Musings of the Sundarman

The Current Economic Crisis: A humble suggestion

"$700 Billion Bail-out for Wall Street".
"Paulson suggests the economy will grind to a halt if action not taken this week"
"Fed Chairman convinced that bail-out only solution."

I disagree. Here's a simple definition of the problem:

Problem:
1. Too many people will default on mortgages they can no longer afford.
2. There are complex securities and instruments based on 1000s of these mortgages that don't have a natural market to be sold in.
3. Therefore, the health of the financial institutions holding them is in serious jeopardy, as the credit markets to provide liquidity to these and other firms has completely dried up.
4. The American economy runs on credit, massive job losses, inflation as dollar tanks, very long recession to stabilize

Solution:

1. The Govt. pays off ALL mortgages held in this country
2. This will definitely be less than $700 Billion
3. This is an equity-for-debt swap with families, not with financial institutions
4. This restores the health of the aforementioned financial institutions
5. The Govt. writes off a certain percentage of the bad loans and provides flexible options to the remainder of families to pay them back. The tax payer may even see a profit on their investment in the future.
6. Economy back to normal, liquidity restored in the markets, consumers go back to shopping like crazy on credit.

Advantages of the solution:

1. Avoid swinging of pendulum to too much regulation of financial institutions and their officers
2. Avoid massive transfers of money in commissions and in golden parachutes
3. Establish faith in the American people that Govt. can and will do something right once in 80 years (Roosevelt's New Deal being the previous one).
4. Simple and Elegant solution