First, I know that the economic crisis we're in has many aspects. Often guests on C-SPAN or Bloomberg or CNN or The NewsHour or FoxNews or blog writers or economists are talking about just one aspect of the large problem. Understandably to some degree. The problem has so many interlocking parts its hard to talk about it with clarity. Most of us are getting a crash course in economic fundamentals so we can figure out what's going on. Unfortunately, the instruments the financial whiz kids have created are beyond standard economics and way beyond responsible financial planning.
So, while I understand there's a high probability that I'm forgetting something or missing some aspect of the crisis...I'm starting to think the government should get out of this bailout talk.
Buffet is buying some part of Goldman Sachs. The stocks are rising a little bit. We LOANED money to AIG, parts of the bankrupt companies are being bought by foreign banks.
I wonder if someone is panicking. The free market that the Republicans trust so much just might work if they weren't so afraid the rich people would lose money. The rich people's private money in the form of stock assets. But, you know what - that's the reality of gambling in the stock market.
Here's what I suggest:
1. Every bank should figure out how many of the people who have bad loans might be able to refinance. How many have the bad loans in primary residences vs second homes.
Some of the homeowners and banks might decide that even with special considerations given (extending the loan term or waiving refinance fees) a person still can't afford to live in the house they purchased. In that case, the government should buy the mortgage.
Otherwise, the banks should modify the loans so everyone gets to stay there.
2. The banks will have some loss in value because the loan they gave might be on a house that has lowered in value. Once they have a clear handle on what kind of loans they've made, the government can come in and LOAN them the capital they need to comfortably wait out the home price problems. That means they'd be back in shape for loaning additional monies with a more responsible attitude.
3. The banks and investment companies and people who traded mortgage backed securities and credit default swaps and all that, will just have to sit tight and wait for the market to go back up. Eventually, the benefit of the rewritten mortgages will 'trickle back up' to them and they can pay off those crazy debts.
The main point of Paulson's plan was to shore up investor confidence and get the credit economy moving again. I think this plan does that by 1) showing the government is willing to step in and lend money, or buy really rotten mortgages and 2) stabilizes the rest of the mortgage loans so they're value is based on fundamentals again, which will leave the banks open to lend money again.
This plan will cost the government much less money (only paying for really bad loans and maybe the cost of refinancing loans). The rest of the outlay is in loans that we'd receive back at some time.
Also, the 'fat cats' who got us into this mess are the ones who are last in line. Normally they get all the money and we have to wait for the 'trickle down' effect. This plan puts them last in line and they have to wait for the 'trickle up' effect. We don't have to punish them - their punishment is that they're last in line. That's fair.
That's my idea (which I'm going to send to my Senators and Representative [I also sent it to Chuck Schumer 'cause I liked his idea yesterday that we pay the 700 billion in increments which made me challenge my assumptions, and Richard Shelby because he seemed skeptical of the bailout. I tried to include Barney Frank and Christopher Dodd, but their contact forms don't allow anyone outside their state to send them an e-mail).
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