I just wanted to humbly and publicly air my own economic plan. I'm mainly interested in putting out ideas that may be helpful, and I'd love your input.
(Sorry, not a general election diary!)
First, the underlying securities that are being held by financial institutions DO HAVE VALUE. The main problem right now is that these are bundles of loans, and no one knows just how valuable they are. Thus, everyone stays clear.
So, their are no buyers for those left holding the bag (the greatest fools, if you're familiar with the 'greater fool' theory.)
- The government should offer to buy these securities at a very discounted rate (60-70%) of original value -- which assumes that the loans are good.
This should do three things: protect the government's finances (as most securities will be worth more than the sale price) and let the holder unload the securities. It's basically pooling risk and determining a value for the larger pool. It will also allow the gov the power to restructure the loans.
This clears up the problem of companies crashing out of liquidity problems, allowing them to cash out.
- Next, the government has no interest in massive foreclosures. Thus, they should refinance the loans (adjusting mainly interest rates, not loan balances) so they are valued at about 5% above the sale price. This gives a small margin for loans that still go belly up.
For instance, if you have a loan for $300,000 @ 7%, the gov should refinance so the face value is (say) 65% (if the purchase price was 60%. Thus, a new loan terms is created that would leave the owner with a $300,000 loan at (an estimated) 3% interest rate. This will allow the homeowner to likely save their home, likely purchased at an inflated price.
- The government will still foreclose on some homes, but the low sales price should protect the gov balance sheet (low purchase price will be recouped in liquidation of underlying asset -- home.)
Conclusions
In the end, the loss is distributed to investors, companies are protected, many homeowners are given cushion, and the destruction of American neighborhoods stops or at least slows. After all, if my neighborhood has a high number of foreclosures, I lose too.
The biggest problem is that it will create a lottery-type effect, based on whether or not your loan is sold to the fed gov. I can't see any way around this, but I feel the other benefits are still worth pursuing.
I'd love to hear your take on my plan.