You can't turn on any source of media without hearing about the bad economy, the stimulus bill, the bad banks. No matter the view, the opinions keep going back - without a source of capital, the economy can't get better. Without removal of the "bad" assets, the banks will continue to sink like they have an anvil tied to their feet. And only the government has the power to remove these bad assets.
Like hell.
1) Let people with resources bail out the banks.
2) Bail out those homeowners who deserve it (i.e., those whose incomes match their purchase).
3) DO NOT bail out those who don't deserve it.
First, these "bad assets" are still assets, namely, land. It doesn't matter where it is, what's on it, what's under it, land will always have value. And this isn't land in the middle of the Mojave, in Love Canal, or in the TVA coal waste site - these are, by and large, residential homes. Homes people wanted to by over the past 5-10 years. Land and homes that are generally nice, habitable, in good condition.
Yes, prices are down now. Inevitably, prices will go up. That is the general working concept of Federal economic controls - slow but steady inflation. Too fast, things get too expensive; not fast enough, companies don't do well. So Bernanke, Geithner, Cox - they'll make sure things head back in the right direction.
Nonetheless, prices continue to fall, so no one is really sure what the banks are worth. If the banks don't know how much is in the vault (now impacted as much by investors as by depositors), they are skittish to lend. If they don't lend, they get no worth; if they lose worth, they lose investors, and down the drain it goes.
A few weeks ago, the talk was of a federal "bad bank," something to buy up all the CDO's and pool them, akin to the New Deal Home Owners Loan Corp. and the savings and loans buyout of the 1980's. This was rejected by the right - "costs too much," "Big Brother," "puts the debt on our grandchildren," even though historically these measures zero out or even profit a little. Now the idea is to guarantee the cost of the assets federally and encourage private investors to by the assets.
If you can't convince private investors to put their money into banks, how effective will it by to encourage them to buy properties, sight unseen, even with a federal guarantee? After all, where would the feds come up with the money?
The members of the right continue to say federal stimulus costs too much, we should not saddle the future with the debts of today. I agree. But they fail to draw on the lessons of true capitalism, of our financial past. In 1907, there was a banking crisis not entirely different from today. J. Pierpont Morgan intervened then, reportedly locking numerous fellow bankers in his study and refusing to release them until they found a solution. Carnegie, Rockefeller, Gary, Barney - all were drafted to buoy the economy. The government was involved, surely, but the men of industry and finance took the lead on saving their livelihoods, not a backseat.
With a few exceptions (thank you Mr. Buffett), there has been no evidence of those with resources helping out the capitalists. If anything, we hear about tax shelters, hedge fund manager tax loopholes, bonuses to Wall Street, the "needy" energy companies. If they won't help on their own, make them help.
The approach: Increase federal income taxes on households with gross incomes of $500,000 or more to 40-45%. Simultaneously establish a federally-supervised Loan Restructuring Agency (i.e., the "bad bank," in the style of HOLC). Make shares available and allow for a dollar-for-dollar tax credit for any investments into the LRA, not to exceed the current tax contributions for the given year (i.e., no payment out by the government). Furthermore, any profits from the sales of those (private equity) shares can be used as a tax deduction after 5 years of holding shares (any losses could be deducted as a capital loss, per current IRS rules).
OK, this may seem a little complicated at first, but it really isn't. The right is correct - the government shouldn't be on the hook for boosting the financial section of our economy. However, the government is exquisitely good at doing what is needed right now - spending money. Let them do that, just finance it with current resources.
Multiple websites give numbers on how wealth is distributed in the US. Most of it is extrapolated from Fed's Survey of Consumer Finances - a survey of over 4000 households. Roughly, the top 10% of households hold about 70% of the wealth of the nation, per this data (this doesn't really take into account wealth held by companies outside of shares, but it's close enough). By extrapolation, about the top 5% make $500K annually, give or take. This is distributed over about 5.25 million households.
These households are currently taxed federally at 35%. Increase that by 5%, you get an extra $25,000 per household, minimum (and likely a lot more). That's at least $125 billion in extra funds, which will go quite a way in federal mortgage aid. Give people the option - they can lose the funds as taxes, or they can potentially get their money back and more and help their country at the same time.
The benefit of a federally-managed bank:
1) The rich don't start buying up large chunks of land across the nation. We're not looking to make liegelords.
2) The federal government can sort the CDO's. A major problem to-date is that no one knows what mortgages are in which CDO's. Buy them up, dismantle them, and re-package them.
Take mortgages that are entirely fine and sell them back to the banks (they'd be crazy not to buy them).
Take mortgages from people who can pay the capital back with an appropriate interest rate, give them appropriate financing rates, and hold on to them. As the economy stabilizes, these mortgages will balance and the government can take a profit.
Take the mortgages from the people who don't deserve them and tell these people they have lost their properties. Cut the losses and move on.
On NPR today, they interviewed 2 homeowners. One family makes about $100K per year, bought a house worth $350K (the standard ratio of income/debt), and got screwed by misinformation from their mortgage seller who shanked them on the interest rate at closing. They didn't lie, they didn't scam - they got lost in the reams of paperwork and have to deal with it. They should hold onto their home. The second guy was a kid just out of college, making $40K/year who bought a $465K house! His excuse - "there was some complicitness." He can't even take the blame - let him burn (financially, that is).
You can't save everyone. Those with resources should try to help someone - even if nothing else, it's in their best interest. They are part of our society. If they can't contribute willingly, penalize their selfishness.
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