Bailout End-Debtors: A Simple Solution

This is a simple point.

Suppose the government is going to give away money to fix the economy. Yes, yes, I know. They are making "investments" and guaranteeing "undervalued" assets and all of that. But let's cut the crap. They are giving away money on a vast scale. Even the Obamawonks estimate a net loss of 33% for every dollar "invested".

So, the government is going to give money away to fix the economy. Consider three options: We can give money to the people who are owed money by troubled banks, for example by guaranteeing bank debt. That makes the creditors whole, but leaves banks and the debtors dangling on a fish-hook. We can keep giving money to banks, who will eventually find themselves reasonably capitalized (as long as the rate at which taxpayers supply net wealth is greater than the rate at which insiders steal or gamble it away). But that still leaves the people who owe the banks money high and dry, teetering between insolvency and personal bankruptcy.

Finally, we can give money to the individuals and firms that are in debt, so that they can repay the banks, which then become solvent as their toxic assets are made "money good", which enables them to pay off their creditors.

We're talking about the same amount of money in all three cases. But giving money to the ultimate debtors bails out three parties for the price of one.

Paul Krugman has speculated that one reason why World War II seemed to absolve the United States of its depression is that wartime austerity and inflation had cleansed the balance sheets of households and businesses. If we are bailing out various groups in order to jump start the economy, wouldn't we want to repair as many broken balance sheets as possible on a per-dollar basis? Call it balance sheet bang for the bailout buck.

And don't go all Rick Santelli on me about the injustice of paying for your neighbor's granite countertop. We are bailing out a banking system that served as a vast criminal conspiracy built around plausible deniability and limited liability. We are bailing out "savers", who not only demand to be made whole by the government on risky loans they chose to make to banks for profit, but are smugly self-righteous about it. Like it's their "right" because after all, they were the "prudent ones".

Of the three groups we might bail out, these crybabies and criminals are no more deserving than some nearly-broke bastard who believed his financial adviser, his banker, his mortgage broker, and the Wall Street Journal op-ed page when they told him that a cash-out refi was as good as money earned, and that granite countertops were a luxury that would pay for themselves. Don't get me wrong — I'd rather we could bail out no one, just do a rip-off-the-band-aid kind of reset and let everybody take their lumps. But households and firms in debt are by far the most sympathetic villain in this horror show we wake up to every day.

In the end, it is households and firms that drive the economy, not financial intermediaries, and most households are not large net savers. If we're going to spend large sums of money on bailouts, and we want an economy in which people have confidence enough to work and spend, and businesses that have ability to invest, why would we not give the same bail-out money to end-debtors, and let it trickle up to banks and their creditors, repairing broken balance sheets at every step along the way?

Comments

[User 288453:]

"Well Duh"

Mar 12 09:01 AM

[Alan Young:]

Good idea, easy to understand, and not advocated enough.

Mar 12 09:33 AM

[misiosnechacz:]

That is just theory when I have to pay for my neighbour granite worktop having at home laminate one. Nothing should be given for free. Even if we know that money are lost we still have to treat it as investment otherwise we will loose even biger chunk of that cake. US banks lost money not only in US but abroad to. I mean AIG. How to solve that problem?

Mar 12 09:50 AM

[JohnL:]

Well, I agree that we should just rip off the band-aid, but since money is being spent and the people seem powerless to stop it, this proposal is better than the others. Sort of a "trickle up" bailout.

Mar 12 11:21 AM

[Leftfield:]

I know from personally refinancing in '05 how radically the business had changed. High-pressure salesman pushing the product, no hard questions asked. Clearly only immediate commissions counted.

I won't be helped by any bailout proposal, but since the banksters leveraged everything down the line, I would advocate helping borrowers over the other parties.

I also think that major tax relief, including local and state (not just income taxes) would be a godsend for many. Getting sunk by relentlessly rising taxes and costs is far more than an annoyance for large number of people who have marginal finances.

It's amazing to hear the large corporations and banks say, they just need this "bridge loan" and they can make it. That's not a new idea for many of us. Strange to see the purveyors of our present circumstances, still overpaid, still spinning shamelessly for help from the rest of us.

Obama's plan is to add more big government bills atop the preexisting bank bailout trillions. To add permanently to the excessive governmental burden we can't carry now.

Good point by the author that many "savers" who point at small borrowers in trouble profited by putting their money in these risky schemes, and in banks who offered a few basis points more on CD's regardless of how.

I would add that the constant reelection of incumbents has entrenched the arrogant, dysfunctional and incredibly overpaid leadership we all suffer under. Savers should be voting en masse to rid us of it.

Mar 12 02:19 PM

[bigmoney:]

"Helicopter" Ben said he "had a printing press", and could drop cash from helicopters (presumably over American suburbs) to "re-flate" the economy. Sounds good to me.

Trucking cash over to the giant monster mega banks is probably much less effective as those guys will just hoard it and maybe take trips to Aruba in their private corporate jets, to discuss America's "deflation" problem over a game of golf, complete with beer, and "beer girls".

Mar 13 01:17 AM

[nym:]

Surely if you limit the sum to that of Obama's current plan, there wouldn't be enough to bail out all the little guys. How would you select the winners?

Mar 13 09:44 AM

[Ecclesiastes:]

Well explained.
This is the way it should be.
But why isn't it?

Mar 13 06:23 PM