Thursday, September 25, 2008


One of the commentators on my post on Bush's speech discussed an alternative proposal to the plan that is currently being heavily modified by Congress. In that vein I thought it would be appropriate to mention some of those proposals, as highlighted by this Washington Post article from yesterday and this NPR report from this morning. The plan as presented by the Bush administration initially involved buying the bad debt from banks and investment firms, and permitting the Treasury Dept. to oversee the disposal of that debt overtime as it's value became certain. There were no provisions for oversight, and no talk of relief for homeowners or punitive actions against the firms who made this mess. It's clear that such a bill never had any chance of making it past Congress, not in the fact of massive skepticism and rising anger among average Americans. The bill presently being discussed before Congress however maintains the basic approach of buying the bad debt, and tentatively provides for greater oversight by Congress, and possibly some relief for homeowners or caps on executive compensation or a smaller purchase of debt at the outset (though things are very fluid at the moment...and there's questions whether such a plan will even work.) So what are some of the alternatives to this basic approach?

1. The federal government lends money to these companies to boost their capital, and accepts the bad debt as collateral. The companies remain the owners of the loan, and would be required at some point in the future to pay the loans back once their value has risen.

2. The federal government operates as an investor in mortgage debt, buying only profitable securities and thus encouraging banks and investment companies to make and buy responsible and valuable loans to other banks, companies and consumers.

3. Another approach that our commentator discusses (and Hillary Clinton proposes in an op-ed in the WJF today) is addressing the problem at it's root, reinforcing these bad mortgages by granting relief to homeowners who presently incapable of paying off the debt they owe on their homes. Relief to homeowners could be granted in a variety of ways, though the most feasible way might be to restructure their debt to make it easier for homeowners to pay, thus increasing the value of the securities that are backed by this debt.

4. Suspending the capital gains tax and relaxing accounting rules to encourage investment.

All of these proposals have their drawbacks. The first two leave the debt on the books of banks and investment firms, hampering their enthusiasm and thus confidence on Wall Street. Restructuring homeowner debt takes time, and it could be months before the effect becomes clear and companies can begin to accurately value the debt they own. As for the last...well, you can probably imagine how we feel about tax cuts being the primary solution to this crisis. I wouldn't count on Congress adopting any proposal that's more creative than simply buying the bad debt from Wall Street, but the best plan would contain parts of various alternative approaches, including relief for homeowners, relaxing accounting rules, a capital gains tax cut or suspension. What Congress will eventually agree to remains a mystery though.

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