Bailout Plan

<Update> I have change the name it is now Instugator's Rescue Plan

In light of the current 'Stimulus' plan and the protests against it, I have dusted off the plan I proposed on 27 August 2008.  The reason I am re-posting this is because I do not understand how the new government spending proposal is supposed to directly stimulate the economy.  I use the word, 'directly' for a reason. 

Direct Stimulation

I can comprehend how a direct rebate to the American taxpayer stimulates the economy.  The taxpayer takes the money and does 1 or 2 things with it that are easy to understand.  He either (1) spends it, (2) he saves it or (3) does some combination of the two.  The direct cost to the government is the price of the paper the check is written on, postage, and the costs associated with borrowing the money. 

The consequences of the payment are profound - if the individual spends the money, he is spending it on goods and services that he personally enjoys - there is no bureaucrat in the middle making these decisions for him.  The money thus spent goes to those firms who make the things the individual enjoys - the market then works as advertised.

If the individual chooses to save the money he is still benefiting the economy.  The bank that he puts the money into now has assets that it may write loans against. 

If the individual repays debts, that still stimulates because the bank has reacquired assets and the individual can use those dollars that were previously devoted to interest in the pursuit of more consumer goods.  The benefit of this type of system is that it requires no bureaucrats in order to properly function.  All the beneficiaries of this system have to do is make good decisions in the aggregate and everyone benefits.

Issues with the current plan

The current plan, however requires bureaucrats in order to function properly.  Since so many dollars are filtering through the hands of so few bureaucrats, any mistake on the part of the administrators is magnified greatly.

The other issue I have with the current bailout plan is that it rewards bad behavior.  That is not quite accurate - it provides incentives to people to engage in bad behavior.  It doesn't just reward bad behavior, it encourages more bad behavior.  The government paying the loans of people who made bad borrowing decisions rewards 2 groups of people - those that made the bad borrowing decision and thos lendors that made poor lending decisions.  This is not the kind of twofer that we need.  Additionally, all this type of plan can achieve, at the most, is a return to status quo ante.  You cannot move forward, and you cannot improve the economy as a whole.  This is because the plan is based on 2 groups of people who have made bad decisions in the past.  Success of the Obama plan, therefore, relies on those who have been unreliable in the past.

By contrast, however, Instugator's plan relies only on those who have been reliable in the past.  All that has to happen for my plan to succeed is that those people who have been reliable continue to be so.

Here is Instugator’s bailout Rescue plan.

Principles:

1. Reward those who practice good behavior

A. Paying your mortgage on time is good behavior

2. Do Not reward those who practice bad behavior

A. Borrowing what you cannot afford is bad behavior.

B. Having an interest-only mortgage is bad behavior.

C. Having an ARM is questionable.

D. Investment Bankers who purchase CDO’s without understanding the underlying value of them are engaging in bad behavior.

E. Those who sold CDO’s without including the data necessary to understand the underlying value are engaging in bad behavior.

3. Do not let those most directly responsible for the current mess come within 100 miles of the bailout money.

A. Those whose W-2 forms show that they work for congress, Freddie, Fannie, or any investment bank in need of a bailout need not apply.

The Plan:

1. Take the $700B <or any figure currently in Vogue>

2. Find those people who-

A. Have a conventional mortgage.

B. Have always paid it on time.

C. Have never declared bankruptcy

3. Establish an agreement that the Gov’t will:

A. Pay off the mortgage of those who meet each condition in item 2.

(This allows banks to resume mortgage lending and permits those who engaged in good behavior to go bargain-hunting - thus rewarding good behavior)

B. Each person whose mortgage is paid off will agree to make monthly payments to a money-market account

(This increases short term liquidity - also allows those with good behavior to use their work ethic to the betterment of all)

C. Each person agrees to re-finance their house at the end of a 5-10 year period of time at market value to repay the Gov’t.

(This repays the bonds that the govt will have to put on the market to fund the plan)

4. The government will issue bonds to pay for this plan (up front).

5. Bonds are repaid prior to maturity by those bailed out.

(People with good behavior are people who are less risky - that is why they have good credit ratings)

6. In the event the number of bailoutees exceeds the dollars available, applicants from the acceptable pool will be chosen by lottery.

Instugator, as author of the plan, recuses himself from participating.