What I Would Have Done

Ok, so this big crisis comes along and we are told that if the government doesn’t step in to bail out the banks the ATM’s won’t be open next Monday. Probably they won’t be open again for some time. Gulp!

For some time the economy had been going along predominantly on one form of borrowing or another. Housing was the big one, but the flood of illegal money into off-shore accounts certainly suggests it wasn’t the only. The accounts didn’t sit quietly and gather minor to no interest. They were investment instruments, based mostly upon debt. They carried risk. So did housing, although we had told ourselves that housing was going nowhere but up. The thing all of these instruments did was to send money into motion. Where housing left off, credit default swaps (the one name can stand for all of those types of investments) took over. They kept the money supply operating on a scale our “new” set of expectations could live with. One tiny thing like a big institution going down and the whole thing started to rattle in a way few ever believed could happen. How could this be?

To fix it we did not sit around and ask how. Our government acted. First under Bush, and then under Obama they kept the familiar things from leaving us. They saved the banks, and with them a many years developed idea of how economies and banks work. So the banks were back, but now they haven’t been lending, not the way that our previously developed concepts anticipated they would. Turns out the banks were, and still are, afraid to lend like they had been, not to that sea of bad credit risk out there. How can this be solved?

We keep being told to be patient, that our economy is slowly coming back. It probably is, but I think I would have done a few things differently at the point of crisis in order to facilitate a smoother transition into recovery, and to change the attitudes that got us here in a way other than to simply starve those who once suckled so alarmingly at the housing teat into submission. We can’t wait for the off-shore money to build up demand for mortgage backed instruments again so that the banks will once again be incentivized to loan in order to participate in the feeding frenzy.

For starters, I agree the banks needed to be bailed out. It would have been the stone age if they had not. I just think that sort of action should have come in conjunction with other actions designed to stabilize not only them, but us.

The first thing I would have done would have been to effectively lower everyone’s mortgage rate to 4%. Rates may be below 4% now, but 4% would have been a good target at the time. I say ‘effectively’ because as part of the bail out I would have instituted full payment to the banks for the loans issued by them. The difference between the 4% and whatever people had agreed to repay at on a per month basis would have been paid for with the part of the TARP not initially given to the banks.

The idea is to stabilize what people can pay on a per month basis at a level they can pay, not at a level they are having trouble managing. People who had no money would have a little money left over after their bills. People who weren’t in trouble would have something like the money Bush tried to incentivize the economy with when he offered the tax rebates he did, only this would have been monthly and distributed by real people into real local economies. Immediately we could have satisfied the banks with one, two, or perhaps three hundred billion dollars, the rest of the nearly trillion dollar TARP would then have been consumed monthly, by the system as it was designed – taking in money for payment on loans according to the structure of those loans – satisfying the system’s need for capital through natural channels.

That is it would have for a time. The other part of this, of course, would have to include a country wide audit of all mortgages. Every single abusive loan would have to have been remarked at an interest rate that was neither usurious to the borrower, nor to society. It became pretty obvious in the aftermath of the crisis that there were way too many abusive loans issued. I know that our definition of what constitutes an abusive loan has changed, er, broadened since that time. Back then it might have been harder to convince people that there were any abusive loans, let alone engage in a discussion over the boundaries of what was abusive and what wasn’t. I fully understand that this part would have encountered severe political roadblocks. The nature of the devil is to reinvent itself, like any narcissist, rather than to admit defeat. This was part of the heart of the problem, yet it took pain to reveal it.

This might have righted the banking ship in the short-term, but oh the wailing you would have heard from the financial sector, and for good reason. The off-shore investments packaged upon the remarked loans would have had to take a huge hit. Instead of dodging tax dollars and illicitly gotten gains biding their time and using the period, and the TARP money, to shift into other investments than the ones they could see obviously going down they would have had to accept losses. Mostly, so be it.

Where the trouble would have developed that this might not have fixed would have been the deflationary force derived from the banks loss of capital over remarked loans. In order to address this a new type of home ownership would be necessary. Banks would need to gain a percentage of ownership (sliding scale) in people’s houses who could not pay, even at the lower rates or who were so relieved by the plan that they found themselves in an ownership position they never could have hoped for under any normal economy. The new banking ownership would not be a majority in any person’s home. They would not have the right to demand a sale of the home in order to redress their grievances against the majority owners. They would, however, have veto rights over any sale of the majority owner’s stake, and over any improvements undertaken upon the home. The majority owners would retain a perpetual right to simply repay the bank by paying the difference between their percentage of the ownership and the bank’s, no interest on this because the bank’s stake is an ownership stake and not a loan.  Any buyer would also be purchasing that right. In turn the banks could engage in all kinds of investment instruments based upon their new minority positions. The majority owners would, of course, take a hit on their credit scores, which would still mean something in a salvaged economy where absolutely everyone didn’t have a bad score because of massive failure.

I would have been fair, not just to the banks but to the people. Outright crooks would still have gone down. Many would have been kept from living under highway overpasses. I can only hope this would have caused people to look within, at how the cause of this was their greed, our greed. At how far, or close, we really are from living in a free and ‘just’ society.


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