Barring any plan for nationalization, we will be deciding between a bad bank, an insurance wrap plan, and other ineffectual attempts to prop up insolvent institutions run by the people who made them that way. Same corporate culture, same risk management, same misaligned financial incentives.
Is there any reason to expect a different outcome when the same players, with the same coach calling the same plays, take the field?
I have a different idea for $350 billion TARP II.
The key problems as I see them is we have a vastly undercapitalized financial sector, a contracting economy that is getting worse, a spent-out consumer, lack of credit generally — and more defaults and foreclosureson homes and credit int he future.
My plan is very simple: Take 175 million taxpaying households — the bottom 80% or so of all taxpayers. They each get a Debt Reduction check for $2,000 each from Uncle Sam. The twist is it can only be used to pay a pre-existing debt (February 1, 2009 or older) — Mortgages, auto lease/loans, student loans, and revolving credit (MC, V, AMEX) or any retail credit card (Sears, Macys, etc.). The check must be used within 90 days — or its forfeited.
What will this accomplish? Consider the following:
• These monies will find their way to Banks and finance companies; its not quite recapitlization, but it gets cash to banks in a productive way;
• Banks experience a (temporary) decrease in delinquencies and defaults;
• Households will reduce their indebtedness by a significant amount; The average
• The consumer will have the ability to spend a little more freely, due to their increased credit position. We do not want them to go on another credit fueled consumption binge, but spend some money now that they are less over extended;
• The taxpayer actually benefits from the use of his own taxpayer dollars — a welcome change.
• It does not reward the misfeasance of the financial sector;
The logistics of this are daunting. Ensuring that only pre-existing debts are paid won’t be easy — perhaps enforcement can be accomplished by requiring all taxpayers to demonstrate on their personal income tax form that the money was used to pay off debt (fail to show that and get tagged for $2000).
Its not that this is such a brilliant idea; to be blunt, its not. Its just that all the other TARP concepts are so terrible — expensive, wasateful, inequitable, filled with moral hazard, and as we have seen, utterly ineffectual.
Previously: Why Not Nationalization? (February 4th, 2009) http://www.ritholtz.com/blog/2009/02/why-not-nationalization/
Nationalize Now (January 26th, 2009) http://www.ritholtz.com/blog/2009/01/nationalize-now/
The Moral Hazard of the “Bad Bank” (January 29th, 2009) http://www.ritholtz.com/blog/2009/01/who-is-the-treasury-secretarys-boss/
Originally published at The Big Picture blog and reproduced here with the author’s permission.