Things are moving fast in Washington, which sounds like a contradiction in terms. Just yesterday, Harry Reid and Nancy Pelosi were talking about adjourning until the administration took over, thus leaving the financial crisis for the next president. During this indecisiveness, Congress was at each other’s throats assigning blame. Things got ugly yesterday in DC and on the campaign trail, but the truth couldn’t be more clear. In Reid’s own words, “…no one knows what to do.”
Well, that’s not necessarily true. Bernanke and Paulson do have a plan for a government bailout of the entire system and the details will soon be announced. Congress will have ultimate say, but already Pelosi and Reid, desperate for ANY idea are saying they are ready to act. Congressional Republicans aren’t quite so eager to spend the taxpayer’s future. The anticipated cost: up to $1 trillion. An amount of money that I can’t even fathom.
The plan will supposedly be the same thing John McCain is calling for, similar to what we did for the S&L crisis. The problem in the credit market is our major credit agencies have a ton of bad inventory, bad mortgages that they can’t get rid of mainly because no one wants to buy them. No one wants to buy them because no one knows what their worth. In truth, since no one wants to buy them they are essentially worth nothing. This is freezing up money and thus there is nothing available for lending, and the entire economy is threatened. So far, Obama has not said what he would do.
Bernanke and Paulson will supposedly offer a plan (echoed by McCain) that will buy these bum mortgages from these agencies and remove the dead weight, freeing up our credit market to allow the economy to steam along. Already, stock markets worldwide have jumped at the mere rumor of such a plan.
But there’s a problem. One trillion dollars is a lot of money. This plan threatens to put an amazing strain on the government budget. The Fed will likely respond as usual, by printing more money, and so inflation appears poised to jump. This means that the dollar in your pocket will be worth much less tomorrow.
I’m interested to see the details. The government is about to be a major player in the real estate market. Once the government takes over these mortgages what will they do with the homes? Essentially, the US taxpayer will own them. If home prices go up as they are expected eventually, how will the sale of these homes be handled? Who gets the money for the sale and how will it be handled? Or will these be a way for the Dems to provide cheap housing for the poor? Personally, I’d like to see the gov’t get out of the real estate market as soon as possible, return it to the free market, but we’ll see.
The conservative in me says that a big government bailout is a bad idea overall. But given my overall limited knowledge of the financial world, I tend to rely on someone who has consistently offered solid plans for our free enterprise economy: Steve Forbes. One thing I liked about Sarah Palin is that she once endorsed Forbes for President, and I think he would have made a good one. Perhaps the next GOP administration should consider him for SEC chair or Treasury Secretary. The guys knows his stuff and this is what he suggests:
1) Yes, the government should take over the bum mortgages. It will cost us but there is no other way to get the economy back on track. If we do nothing, we’re looking at very bad times ahead.
2) Return to the gold standard for our currency, basically stop providing unlimited amounts of money and set a goal for the price of gold (which is based on the value of the US dollar) at somewhere around $500
3) Suspend mark-to-market rules for long term assets. This has been a big problem. Basically, if you owe $250,000 on your mortgage and the value of your home drops because of a bad market to, say $200,000 – the bank has the power to call and demand a $50,000 payment or else lose your home. For a long-term asset this is outrageous and must stop now. Also, institutions who own these long-term assets are constantly repricing them downward, which is one reason these financial giants are suddenly going bankrupt.
4) Ban naked short selling, basically requiring stockholders to actually hold the stock before they sell it. This, in effect, would stop short selling, which has been another major player in the financial collapse. Greed is indeed alive and well in wall street and yes, people are making money off the suffering of others.
These things seem simple, except of course for the $1 trillion bailout. We’ll soon know more and I’ll continue posting if answers to my questions become evident. Either way, the next president will certainly be handcuffed in his budget. New spending and tax cuts will be hard to come by. Things like national health care and other big budget items are now unlikely without an extraordinarily heavy tax burden.