The Big Fix

There’s still $350 billion left from the old bailout fund (TARP), and the President-elect is planning to ask for a second, two-year plan (ARARA) that could reach close to $800 billion. Simply put, the issues are jobs, house values and credit. Congress is circling wagons, albeit in different camps, and new administrators and a newly-seated Congress have differing ideas about what to do. I’ve blogged about the problems; let me now suggest the solutions.

Stop with the tax credit formula. I’ve already blogged about the ineffectiveness of using indirect “tax credit” stimulus programs to generate consumer-spending and job creation, and, by the tone of the President-elect’s January 10^th YouTube release, it looks like pressure from Congressional Democrats will force a reduction in at least a portion of the jobs-incentives tax credit which Obama had earlier suggested.

It’s worth remembering that we already tried the taxpayer rebate credits last spring, and, given the low level of consumer confidence then (and we currently have the lowest level of consumer confidence since it has been recorded), nothing really happened – the meltdown hit us anyway – hard. Giving businesses a tax credit against years in which they are recording losses (so they don’t have taxes against which to use the credits) to hire employees to make stuff and perform services that consumers aren’t willing to buy or use and order unneeded underlying raw materials seems to be a waste of taxpayer money.

If you want jobs, then create them directly, either through public works programs, funding states to implement job creation or engaging contractors and researchers under government contracts to address the infrastructure, educational and new technologies research programs that were discussed in the recent pass. Just do it directly! Consumer confidence will return when the fear of jobs loss and destroyed housing values is mitigated with results.

We need to stop bailing out and then rewarding the cadre of failed financial executives who clearly helped accelerate, if not create, this mess in the first place. House Financial Services chair, Representative Barney Frank, wants strict limits on executive pay in such “bailed out” companies, including eliminating any bonus compensation on the 25 highest paid corporate executives. Good start, but we need more.

The new “Regulation Czar,” a Harvard academic, should be assembling and drafting the new regulatory schema to re-instill accountability in any market segment that could impact the overall economy – the notion that someone is just too big to be regulated (rich folks can take care of themselves) just doesn’t work when the failure of the biggest investors can destroy the economy for everyone else.

Accountability is a huge issue, not just for the private sector, but for the government itself. The January 9 Associated Press: “[Harvard law professor Elizabeth Warren,] the head of a congressional panel overseeing the Treasury's $700 billion bailout program[,] said lawmakers need to ‘take a very hard look at how banks have used the money… I'm shocked that we have to ask these questions… but what I will say is that I'm not giving up on this. The best news is that these questions have gotten a lot of attention and a lot of people are demanding answers and when a lot of people demand answers, things start to change.’"

With banks holding back, not trusting each other enough to put together the bank syndication packages that drive the mainstream economy, it would seem that the federal government, even if only on a short-term basis, needs to guarantee inter-bank lending to jump-start this market sector now. For those banks tapping into cheap Federal Reserve lending, we need new rules that require these lenders to deploy that $1 trillion of hoarded cash at designated minimum levels to homeowners and businesses as a condition of continued access to such funds.

Sheila Blair, the FDIC holdover from the Bush administration and key members of both Congress and the new administration also realize that a significant part of the remaining TARP funds need to be deployed to stop the hemorrhaging in the housing market. Those subprime consumers who should never have been allowed to borrow in the first place and cannot sustain the payments on any reasonable going-forward basis – and most of those home are either in default or foreclosure already – probably cannot be saved. That bottom end of the housing market may benefit by allowing new buyers – assuming we can hold their jobs or create new ones under the above plans – to step in with low interest rates and drain that excess inventory as much as possible.

For the rest of the housing market, outside of the unqualified buyers that were encouraged to buy what they could not afford, we also need to place the originating banks (or their successors) back in control of the mortgages they originated – even if they sold off those loans to outside loan aggregators. We need to encourage and even subsidize principal and interest “adjustments,” perhaps taking a small slice (nothing like the HOPE for Homeowners program, an utter failure) of the appreciated upside as a possible payback to the taxpayers. By covering that portion of the “negative mortgage” (the amount that the mortgage exceeds the value) to homeowners who really can pay a reasonable monthly mortgage, the market will bottom out much more quickly, stabilizing home values – a cornerstone of the economy – in time to stop this dark economic malaise from sliding into a full-blown depression.

My bottom line in all of this: stop trying to figure out indirect incentives – particularly through the tax system – in the hopes that this indirect action will, eventually, produce the desired result. We do not have the time or funding to find out if these strategies will work. If you want a desired effect, and you need it fast, the direct approach is the most obvious and viable path.

I’m Peter Dekom, and I approve this message.