Wednesday, November 30, 2011

Bail out everyone

I had wondered about this idea a couple years ago -- but that's all I did, wondered about it. The idea is that when banks need bailing out -- and sadly, we seem stuck with that problem for the moment -- we shouldn't bail them out directly, but indirectly. For example, just give every single person in the US $1,000. Or maybe a voucher for $1,000 that they have to spend somewhere, or put in a bank. This quickly amounts to $300 billion infused into the economy, a large portion of which would end up in banks. So cash would be pumped into the banks too, but only through people first.

You can imagine all kinds of ways to play around with such a scheme. Paying off some of peoples' mortgages. The amount injected could be much larger. Perhaps similar funds would be injected directly into banks and other businesses as well. Mark Thoma has thought through some of the details. But I'm quite surprised this is the first I've heard about any idea even remotely like this. It seems like a much better idea than just giving money to the bankers who created the problem in the first place. Why don't we hear more about such possibilities?


  1. i saw a white paper in late 2008/early 09 that suggested an instant writedown of every mortgage to no greater than 95% of the underlying home's value, whether the borrower was current or not. that would be somewhat unfair to those who didn't borrow as much as others, but would at least avoid the moral hazard problem of encouraging people to go delinquent in order to get any form of government help that plagues most borrower aid plans. it would obviously then require the government (and shareholders) to bear $100s of billions of losses as banks would have been insolvent. it could possibly be done by changing the classification of a nonperforming asset at a bank to anything underwater, which would put everyone's NPA ratios well above a level they could be taken over. but legally it would be tricky no doubt.

    it struck me as a great idea at the time, and in hindsight it looks even better as potentially much more effective than government spending stimulus has been. you accomplish the same thing directly, leveraging up the public sector as the private sector deleverages, that stimulus attempts to do indirectly. unfortunately the public sector has leveraged up by a much greater extent than the private sector has deleveraged (and that little deleverage has come from charging off bad debt rather than anyone paying it down), yet growth has still been anemic. this suggests a greater potential return on investment of attacking debt directly rather than indirectly.

    one thing that i think people are starting to take away from this episode is that the problem isn't lack of "aggregate demand" as traditional keynesian theory suggests. the problem is too much debt, which is why financial crises beget longer hangovers and weaker recoveries than typical cycles. as long as this condition persists, growth is likely to be weak no matter how much the government tries to spend or how much in tax it tries to cut

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