Bailout Must Address the Crisis' Root Causes

Trickle-down economics has Washington in its grip as the Treasury, the Federal Reserve, the White House, and Congress now focus on bailing out Wall Street with a massive transfusion of cash from the top down. That focus turns a blind eye to the problem that has worked its way up from the bottom. If the problem is bad mortgages, the fix should focus at the root of the problem.

But the Fed wants to throw $700 Billion more onto a fire that threatens to engulf the economy without having a clue if that will put out the fire. While knowing that massive cash infusions are inflationary, the Fed has already thrown hundreds of billions onto the fire and the only response to date is a conflagration.

A simpler solution that is much cheaper, less exotic, and more likely to solve the problem without fueling an inflationary spiral is to bail out the mortgage holders. By some estimates there are about 1.4 million American mortgage holders in trouble now or in the near future with as many as 19-million if the economy goes into meltdown.

If the Fed took the simplest step to implement an emergency program to accept whatever troubled homeowners could pay on a monthly basis and then supplemented the mortgage payments of a million or two million homeowners to ensure that the banks were guaranteed their contractual revenues, the critical cash flow would avert the systemic collapse. With this intervention, the homeowners would pay what they could afford and the Fed would make up the difference.

Then there would be time to reevaluate each mortgage to determine if the mortgagees had been victimized by unscrupulous lending practices or if they were a victim of a failing economy or if they over-extended themselves. Bad mortgages get fixed, people keep their homes, and the economy gets an infusion. The unscrupulous lenders could then be subjected to fines, fees and penalties to reimburse the taxpayers.

If the Fed supplemented 2 million American families that are struggling with their mortgages to the tune of $1000.00/month on average, the cost would be $2 billion a month. Over two years, that could be as little as $48 billion. Even if every cent was written off by the taxpayer, our economy would be $652 billion better off than under the current proposal.

Even if the number of troubled mortgages was doubled to exceed all current estimates (4 million homes) and the amount that the Fed was obliged to supplement on average was doubled to $2,000/troubled mortgage/month, the inflated figures would cost less than $100 billion over two years as compared to $700 billion. The money going into the system from the bottom up would immediately help the distressed banks, local businesses, and then ripple into the world economy.

In addition a stock trade surcharge could be imposed on each share of stock traded. For example: if the buyer and seller paid $1.00 on each share traded every time a share changed hands, every day billions of dollars could go into a super fund to bail out Wall Street. And the entrepreneurs that borrow stock to facilitate their trades could pay a dollar per share when they borrow and when they return them. They made their money and they would fund the fund.

These are two very simple steps that will never see the light of day. They could be tweaked and combined with other programs that would help the little guy, but they would not enrich the mega-billionaires up-front. But instead of risking $100 billion over 2-years to temporarily subsidize working Americans that have been victimized by poorly regulated money lenders and an ineptly managed economy, the Fed seeks to throw a trillion dollars onto the financial fire or if wrangling over the details prevails, do nothing. Not to rain on the parade, but either way the probable solution or lack thereof will result in an economic catastrophe unlike anything ever seen before.

Disclosure: Short mini S&P 500.