I would probably be the first
person to admit that I’m no economic expert, especially as it’s defined these days. But then, whoever said
economy was supposed to be as incredibly complicated as it’s become?
Think about it. The
way capitalism is supposed to work is, you make something or perform a
service, and when you’ve delivered that product or performed that service, you get paid for it. Then, in
order to make sure everything is open and fair, the government is supposed to
enforce basic regulations. And you need
those regulations because, while most people are actually quite fair and
honest, there is always a segment of the population who will try to gain unfair
advantage of people.
I even understand
the introduction of credit and debt into the economy. The vast majority of
people want to buy things, and can be trusted to pay for them over a reasonable
period of time, along with a fair rate of interest going to the lender.There’s absolutely nothing wrong with that.
So, how did we get
to where we are today? Why do we keep having to bail out the economy, just to
keep ourselves afloat?The answer is deceptively simple. For the last 30 or so years, the government has been in charge of a government that deregulates everything, and believes that any economic device the market creates that generates cash is perfectly okay, and should be operated without oversight.
course, the economy needs some sort of bailout. I know that many people
think this is the government bailing out "rich Wall Street
types," but it’s not. Let’s be honest here; the "rich Wall Street
types" already made
their money and bailed out of the system, leaving mostly honest people
holding the bag. This bailout is actually all about making sure
small businesses keep operating, and making sure the vast majority of
don’t lose their jobs, because their bosses can’t afford to pay them.
This is not
about mortgages and foreclosures; those ships has already sailed, and is in the
middle of the ocean by now. There will still be some foreclosures, but not as
many as there had been.
This is also not
about subprime mortgages. Once again, that ship has sailed, and is even farther
out to sea than the foreclosure bubble, unless you can imagine anyone on either
side of the equation signing on the dotted line for a subprime ARM at this point
is the end result of benign neglect on the
part of the Republicans in government who, despite the evidence in
their puffy white faces, still believe "the markets" always right
no matter what. Subprimes mortgages were supposed to be devices to get
people with means into houses which they could afford, but didn’t have
enough saved for a down payment, into a home. Instead, the unregulated
market allowed mortgage brokers and fraudulent actors to use these
devices to put people in homes who had no qualifications other than an
ability to sign their name.
we’re dealing with right now is the end result of a phony market, which
caused the value of homes to become hyperinflated; a circumstance that
a regulated market would never allowed to happen.
What the economy faces now is not a mortgage crisis; its a credit crisis. The vast majority of mortgages
are perfectly fine; people are making their monthly payments, and banks
are experiencing significant cash flow from payments on these mortgages. But the previous hyperinflation of real estate values served to intensify the effect of the inevitable collapse. Suddenly, banks and other financial institutions
found themselves with hundreds of billions of dollars worth of mortgages that
were upside down, meaning the amount owed was far more than the value of the
home securing the loan. In addition, tens of billions of dollars more
in home equity loans were suddenly unsecured. Banks and other financial
institutions can’t borrow money if they’re holding too much unsecured debt.
And then there are the phony-ass, unregulated mortgage-backed securities in a market that Republicans like Phil Gramm (McCain’s economics guru, by the way) created in the middle of the night, when almost no one was looking.
Right now, banks are reticent to lend money to other financial institutions, because they don’t know what kind of paper
the banks they’re loaning to are holding, and they can’t be reasonably sure they’ll be paid back. The problem with mortgage-backed securities is that they’re not
actually tied to anything specific, with a specific value. Theoretically, they’re supposed to be tied to the total value of mortgages represented in the MBS market, but the fact is, this market was made up
out of whole cloth, and the securities were never actually assigned a specific value. So, when the
housing market tanked, the mortgage securities market went into a
nosedive, and suddenly, a whole lot of investors, including financial institutions, are holding pieces of paper
that are worth something, but no one knows how much. A solvent bank
might want to lend money to another bank, but they don’t know how much of the borrower’s assets are tied up in these securities, or how much they’re worth. To loan money to such banks would be roughly equivalent of, well, writing a mortgage to
someone without checking their credit first.
Yes, that’s right; after many years of absolute irresponsibility and sloth with regard to lending practices, the current crisis is actually being caused by banks who have chosen to start acting
responsibly. The end result, however, is that, like it or not, our economic
well-being relies pretty heavily on ready availability of credit. Without
it, many businesses of all types will find it difficult to impossible to
operate. They need credit to purchase merchandise to fill their stores, or equipment or supplies to do their jobs, and often, they need such credit to
operate from day to day, until they can turn a profit. College students need
credit to continue their studies, and consumers need credit to buy large
items, such as televisions and cars. And if you think gas prices are high now,
wait until station owners can’t borrow money to buy their next gasoline
The bailout is not
about making the crooks whole; the crooks already stole their money. It’s all about keeping the economic system running.
