$700,000,000,000 bailout

by Leonid Balaban

If somebody can give me an educated answer on why this bailout for the financial industry is necessary, I would certainly appreciate it. And no, I’m not trying to be sarcastic here, I’m simply trying to understand the difference between ordinary citizens who made boneheaded financial decisions in buying homes they couldn’t afford and banks who gave them these loans without properly vetting their repayment capabilities. I will not accept the argument that if there was no bailout, the whole financial system of the country would collapse, if the same people are not advocating for the bailout of the failing health care system, where over 45 million people are without healthcare insurance. I will not accept the argument if nothing is done in raising minimum wage, elevating environmental standards or fixing failing infrastructure around the country. Bailing out financial institutions without doing nothing for its citizens shows complete moral bankruptcy of this government.

I will argue, that instead of bailing out financial sector, our government should have simply given that money to the citizens. I know that some of you will scream that murder at this proposal, but my reasoning behind it is very reasonable. According to this CNN article, there are approximately a little over a million foreclosures in the US, as of June of 2008. Figuring that an average home mortgage is about $250,000, using simple math we conclude that by simply giving $700 Billion to the people, the government can pay off by my estimations about 2.8 million mortgages. What will this giveaway do, you might ask? Well, firstly, considering the fact that property values have gone down by as much as 25%, by eliminating all foreclosures, the house values will go up instantaneously. Secondly, this move will immediately allow at least 2.8 million consumers to invest a lot of money into the local economy, since they don’t need to worry about paying their mortgage anymore. That means that thousands of new businesses will be opened which will subsequently result in thousand of new jobs. These new jobs will in turn generate additional tax revenue for not only federal, but also for state and local governments. Lastly, these paid off mortgages will automatically rescue these financial companies, because they will no longer have the bad debt that brought us to this point in the first place.

I understand that my solution might sound like a crazy socialist talk. But bailing out commercial and insurance companies when they made terrible business decisions, using taxpayers money, is no less socialistic. If we allow corporations to easily right off their debt and stave off bankruptcy, we should do the same for ordinary citizens.

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6 Comments

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6 responses to “$700,000,000,000 bailout

  1. Heather

    I think you bring up many solid and good arguments that, I for one, agree with. As a hard working American trying to better her life by going back to school in her mid-20’s while all friends around her have health insurance (I do not), 401K’s or retirement investment (I do not), and money to vacation with their signifanct other (we are so broke), I am absoutely frustrated that my government does not reward my effort to not only better myself but in the end, possibly better America (each person counts!).
    I therefore agree that the trillions of dollars need to put in the hands of the American people. Huge instutions may bring the capital and investment, but the layman consumer brings to the American economy more than I believe any of us think about. When people have the chance at the coveted “American Dream” (in this case an affordable house and mortgage that they can barely afford) then they will buy. They are told by the radio and the media, “This is the best time to buy”, “5% 30-year fixed rate”, etc. (think to 2005 when this was all we heard; even I met with a title company to consider buying). Match this with an unaffordable war, inflation increases and net income decreases, then yes, the economy is going to crash. I may be ignorant (although I hope to hell I am not) but I do not believe the crash of these financial institutions has to do with what was going on in the “inside”. Although it is a factor, the main reason this happened is because the American people cannot afford life anymore! Their “American Dream” is crashing down on them!
    Now that I have said my peace, I disagree with you on the solution as paying off the 1.8 million mortgages. Hear me out on this…
    If the government were to pay these mortgages, every single american would want that $250,000. I know I would. Most people cannot see what may be better for the country and all opperate in their own self-interests. As much as I see you vision and want the same for this country, this solution is too utopian. Furthermore, the outcry of all who work their asses off with nothing to show for it will want a government-paid-for house as well.

  2. Stephen Noriega

    Your argument is emotionally compelling and under certain circumstances might just work. However, it is less money than time that forces the government’s hand. My brother is a stock broker (No he has not flung himself out a window yet, but he did lose two million dollars in a 48 hour period!) and he has explained the situation to me in terms I can understand. The credit system that drives the economy and allows corporations to borrow money for payroll and other things froze on Wednesday because of all the bad debt out there. With Goldman Sachs, Washington Mutual and Morgan Stanley facing insolvency, the credit markets worldwide were poised to freeze totally in a matter of a day. This has not happened since October of 1929 and we should all know what happened after that. If the credit system ground to a halt, companies all over would have to immediately lay off millions of workers. They, in turn, could not pay their bills and you see where I’m headed with this. I agree with you on principle but unfortunately the current government policies had us eleven hours from a possible depression. The fat cats need the money because if they sink, they pull us into the abyss with them. This has nothing to do with justice and everything to do with poor regulation and a refusal to see a storm coming until its too late.

