Following many of the discussions about the bailout (including the many high-quality threads over at European Tribune, my home away from dKos, which I can only encourage newbies to visit), and my own earlier proposals, here's a simple idea to solve the current crisis in a practical way.
I think that everyone agrees that the worst thing that could happen is that bank failures spill over into the real economy and cause a vicious circle of failures, so any plan has to work in that respect. I think that most everyone sane also agrees that the goal is to help people deal with the consequences of the housing crash, rather than the banks.
In that context, a smart way to use any public money would simply be to set up a new public financial institution (which I call the National Investment Bank) to fulfill the following roles:
- allow bankrupt institutions in the existing financial sector to go bust without damaging the real economy by creating an entity able to step in to fund the real economy. In other words, even if banks going bust take other banks with them, there will still be a banking institution able to step in and provide credit to worthwhile business activity that was banking with failing institutions;
- provide specific investment capacity for targetted sectors that will help the economy from the bottom up: (i) a programme to make buildings energy-efficient (via insulation, solar heating, etc...) , (ii) a public works programem focused on infrastructure, and in particular on public transport and the electricity grid, and (iii) a programme to develop investment on a large scale in renewable energy.
The bank could act as a direct investor in such activities, as a lender to other investors in such sectors, or as a distributor of subsidies to households for targetted local investment, and it would be easy to identify what money is spent as grants and what is done on commercial terms.
Such a programme would help re-create activity in the construction sector, would encourage investment in manufacturing capacity in the relevant sectors by providing predictable demand for whole categories of goods, and would have easily understandable long term benefits in term of energy independence and the trade balance;
- provide direct support to homeowners and lenders, when they have a direct, identifiable relationship, by helping to renegotiate terms that are bearable by the borrowers, and briding part of the gap between the earlier terms of the mortgages and the new ones. This could provide enough support to limit to some extent the number of foreclosures and their attendant collateral damage on households, neighborhood and all the financial products built on top of these mortgages.
Such an institution would ensure that the economy can survive a crash of the financial sector (which would have to sort out its mess without beign able to hold the rest of the economy hostage), would help put a floor on the value of some of the toxic mortgage-backed products, and would provide a much-needed boost to parts of the economy that need it, while investing in much needed infrastructure for the future.
Given that $700 billion are already on the table, there would seem to be no immediate obstacle to funding properly such an institution; additionally, that sum could easily be beefed upby tax increases on incomes above a reasonable threshhold (Obama's proposal at $250,000 pa comes to mind, but higher tax rates beyond that sume are probably necessary); such tax increases would eliminate the whole discussion about pay caps on bankers or CEOs (which are likely to be avoided by ever imaginative bankers, lawyers and accountants and will in any case remain the banks' problems as they struggle to survive) and would make it obvious that those that benefitted in earlier years would now contribute to help.
Such bank would need to be regulated and supervised closely, and could certainly be used additionally as a model of transparency by making its operations as open to public scrutiny as possible. It would also show government under a new, positive, face.
This is just a rough idea for now, and I'm sure it can be criticized and hopefully improved, but I think we precisely need to have those discussions on our ideas, and not startign on the basis of the plans of the Republicans or the administration.
So have at it