So we do need a bailout of some sort. The only question has to do with what form it takes. I’ve been listening and reading a lot of real
economics experts over the last few weeks, and I think I have a solution that
everyone can live with, including those Congresspeople who are reticent to back
anything, for fear of losing because of this "October Surprise."
Here’s my version of what a bailout should look like.
First off, it
shouldn’t cost anywhere near $700 billion to bail anything out. The problem
with the Bush/Paulson plan is that it applies a number to something that everyone
involved agrees has no actual known value at this time. In other words, that
number was pulled out of their ample derrieres. So, let’s ditch that number
right off the bat.
The first step should be low-interest loans (LOANS!) to avert the short-term credit crunch. Then, since we don’t know
how much the mortgage-backed securities are worth on the open market, let’s
close the market for now, and give an
auditing team about 120 days (Bush and Paulson will be gone by then) to figure out just how many mortgages are backed
by these securities, and their actual worth in the current market, based on the
current value of the homes securing them. We can also assume home values will
continue to drop, so we can reduce that value by 20-50%. Then, we will figure out how
many shares are outstanding, divide that into the actual value of the homes
secured by these MBS’s, and buy them back at approximately 20-25 cents on the
dollar. And I mean buy all of them, and liquidate the entire mortgage-backed
securities market as it exists now. At most, that will probably cost us far
less than $100 billion up front. But we’ll make back that money in no
Then, we’re on to
step two. Since banks helped cause this problem, they should actively participate in its
solution. First, put a one-year moratorium on foreclosures , during which time
mortgage holders will get to refinance their mortgage at the current value of
their property. This is where the other 75-80 cents on each dollar comes in.
The originating bank will refinance the mortgage at the lower home value, and
they wilol once again own the paper, which they can then sell to a now-tightly-controlled secondary market, they
way they could before Phil Gramm and the Republicans hijacked the system. In
other words, even if they sold the mortgage to the MBS market earlier, they get
the mortgage back, to sell in a newly restructured Fannie-Freddie system,
whereby such Securities are tightly controlled and regulated. Back to this in a
If you want to talk
about a huge economic boom, this would create one. This is no $300 "tax
rebate." Imagine millions of homeowners and business owners suddenly find
themselves paying far less for their property than they’re paying currently, and
doing so every month. Banks would have more money to lend, and would suddenly
find themselves solvent, with very little up-front cost to taxpayers
whatsoever. And those legitimate banks who invested in the mortgage securities
market would lose some money on the front end, but would more than make up for
it on the back end.
Several other things
have to happen, as part of this plan.
As noted, Fannie Mae
and Freddie Mac should be fully absorbed by the government, and operated as a
federal agency, with all proceeds going into the Treasury. They should still
operate as they have for years, but this combined agency should be the only entity
allowed to purchase Mortgage-Backed Securities, with all proceeds going
directly into the Treasury.
Second, there has to
be greater protection for the average consumer/taxpayer. The federal government
faces a Constitutional mandate regulate commerce. If we are going to
operate an economy that relies on debt to keep the economy moving, then we have
little choice but to regulate financial instruments, and to do so heavily. I
don’t care what the far right Republicans say; when you hand the system over to
crooks, the crooks will game the system, and the rest of us will suffer.
Third, create a
fund, in which all securities traders pay a small percentage of their trade (in
most countries it’s less than half a percent), to insure the taxcpayer, should this sort of thing
from happening again. Increase the FDIC maximum to $250,000, but increase
enforcement of rules, as well. Close the
"Enron loophole," ban short-selling altogether, and see to it that
speculators have to act in the best interests of the economy at large, and not just their own self-interest.
This is how we can
fix the problem, with minimal cost to the taxpayer. We also have to institute major reforms to the system, to make sure the same problems will not be
repeated. The purpose of the creation of mortgage-backed securities in the
first place, was to give banks a way to raise more money to finance more mortgages;
they were not created so that shifty traders and speculators could run the
price up and down at will, in order to game the system for as much money as
they could take.
There you go; a
solution that will cost taxpayers far less than $700 billion, that will give us
a basis upon which to reform a system that is horribly broken (once the neocons
are defeated and gone this coming January, anyway), that will make everyone whole,
except for the people who gamed the system and lost.