A Three Point Plan to Get Us Back on Track

Before we embark on another round of stimulating our economy by reducing taxes or printing more money and giving it away, we should get our economic system back on track. The instability in our system that manifested so dramatically a few months ago with the collapse of Bear Sterns has caused our banking system, our money system, to freeze with indecision, fright, and paralysis. The issue now seems to be somewhat understood: there are too many worthless or bankrupting assets in the hands of the institutions that control our money. The problem must be fixed before we can hope to stimulate the general economy into prosperity. If the problem is not fixed, no amount of stimulation will help.

I would like to propose a simple three point plan to get us back on track:

  1. In the short term, the government should pay the mortgages for foreclosed properties to get them our of arrears. This might seem like welfare but I’m looking at it from another perspective. If we invest $1 into a bank it can only get $9 from the Federal Reserve Bank. That is 10:1 leverage. If we pay $10,000 to get a house out of foreclosure, then the whole original value of the house is available for the bank to borrow against. That is perhaps a 100:1 leverage, at least in the short term. 100:1 leverage means that we would have to put up $70B instead of $700B to get the same effect. What happens to the money we put in? We get equity in the properly in proportion to the owner of that property. So, for example, if the owner of a foreclosed property had $100K equity in that home, and we put in $10K, we would get 9.1% equity in the home.
  2. Go to court and establish that so-called “default swap” derivative contracts, and other derivatives are illegal gambling and therefore unenforceable. This might set off a bunch of lawsuits and accusations of fraud, etc. but that might be good in the long term. Eliminating the cloud that a default swap might come due and kill a bank or insurance company (the “fuckle finger of fate”) would bring confidence in lending, a crucial step in restoring faith to our money system. I had proposed a more complex system for the long term that would allow gambling for financial institutions, but in the short term, let’s just get off the juice.
  3. Since paying the mortgages of foreclosed properties would be prohibitively expensive in the long term, the government must set up a system to sell these properties (we all have an interest in these properties). If the real-estate market recovers, then this will result in good yield, but if that growth is slow, which it will be, then we need to find investors to take on the challenge. The easiest way to encourage new investment into real-estate (or any business) is to offer a tax incentive. Perhaps if the capital gains tax is eliminated for any gains in any foreclosed property, whether one lives in it or just uses it for investment, that would be incentive enough.

Eliminating the current credit crunch by using the most leveraging methods, eliminating gambling masquerading as securities, and providing tax incentives for long term investors that step up to help solve our current problems is the best solution to our money crisis. Relying on the government to invest $700B or more of our dollars and simultaneous attempt to stimulate the economy will add even more instability to the system, something that none of us need.

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