In an obvious solution to the latest Bush "crisis," Chuck Schumer is suggesting that we set up a partially funded bailout.
Chris Dodd and Republican Bob Corker are willing to sign on to the proposal to start a fund at $150 billion and see where that takes us:
"Come back and talk to us when you’ve got a little meat on the bones," said Corker. "Why we don’t pass legislation that says we have a goal of 700 billion?... Bring us a fully baked concept."
In the meantime, if you're looking for a plain-language primer on the proposal, here's one I like, by Will Bunch at the Philadelphia Daily News. A sample:
Q. Wow, that's a lot of dough - where does it come from?
A. You!
Q. Me! That's not fair.
A. No, it's not! But the cost of these bailouts ultimately falls on the federal Treasury - in fact one aspect of the proposed deal is that Congress would increase the federal debt ceiling to a whopping $11.3 trillion; it was roughly $5 trillion when President Bush took office in 2001.
Now, there is a chance that the government will recoup some of the up-front cash by selling these loans, especially if and when the housing market improves. The government actually made back its money when it bailed out Chrysler in the 1970s.
Q. What if we're on the hook for the whole $700 billion?
A. Experts estimate the cost would be $6,000 per taxpayer or more.
Bunch is correct about the possibility of recovering much of the money spent. One thing that gets lost in these discussions is that some perfectly good mortgages have been combined with some bad ones to create the financial instruments at the heart of one of the problems. They will likely remain sound if the situation is stabilized. Also lost is the reality that even many bad mortgages are on properties with some residual value.
What we lack, Secretary Paulson, is data. The best way to get useful data, as every programmer knows, is beta testing. Start with the worst situations; put some money in; see what the end result is. To mix metaphors, Paulson is suggesting amputation for a laceration; let's see if we can stop the bleeding first.
If it were up to me, I would do the following:
Fund an initial bailout plan. Require the Treasury Secretary to identify the worst 10% or so of debt instruments, ranked by their ability to collapse a company or a market. Apply the financial remedy, and report back to the lame duck Congress after the election.
Refuse to make good on credit default swaps. These essentially were bets on the quality of the debt instruments. Like any hedges, they serve a useful purpose; but at some level, they were used inappropriately. Let the market sort out winners and losers.
If we're going for bonus points: Enact into law the one proposal that --
. Provides economic stimulus to the middle class.
. Adds taxes to the general fund to cope with the expense of the bailout.
. Has the potential to penalize those who reap outsize gains from this fiasco.
. Jump starts new businesses.
What's that proposal, you ask? Why, it's Obama's tax plan.