An Optimum Government Policy to Aid the Financial Crisis

What would an optimum government policy for helping the financial crisis look like? On each side of the political spectrum, we can all agree that it should be transparent, targeted, provide patient capital to the financial markets, help with deleveraging, and minimize government payouts.

The number one thing the government would need to do is create market incentives for investors to provide patient capital to the debt market. Otherwise, most investors may keep their wallets zipped.

Residential real estate, the heart of the problem, could be clearly targeted in a transparent way by a relatively simple policy which would provide much needed, non-taxpayer money. Congress should approve the creation of a new class of super mortgage REITS. What would this new class of mortgage REIT look like? To help in the deleveraging process, enhance stability, and provide totally solvent, patient capital:

1. The super REITs would not be allowed to use any debt leverage whatsoever. All capital would be raised as equity from stockholders. No debt could ever be raised.

2. The super REITs not only would be exempt from taxes at the corporate level, but their dividends to investors would not be subject to any tax whatsoever in perpetuity at the state or federal level.

3. The super REITs would only be allowed to originate residential mortgages or buy mortages/MBS.

4. In order to receive the above benefits, they would have to be started 12 months after a bill is passed allowing their creation and raise all of their equity capital within that 12 months.

5. In order to prevent leverage from migrating from one place to another, banks and insurance companies would not be allowed to own shares in these companies, directly or indirectly.

What would the objections be to such a plan? Some might argue that this is a tax handout. However, the government's TARP is a $700 billion handout. Members of Congress are calling for more multi-billion dollar stimulus plans. Any money that could be raised in the private sector would directly save the U.S. taxpayer money, even if it would mean forgoing future tax revenue.

Another objection might be that these super REITs would reinflate the housing bubble. That is a reasonable concern. That is why I propose that these super REITs would only be able to be started and raise all of their equity capital 12 months from the passing of such a bill. It would be a targeted free market solution. Not the Wild West.

Some might object that their tax status would give this new class of REITs advantages over other financial institutions/funds. This argument neglects the fact that our current tax code incentivizes the use of debt in our economy by making interest payments tax deductible, increasing the incentives for debt leverage in our system. The whole point of the bill is that it creates a tax advantage to using no debt at all, virtually assuring the solvency which is so lacking in much of the financial system.

Essentially, the adoption of the proposal would be a more free market approach to incentivize non-leveraged private capital to help the financial system deleverage by buying the very assets the TARP was originally created to buy, while simultaneously creating new sources of non-leveraged, patient capital to originate residential mortgages in a transparent, targeted, politics-free fashion.

Comments

[Left Coast ...:]

Might help in, what, two years? Too little, too late.

2008 Nov 20 11:38 AM