Lots of investors breathed a sigh of relief last week when the bailout was passed and signed into law. What people may have missed is that there isn't a chance of any of that money being spent - not a dollar of it - before mid-November at the earliest. For a plan that was supposed to inject liquidity with rapidity into the credit markets, this isn't a plan; it's an excuse. But wait just a second, Anne, you say; weren't you just saying that you supported the bailout? That you thought it better than nothing? Well, yeah, I am still that Anne. But it's clear today that, although it's better than nothing, it's not much better. What I opposed was doing absolutely nothing and, given the political landscape, this was something that had to be done if only to get folks off the dime.
Here's todays news:
Credit markets were still choked Monday, as the financial crisis spread throughout Europe and stock markets around the world tumbled.
Treasury prices jumped higher as investors waited to see signs of relief.
"What we thought was going to be a contained domestic problem is definitely global," said William Larkin, portfolio manager at Cabot Money Management. "It is now rooted in Europe and it looks like it is probably spreading to Asia."
Now it's clear that last Friday's bailout is not going to work. Time to go back to the drawing board but fast. What's my plan then? Glad you asked. I have a few although I am about as confused as the next guy. But we have to get these credit markets unclogged ASAP.
Plan Numero Uno: The Government sets up a body called the Mortgage Resolution Trust. This Corporation forcibly acquires all distressed residential mortgages at 50 cents on the dollar. The mortgage can be offered by the mortgage holder or by the homeowner, but they have to be in foreclosure or about to go into foreclosure. All mortgages in foreclosure become the property of the MRT. All back payments on foreclosed mortgages are vacated. The MRT holds the mortgage at its discounted price until the mortgage is either paid off or the homeowner finds another mortgage. All acquired mortgages become fixed-rate 30-year loans at a rate to be determined, but probably would reflect the mean interest rate currently.
The underlying logic of this approach is that, if the market cannot find a valuation for these securities, the Government will supply one. The valuation is 50% of the valuation on paper. The markets can just suck up the losses and move forward from there. Some banks will become insolvent, but we will have resolution because lenders and borrowers will be quickly aware of who is in and who is out. The losers get bought by the winners, and things start flowing again.
Plan Numero Duo. This was a suggestion I read last week. I still like it. The Government pays the first $250 of every monthly residential mortgage in the country - all 40 million of them. That would cost $10 billion per month, $120 billion p.a., $700 billion over 5 years. If things get better, the payments could be lessened or phased out. The strength of this is that it really would be fast. The benefit would flow to the poorer folks more strongly than the wealthy. The credit markets would be relieved of a lot of non-performing loans, and credit would start to free up. At the very least, it would represent a strong boost to the economy.
So, if the so-called bailout has to be revisited not merely because it's impossibly slow, what are the other plans floating around that people have heard or have thought of?