Marion Brothers

Marion Brothers

Thursday, September 25, 2008

Solution to the Economic Crisis

Editor Note: I hate to complain about a problem and not offer a tenable solution

So let me lay out the outline for a comprehensive plan to solve the current financial crisis.

First, we should finish the job we started. That is to say, we should buy out the rest of the private investors in Freddie Mac and Fannie Mae. Thus, homeowners who are threatened with foreclosure can seek a government-owned financial haven to restructure and refinance their mortgage debts, (maybe extending their 30-year note to 40-year notes, which are not now possible with private financial institutions). We know that private market capitalization of mortgage debt makes it impossible to restructure homeowners’ loans, nor can these institutions stop the bleeding of foreclosures or prevent glutting the housing marketing with foreclosed properties.

Second, we should finish buying out AIG and convert it into a full service financial institution where businesses and consumers would have access to alternative lines of credit and finance capital. With a full service government-own financial institution, interest rates would stabilize and GDP would not decline.

This plan assures the American people of their level of risk and provides a public haven for those in financial distress. Rather than providing the government with a $700 billion blank check to bailout Wall Street and reward its CEOs with obscene bonuses and golden parachutes, the American public’s dollar would bailout financially distressed homeowners and cash strapped businesses, with the added benefit of direct oversight and management. Rather than propping up Wall Street after its reckless leveraging of consumer and homeowner debt above and beyond acceptable risk levels, government oversight removes the cut-throat profit motive in the financing system.

This solution is more akin to the true American public sentiments to save the economy, without rewarding the fat cats on Wall Street. In the meantime, let the capitalist Free Market system heal itself, since it is no longer capable of extending credit to the current market and incapable of financing new development and commercial expansion.

Free Market principals dictate Wall Street should heal itself, and not place their burdens on the American public’s back.

We have already crossed into uncharted territory. We have precedence in the Savings and Loan bailout, where commercial property appraisals were intentionally and corruptly inflated in order to siphon off the excess value in the form of profits and executive bonuses. There is no doubt that, with the current bailout package, we will be faced with the same.

Mortgages, once deemed dead or valued at zero, would suddenly regain book value after being written off by mortgage lenders, and then auctioned to the government. What then was once of no value is suddenly pawned off on the taxpayer at an inflated appraised valuation.

We started a trend of nationalization of our financial industry, although everyone decries this is something we do not want to do. We are already trapped somewhere in between capitalism and socialism. However, if we are going to socialize risk and bear the loss and then turn around and allow the private sector to keep the prime assets and reap all the profits, we may as well nationalize both risk and profit taking.

That is the only way the American taxpayers can be assured of equity in the “new financial system” now under construction in Washington.

President George Bush is in no negotiating position because, within 40 days, he will be a lame duck anyway. And, Wall Street is in no negotiating position because it caused the mess.

Where I come from, you are either part of the problem or part of the solution, and the above is neither part nor parcel in the solution.

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