What if you hired a plumber to remodel your bathroom who, in the process, destroyed your entire plumbing system? You fired him and hired a new plumber. The new plumber, finding the job too difficult, hired the first plumber to help him correct the job? Would you pay the guy who caused the mess in the first place or throw them both out?
Okay, now imagine your best friend approached you for a very sizeable loan to help him right himself financially. But this is not the first time he’s asked you for a sizeable loan this year. You agree, but it will require you to again tap your retirement pension. All you ask of the best friend is for a detailed plan regarding where the money is going, how he will manage the funds, and when you might get it back.
He tells you he does not have a concrete answer yet to these questions, but will get one for you later after he starts spending the money. By the way, he also tells you that you need to butt out of his business so he can figure out what to do with your money.
Do you lend it to him?
I pose these scenarios because they essentially reflect what is happening with the proposed bail out plan. Secretary Henry Paulson told the Senate Banking Committee during a question and answer session yesterday that the Treasury Department needed full authority to spend the 700 billion dollars as it sees fit. However, he could not provide a concise plan of implementation, a clear process for instituting the reverse auctions being proposed, or details regarding the oversight structure for managing this money.
He did argue that giving the entire 700 billion now would shore up market confidence, despite a national debt expected to jump to a staggering 11.315 trillion if the money is granted.
Secretary Paulson also tried to calm fears by assuring the American public that this is not an expenditure but an investment.
I can sleep easier now knowing that the government is going to “invest” in my future by purchasing bad debt without a clear idea of the implementation plan, process or oversight structures to protect the investment.
After listening to the Senate Banking Committee meeting this much is clear to me: (1) reverse auctions will be used to reduce debt (tax payers money will purchase banks deteriorating assets); (2) the people who are partly responsible for the mess—market experts—will be hired/paid to help make the “plan” work (when they get it figured out); and finally, (3) Secretary Paulson wants unfettered authority to “experiment with some solutions.”
Invariably, something must be done to keep our economy from collapsing. The financial institutions have more debt than capital. Purchasing bad debt, including mortgage backed securities from financial institutions will free up money that is tied up on the sheets of struggling financial institutions, allowing them to lend to consumers and keep the economy going.
But where does this leave the average American? Where is the guarantee that these assets will be resold for a profit to taxpayers? How do you keep investors and banks that are culpable from profiting again?
Since we are in an experimental mood, let me offer up an “experimental” solution of my own.
Because we know that bad mortgage is at the heart of the current crisis why not address the core of the solution: homeowners.
After giving financial institutions up to 100 billion dollars, reserve 50 billion for loan renegotiations for homeowners for the actual value of homes right now. Too many people are upside down in their homes and need to have their loans renegotiated.
They pay the government back the reduction amount upon selling, if what they earn is equal to or exceeds it. Also, they cannot take equity out of the home unless the reduction amount is repaid first.
The long-term rate of return in this experiment could yield more than what is currently being placed before us.
What is on the table now is as bad as hiring the plumber that ruined your house in the first place or giving money to the aforementioned best friend—money flushed down the drain, if the drain ever gets fixed.
Thabiti Lewis is author of forthcoming book, Ballers of the New School: Race, Sport, and American Culture (Third World Press, fall 2008) and teaches at Washington State University Vancouver.