Monday, September 22, 2008

My Solution To The Credit Crunch

Alex asks (via comment)

So, what solution would you favor? Admittedly I haven't searched much, but it seems like I've yet to find a well thought out, pragmatic solution.

So far I've seen "It sucks, but may be the only option" and "no bailouts for billionaires".

An excellent question. In my opinion, the best solution is one that is clear about its objectives, and achieves them with the least possible amount of intervention.

If I were asked to structure a bailout deal, here's what I'd do:

1) The bailout would be voluntary; no companies would be forced to participate.

2) The bailout would consist of the ability to sell assets to the government as a buyer of last resort.

3) Each firm could only take advantage of the bailout once--that is, get all the bad stuff out of the way in one fell swoop, rather than dying from a thousand cuts.

4) The government would appoint a bipartisan committee that would include representatives of Wall Street as well as "ordinary citizens" to decide what to bid for each company's package of assets, but no bid could ever exceed 50% of book value.

The effect of this system would be to provide a miserly safety net for Wall Street. It would head off catastrophe, but strongly incent people to avoid availing themselves of government benefits.

As for the calls I hear for a bailout for homeowners, forget it. Those who bought houses beyond their means should not be rewarded for it. Foreclosures are unlikely to crater the financial system in the same way that the failure of leading financial institutions would. Unfair, perhaps, but true. My goal is simple utilitarianism--the greatest good for the greatest number.

1 comment:

Alex said...

Well, I guess the good news is that something like what you are proposing looks likely. The bailout looks like its going to happen, but the details should offer a lot of different outcomes. The solution that the financial industry is lobbying for is surely going to be favorable for them, but I think it will be political suicide to support anything that isn't "miserly" in nature.

This isn't a partisan issue, and I don't think the 'average citizen' is going to stand for a bailout that is just a slap on the wrist. Even if a 'wrist slap' bailout is better than none for the average citizen, they are not going to accept it. Sociology shows again and again that people weight fairness into decisions that logically shouldn't include it.