In his column today, Paul Krugman asks a question that I have been trying to figure out for a long time, "Who'll stop the pain?" I've been asking myself this question since the early '90s when the Home Equity Line Of Credit was invented to allow people to put up the equity in their homes in exchange for the instant gratification of purchasing a bigger TV or taking a vacation. It seemed clear to me, even back then, that we could reach a point when people would have so little equity in their homes that a significant downturn in the economy would start us on a downward spiral that would be difficult to stop.
As Krugman puts it,
So people at the Fed are troubled by the same question I’ve been obsessing on lately: What’s supposed to end this slump? No doubt this, too, shall pass — but how, and when?
In addition to the measures already announced by the administration, I have two suggestions; one is for consumers, the other for businesses.
On the consumer side, there are always questions of fairness when one group or another receives help from the government, and it is not feasible for the government to assist everyone directly. Fortunately, we have a designated preferred class in America, and they need help right now, and the government should give it to them: veterans. Helping veterans reaches across party and class lines into every community in America.
Right now, the government should step in and halt all foreclosures of veteran owned primary residences. All veterans should have the option of refinancing their homes at a minimal interest rate, and also be given the option of paying interest only for a period of up to four years. Those veterans interested in purchasing a home should be given substantial assistance in the form of down payment and reduced interest rate.
Services at VA hospitals should be expanded. A program should be established to help aspiring doctors and nurses pay for school if they pledge to work in a VA hospital for a fixed period of time upon graduation.
Psychiatric services and homeless shelters for veterans should be expanded in every city, thereby taking tens of thousands of veterans off the streets.
On the commercial side, the government needs an antidote to the problem of banks taking bailout money from Treasury and not using it to make loans to businesses. But we need a system that falls short of nationalization.
That antidote could be the Treasury Department establishing a loan board that will take applications for commercial loans, provide the funds directly to the borrower instead of a bank, place those loans in banks through a bidding process, and guarantee them to a limited extent. This would guarantee that the trillions of dollars we are going to borrow to bail out the financial system actually ends up back in the economy rather than in some executive's Swiss bank account. It will also help weed out the banks that are incapable of addressing the current crisis in a pragmatic way.
I am neither a veteran, a banker, nor an economist, so I am sure that thoughtful people can shoot holes in these ideas. My effort here is to stimulate a conversation that moves us closer to discovering the answer to Krugman's question. Who will stop the pain?