12 March 2008

Economic Earthquake Relief for the Wall Street Banks? A Modest Counter-Proposal

In his blog The Economist's View professor Mark Thoma of the University of Oregon writes:

"I’m starting to think that the Fed should drop the term part of the TSLF – trade permanently for risky assets (with the haircut sufficient to provide some compensation for the risk), bonds for MBS, money for MBS, or whatever, and don’t limit trades to banks.

The Fed would act as risk absorber of last resort. Why should it do this? There has been an unexpected earthquake of risk, a financial disaster on the scale of a natural disaster like Katrina, and the government can step in and sop some of it up by trading non-risky assets (money, bonds, etc.) for risky assets at an attractive risk-adjusted price. To limit the amount, this could also be done through auction with a ceiling on how much will be traded, except unlike the current auction it wouldn’t be a repo and it wouldn’t be as limited in terms of who can trade and what can be traded.

What am I missing? Moral hazard and worries about the next time? I’d still fix this first, worry about moral hazard later, perhaps through regulatory changes down the road that (hopefully) limit the opportunities for such behavior."

Now, before you dismiss Dr. Thoma's idea out of hand, first consider that several eminent economic professors and members of Congress have gone even further in espousing this, so it must have merit. Bradford deLong, professor UC Berkeley, and former Treasury Secretary and President of Harvard Larry Summers have recommended saving the banks for the good of the nation, deconstructing any question of moral hazard: Beware Moral Hazard Fundamentalists and The 'Somebody Must Suffer' Caucus Should Chill. Fed Governor William Poole has also weighed in with a pronouncement of papal proportions: The Fed is Without Moral Hazard. William Buiter in The Financial Times The Fed as Market Maker of Last Resort: Better Late Than Never. Even Paul Krugman is flirting a with some good spirited 'face slapping' and perhaps a little 'asset goosing' in order to help us to simply move on. .

But it was the thoughtful and moderate Dr. Thoma who has stumbled on the genuine solution to our current economic crisis.

"Don't Limit the Bailouts to Banks."

Think about this for a minute. An act of God, "an unexpected earthquake of risk, a financial disaster on the scale of a natural disaster like Katrina" has assaulted our nation. Are we going to sit around and let people suffer thirst, heat prostration, and gunfire while seeking shelter, as we did in New Orleans that last time an act of God took away our punchbowl?

Rather than risk a flood of jingle mail, let's allow the Fed to cut a check to EVERY homeowner in the full amount of the house in which they are the full time occupant (no need to encourage speculators). This way, they can be compensated for this act of God that threatens to reduce the value of their net worth. We can use the current assessed value for property taxes as our benchmarks.

But let's not stop there.

What about all the large ticket consumer products that people purchased with their hard earned credit that have simply not met expectations, through absolutely no fault of their own?? That big screen TV that is now outdated because it doesn't support 1080p? (how were WE supposed to know about THAT!). What about those crappy refrigerators, washers and dryers that no long function and are OUT OF WARRANTY? We bought two Maytag appliances (just before they were acquired by Whirlpool) that had major failures within 16 months, and required substantial labor costs to fix them even though they were obviously mis-designed and of poor quailty.

What about people who have suffered the earthquake of bad investing, and can show losses on their brokerage accounts, and carryovers on their income tax forms? Not to mention those whose cars are just not up to snuff, or have been damaged in accidents and are insufficiently insured? Should they be made to suffer? Are we that cruel? Costco will take almost anything back if you have a receipt. Is the United States government less sophisticated than a discount store (with great quality products AND plenty of free samples for the afternoon nosh).

Working with local municipalities we can set up 'economic relief centers' where we can:


And let's not limit it to houses and consumer durables, which are only a percentage of our GDP. What about the service sector? We're a service economy now. What about the man who spends a CONSIDERABLE amount of time and expense and personal energy trying to score with some likely hottie, only to STRIKE OUT! Should he be punished for falling victim to the earthquake of reality? And what about a woman who marries a prince charming, but who turns out to be a shiftless dud? You still have the original marriage certificate? He may have to take a 'haircut' which he probably needs anyway, but why should you have to live with your clouded judgement? Ever gotten stuck with some sour milk, bad dope, a lousy movie that had a good rating? Oh, you didn't realize that the upright conservative you voted for was going to squander your Social Security on crony capitalism? And dare we mention the faux pas of the century...... the Iraq War?

But the banks are too big to fail! And we're not! And if we don't give them what they want, they are going to make us miserable like they do to Third World countries, have done to us before. Oh yeah, before they had the laws changed there were lots of small banks, but they got organized into a few powerful behemoths! That's the difference.


Note: The above is satire in the nature of The Colbert Report. It pokes fun at some very intelligent and sincere people who are merely raising some questions worthy of discussion and debate. This is NOT a polemic nor should it be. Just in case you missed the obvious reference in the title and in the florid exaggeration. But there are a lot of folks discussing this in a very serious way, and you need to be aware of it since it has quite a bit of support, and ultimately YOU pay for it with a devalued US dollar and/or higher interest rates on official debt.

And yes, we have come up with a proposal we think is better. At the Crossroads of the Packaged Debt Crisis