CT Blue

Yesterday I was talking to Frank Liberty, an attorney from New London. He told me about his own ideas for dealing with the credit crisis. I started a post yesterday, to incorporate them, but after doing some math, decided that his idea would be prohibitively expensive. Frank wrote me this morning, with a suggested post, which I’ve inserted below. After some back and forth, I concluded that my off the cuff figures were wrong. There are about 100,000,000 taxpayers in this country. The total bailout cost so far, including the secret guarantees from the Treasury, etc, exceed trillions of dollars, the $700 billion figure being only the tip of the iceberg as far as taxpayer cost and exposure is concerned. The per person cost for Frank’s idea is well within the range of respectability, given those enormous costs.

So far, there hasn’t been much talk about a bottom up approach to dealing with the current situation. Nor have any of the suggestions I’ve heard directly benefit many ordinary people. We really need to start thinking outside of the box, and I think Frank’s idea deserves some consideration as a starting point for dealing with this. At least it guarantees that a whole lot of ordinary people will get some tangible benefits from the vast amount of debt the government will be running up in their names.

Frank describes himself as a fiscally conservative Democrat, but I don’t think there’s anything traditionally conservative about this proposal. So without further adieu, Frank’s proposal for dealing with the mess the banks have bequeathed us.

Prior to the initial bailout by Treasury, I saw a number of emails suggesting that cash be given to the public. I did not take it very seriously.

When the automakers sought a bailout, and after I saw the across the board decline in auto sales as to ALL manufacturers, it occurred to me that the slowing demand, increasing layoffs, further slowing demand cycle had no end point in sight. The auto bailout is throwing good money after bad unless there is an increase in demand. We will have to throw that money at them anyway and should to save that industry.

Both stimulus checks and bailout have failed to accomplish their purpose. The stimulus checks because it is a one time event for which consumers expect no repeat. The bailout because of hoarding. The bailout is also repugnant in that the financial companies can still enforce debt obligations despite receiving dollars from the very consumers they seek to foreclose/sue. Creating public works projects in the Great Depression also failed in their goal.
That brought me back to the cash gift idea. First, it had to be renamed to appeal to those who view it as socialism. I will call it a Voucher.

Each individual over 25 would receive a cash voucher for $25,000.00. If the consumer directs payment towards an existing debt as of 12/1/08, that money is not taxable.

This would reduce credit card debt and mortgages; it would take the pressure off the financial institutions as to toxic debt. The effect on the consumer is not a one time stimulus but a reduction in expenses freeing up disposable income in the future. Then the consumer is placed in a potential buying position to increase demand.

As to the housing crisis, purchasers of existing housing stock after 12/1/08 would still be able to use the voucher solely for that purchase. This should begin to lower inventory, reduce mortgage amounts to help purchasers secure mortgages as to their debt to income ratio.
For individuals on State assistance, the Voucher would be required to re pay the States, thus easing their revenue collection problems. This also eliminates the gift or non deserving recipient argument that would arise.

Cash would be available from the Voucher at a 50% federal tax rate at a determined sum.
This would have to be accompanied by serious financial reforms. In addition, Congress would have to eliminate default penalties and default interest rates from credit card judgements or debts to make this fair. They do not deserve anything beyond the standard interest rate.

I do not have all the details worked out. And leave it for people to use this a spring board for future discussions/ better ideas. But clearly, something different is needed.

I’d take issue with one thing. I think public works projects did achieve, or could have achieved, their goal during the Depression. As Krugman has said repeatedly lately, the programs were working until Roosevelt cut them in an effort to balance the budget, sending the economy back into the crapper. WW II, which was, in effect, a massive public works program, turned the economy around. In any event, such projects are a longer term solution. Frank’s idea is more of a kick start, but given the enormity of this crisis, I think both short and long term solutions are necessary