CNBC broadcast. As quoted by David Brooks of The New York Times:
“The government is promoting bad behavior!” Santelli cried as Chicago traders cheered him on. “The president ... should put up a Web site ... to have people vote ... to see if they want to subsidize losers’ mortgages!”
Brooks goes on to say that despite Santelli’s rant, the situation is so dire, there is no choice but to rescue the markets:
It makes sense for government to try to restore some communal order. And the sad reality is that in these circumstances government has to spend money on precisely those sectors that have been swinging most wildly – housing, finance, etc. It has to help stabilize people who have been idiots.
Sounds great. But as much as I like Obama on principle, his rescue plan is not bold and hence not the solution, as far as I can tell from my $80 faux leather office chair.
What I do know, is that as much as I H-A-T-E the idea of a bailout, the situation is dire. Empty businesses everywhere. People being chased out of their homes. My school district plans to cut sports next year while increasing class size minimums from 24 to 30.
So, we NEED a bold plan. Mine leaves nobody happy, but it sure sounds better than what’s been put out so far because it actually addresses some of the underlying problems without rewarding the fools that got us into this mess:
- Nationalize banks that are insolvent but are needed for the American economy to run effectively in now and in the future.
- Wipe out the shareholders.
- Replace upper management with those who actually know how to run a bank.
- Identify bad holdings such as mortgages, CDOs and credit cards.
- Move all questionable liabilities mentioned above into a federally-run equivalent of the Resolution Trust Corporation. Because we need a NEW stupid name, we’ll call the organization The Economic Reset Fund or TERF.
- TERF will continue foreclosing on properties BUT…
- TERF must rent homes out to the former owners if the property cannot be immediately sold.
- TERF will be obligated to sell the properties when housing prices rise. This money is returned to taxpayers.
- As the banks emerge with a clean balance sheet, the United States then has the equivalent of an IPO, selling shares in the healthy bank. Proceeds go back to the American taxpayer.
Wiping out shareholders, cleaning out the banks balance sheet and then reselling the bank might mitigate the cries of socialism. Oh, there will be those who still scream, but as long as the appropriate people are punished – i.e. bank management and shareholders – at least moral hazard is mitigated.
Once the “new” bank is back in the game and recapitalized, it is much more likely to resume lending instead of hoarding cash against declining assets. The economy wouldn’t jump out of the gates, but at least basic lending would resume.
Allowing homeowners to stay on as renters would have an immediate positive effect:
- Renters prevent the property from becoming run down. (And cities don’t have to drain pools to kill the mosquito larvae.)
- Those who default on the property are not rewarded for their greed, because those properties will eventually be sold.
- The decline in property values will eventually slow as fewer homes are left abandoned.
- Some of the rent money can be used to pay property taxes, which helps out states and municipalities.
- The properties become more attractive to investors because they have tenants.
I’m sure there are a lot of details that would need to be worked out. That’s for the guys with the 20 letters after their names. The trick would be to make sure the bold part of the plan remains BOLD.