My Rescue Plan

After 2 weeks of thinking about this economic bailout, I am decidedly undecided about whether it should be passed.

Here is a summary of everything floating around in my head:

There seem to be two major problems with the current crisis. The first is that the precipitous decline in the housing market and rise in foreclosures has resulted in the collapse of mortgage-backed securities and the investment firms that pushed them. As long as housing values continue to decline and as long as foreclosures continue to increase, these debts will continue to drag down wall street and thus keep us in this economic crisis. The Paulson plan is basically writing off all of these debts (and thus writing off the individuals who hold these mortgages) saying that we cannot recover until we wipe the slate clean. That way, if and when these mortgages do go into foreclosure, the debt has already been paid. And if they miraculously avoid foreclosure? The government profits.

This plan is the equivalent to using controlled burn tactics to fight a large forest fire. By conceding a large piece of real estate (no pun intended), the fire will eventually put itself out. The problem with this plan is that it does nothing to put the fire out directly. It is still trickle-down economics. Prevent the whole forest from burning by sacrificing the areas in the most danger.

Without more direct help at the individual level, these houses will continue to go into foreclosure. Yes the banks will be safe, and yes the market will survive, but the housing market will continue to suffer, and the wealth of the majority of Americans will continue to decline. As long as the housing market continues to slump, America will suffer into the future.

Don't get me wrong, something has to be done immediately. Without any intervention, the credit crunch will worsen and capitalism will collapse. The key problem here is that the credit market is driven by these large banks and investment firms willing to make small amounts of money by lending large sums of money to low-risk businesses (commercial paper). As long as the investment firms and banks are worried about their balance sheets in relation to mortgage backed securities, they are going to be less willing and able to lend money to businesses through commercial paper. What we will see in the next few weeks are solid companies unable to make payroll, unable to invest in infrastructure, and unable to keep their doors open. The Paulson plan will prevent this from occurring by freeing up the investment banks to re-enter the commercial paper market.

So those are the two problems: the housing market's collapse, and the resulting disappearance of the commercial credit market.

Here is my solution;

A) Go ahead with a scaled back Paulson plan and begin buying up the mortgage-backed securities. This will largely solve the credit crisis and avert a capitalism meltdown.

B) Empower the federal government to re-negotiate mortgages to reduce the risk and frequency of foreclosure, which will stabilize the housing market and shore-up mortgage-backed securities.

While part B would actually solve the entire crisis long-term (because it fixes the underlying problem), part A is also essential because our economy runs on confidence. Without the bailout of investment banks that need to dump mortgage-backed securities, the system will collapse very quickly.

Think of these two solutions as short-term and long-term fixes. In the short-term, we need to avoid the kind of crisis that could set our nation back 30 years. But in the long term, we need to fix the problems that could keep us from advancing for the next 30 years. Without the short-term plan, we sink. Without the long-term plan, we tread. With both, we build a raft and sail out of this mess.