    Stephen

  3. Tony Robinson

    Stephen has it right.

    I agree with Leo’s attack on the moral bankruptcy of a government that has allowed declining standards for living among common folk for years, and that consistently is more worried about securing record corporate rates than about addressing poverty, homelessness, etc.

    But Stephen is correct that “time” is the key issue here. Leo’s analysis is persuasive in addressing a chronic problem of the American economy. We need ongoing, structural change in how our economy is built: higher wages, better social guarantees like health care, and more investment regulations. All of this, implemented over the long-run and consistently over years, will address the chronic problems of an unsustainable/unjust economic system.

    But our problem right now is ACUTE, not chronic. Paying off 3 million mortgages tomorrow will not address the immediate problems in the credit/investment markets, and thus would be a very poor solution. Massive bad mortgage debt (way more than 3 million mortgages), packaged into securities used to collaterallize even more massive speculation into all sorts of bad lending has resulted in an immediate crisis of confidence (and a real crisis of liquidity–e.g., hard money) across global markets. Without this bailout, lending worldwide was freezing up, day by day. Billions every day were being withdrawn from U.S. equity markets by global investors, banks across the country were absolutely freezing lending, and lending was on the brink of absolutely freezing as AIG and others were going belly up.

    Bailing out these lenders and investors is key in the short run, if we don’t want millions to be laid off within months and hundreds of thousands of small businesses to quickly go bankrupts as banks literally turn off lending. Helping millions of people to pay off their mortgages and waiting for this money to stimulate the economy through increased consumer spending would help–but that solution will talk serious time to work its way through the economy. And that’s time we don’t have today. If we had adopted this solution several years ago–we might be in a different place today. And if we had adopted keynesian demand-side government policies over the previous decades (e.g., better wages and health care coverage) we might now be in the unsustainable bubble-economy we are in today–but a long-term keynesian solution will not solve the immediate supply-side crisis.

    Even when FDR came in the midst of the depression–his first actions were to take over and guarantee banks and increase oversight over them (I think it was called the resolution trust corporation). That short term supply side solution created the room later on to implement social security, minimum wage guarantees, welfare programs, public works and other programs that addressed the long term structural problems of the economy.

  4. Melissa

    I have to agree with your post. I do not think the government should be picking which companies are ok to bail out, and which ones they are going to let go bankrupt. It seems to be a very unfair decision. There are lots of people that are losing their homes, and I do agree that if the government would have paid off those mortgages instead, then the economy would be in a much better state. Without oversight on these companies, the companies have been allowed to make very unstable decisions which are why our economy is in the current state that it is. If the companies can’t be responsible, then maybe the government needs to help out the citizens instead of the companies, and see where things go. Who knows, if we give some economic power back to the people, maybe the people will surprise everyone and make some responsible decisions.

  5. Tony Robinson

    On Larry King today, following the “NO” vote on the bailout, I watched Paul Krugman and Ben Stein on Larry King. BOTH Krugman (a professorial lefty) and Stein (a rich Republican) proposed a new approach to replace the failed Paulson Bailout. They both proposed that instead we invest billions in bailing out homeowners directly, helping them avoid foreclosure, pay off debt, etc. Then the bailout money would trickle up through the economy, rather than using the Treasury dept. to buy bad debt from Goldman Sachs, etc., and letting the money trickle down, as Paulson proposed.

    Stein and Krugman were voicing a proposal not so different that what our resident socialist Leo Balaban (he is a from Russia, after all. once a socialist, always a socialist?) proposed in this post. I had pooh-poohed Leo’s idea in my first response, but now that I see a Princeton eminence like Krugman taking the Leo line, I am bowing down to Leo’s great wisdom.

    I’m not worthy. I’m not worthy.

    Still, for all its bold vision, such a demand-side Keynesian solution to the stock market collapse is about as likely as a McCain Presidency. Yes, it will be Obama–but Obama is no FDR, and the Leo/Krugman/Stein vision will be nothing but a lovely dream, I’m afraid.

  6. balaban13

    Should I be expecting my graduate diploma in the mail already, since 2 world famous economists agree with my bailout proposal?

    Joking aside, I think that this bailout is not going to help the economy ultimately. Proof of that is the reaction of Wall Street on the news of the passage of the bailout on Friday. Dow was down 1.5% or about 157. Nasdaq was down as well by about the same %. To add to the already miserable economic situation, there was a report that more than 160K jobs were shed. This bailout, which does little or nothing in addressing job losses, home foreclosures and heath care, won’t help the Main Street in a long time. The deep economic depression which the Bush administration and Congress is trying desperately to avoid, just might happen anyway, but now we’re about 1 Trillion more in debt.

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