Saturday, March 22, 2008

A One-Sided Conversation with Doublya.

As the saga continues, its clear that everyone understands the problem now, so I'm gonna put in $.02 on the newer discussions which are circling around - how to solve this without creating a massive moral hazard.

Its pretty obvious that your Bush administration is very concerned with the possible moral hazard of intervening to save any one party or the other. Good for you "doublya". However, what you need to consider is the collateral harm to everyone of not coming up with the most swift solution regardless of the presence of a moral hazard or who it "bails" out. Oh - the Fed is already bailing out Wall St. by the way and its gonna have its costs later on down the road when interest rates come back up to stave off the inflation that is coming, it might be here now hiding under energy price inflation - which we commonly dismiss as isolated and limited in effect.

So anyway, lets offer some solution that helps the rest of the country. I mean, don't get me wrong - saving Wall St. just might save my paltry 401k from diving another 15% on the 15% haircut I already incurred this year to date, but lets think big picture because unless you fix the big picture all the Wall St. massages last about as long as they do in the real world - not nearly long enough for the money.

The moral hazard I see right now is allowing people to get out of their predicaments without any repercussions. So the first step in any bailout needs to be a serious ding in the credit file - to make people think twice about receiving a handout. This would still allow them to retain their homes - if they actually wanted to live there in the first place but keep them from causing the same problem again.

Second, in conjunction with a little home owner punishment - back the difference between the mortgage value outstanding and the current value by the full backing of the government. If this happens, the homeowner might stay in the home, the bank lowers its exposure by the bubble amounts, and at least the bank knows where it stands.

Now, in the true sense of negotiation - what does the government get from these two parties for putting every responsible person's tax at work and risking a dollar devaluation? Well this is the hard part - but it has to amount to Federal government getting something back for the bailout. Unfortunately this has to be in the form of some collection of future profits to go toward some cause which will upgrade the U.S. long term debt outlook and strengthen the dollar. Oh, by the way - lets put this in one of Al Gore's "lockboxes" so whatever party in control in the future (both of which would happily spend it recklessly) can't touch it. Why not give it to the Fed - at least they care,

Basically - survival as a bank now is going to cost them a bit in the future which hopefully will keep any future bubble possibility limited by the payment back the government.

If this sounds a lot like a credit counsel plan - its because it is! Get some debt forgiveness in assurance of future payment security and stretch the time frame out to alleviate the current crunch. Nobody gets off scott free, but thats the perfect basis of a good solution to a problem everyone had a hand in.