Posted by
Andrews on Tuesday, March 31, 2009 1:28:01 PM
I wrote many times about how, by simply creating a fund to buy back "toxic assets" the government could have restored much of the economy at the lowest possible cost. Of course I have
always argued we should really
do nothing, let the economy straighten itself out, and then, having taken our lumps, proceed on a much more sound footing. But, as politicians
fear doing nothing would result in being voted out of office (
and they are probably right), that will never happen. So, since
intervention is all but inevitable, I came up with
the least damaging intervention I could.
And that was based largely on the S&L Resolution Trust Company. Admittedly, the S&L bailout was not a rousing success, but it was not as intrusive as, say, the current efforts, or FDR's efforts during the Great Depression. And my plan is actually even more modest than the RTC. My basic idea is that the government would establish some criteria for buyback, say loans made between specific dates, which had not paid in so many months. The specifics could be worked out later. Once the targeted loans were defined, the state would then promise to buy back the loans at a fixed price, probably the outstanding principal, perhaps with a small premium if the principal alone proved too small to get the economy going. (I would also hope that the state would stop
encouraging lenders to make
more such loans, but if they are unable to do so, the fixed date provision above would at least keep such new bad loans from increasing the costs of the program.)
If such a program were instituted, it would seem to solve most of our problems. Banks and others holding mortgages would find they could once again trade them and use them as liquid assets. Once they are indemnified by the government, they would have value again, and our liquidity crisis would be over. Granted, we would still have other problems caused by declining property values, under-capitalized loans and so on, but it would be a big step in resolving the problem, and probably would be enough, given some time, to allow the economy to recover without any
dubious "stimulus package".
But the handling of
AIG and
GM have likely destroyed any hope of that plan working. By telling those who make a profit that
offends the public that they may be subject to
punitive legislation, and telling any company dealing with the government that the state may intervene and fire their CEO and board members, the government has almost certainly convinced any business that can do so to stay away from the federal government. With the legacy of AIG and GM in mind, I doubt any company would willingly hold loans under the bailout scheme I mention, nor present them to the state for indemnification.
And so, in a few short weeks, Obama's administration has made the most simple solution completely unworkable, as well made any solution requiring voluntary cooperation with the government much less likely to work. In fact, thanks to his heavy handed approach, Obama has ensured that the only options left to him are those in which the state
dictates a solution.