Take a look at Krugman's 4 step description of the crisis. Krugman says Paulson is trying to contain the mess at step 4 using $700 billion over 2 years, while a better approach (Krugman's) would be to act on step 2.
I can beat them both. I think a sensible rescue plan should work on step 1. That will make it more effective, equitable, and inexpensive. According to a 2007 study by the Chicago Fed authored by S. Agarwal and C.T. Ho, the estimated face value of outstanding subprime loans in 2007 was $1.5 trillion. (I've seen other estimates at around $1.3 million, but let's not quibble with details.) According to same Chicago Fed study, the delinquency rates nationally average 2.5% or so. Let's be generous and say it is 5%. In other words, the exposed portion of those outstanding subprime mortgages amounts to $75 billion. Say, it is $80 billion. Add consumer credit in distress (car loans, credit cards) of lower-income people to total, say, $100 billion. The number of households involved is somewhere between 300,000 and half a million people. If these calculations are even roughly accurate, the Treasury could -- not buy those assets from the financial firms that hold them but -- locate the original issuers of the mortgages (the subprime borrowers) and help them make the monthly payments for the next 10 years. Note that the Treasury doesn't need to come up with $100 billion cash upfront. He just needs to service a relatively small annuity with a total payment adding up to whatever is required to help those borrowers meet their payments on time. Clearly, the present value of that annuity would be much less than $100 billion. If we say it's $25 billion, we'd very likely be exaggerating. But let's exaggerate and say it's so. Still, should the Treasury give away money to poor people who dared dream own a house? I'd argue that doing so beats giving $700 billion to the shareholders and creditors of banks and financial firms over at least 2 years (I'm sure that the $700 billion would not be the end of the Paulson plan, just like Wolfowitz's $60 billion cost of the war of Iraq was just the beginning). However, I'd never ask for a give away to the poor. That, of course, would create horrible moral hazard. When in need, people would grow accustomed to receiving the solidarity and support of the rest of society. That, of course, would erode the basis of our civilization. So, no. There'd be a quid pro quo. Clearly, our economy and fisc underproduce key public goods and -- as a result -- the quality of our life suffers. Two of those goods are public education and public health. Clearly, if more Americans are educated and healthy, the rest of us benefit greatly. They would be more likely to be better coworkers, neighbors, and citizens. It turns out that, by helping those people the government would have tremendous leverage over them. Thus, the government could condition the financial help on their committing to sending their children to schools (all the way to college), and to regularly visit the dentist and the medical clinic. They themselves would commit to attend vocational school, if of age. Etc. That would make our society much more livable at their expense. But, how would those schools and clinics be funded? Because they do not currently exist. Let's see. Say that the present value of locating the borrowers and managing the annuity fund to help them service their loans over the next 10 years is $5 billion. Again, I'm exaggerating. Now add that to the present value of the annuity $25 billion. It'd be $30 billion altogether. Take the first year of the Paulson plan: $350 billion. Subtract those $30 billion from them. You have a remainder of $320 billion. That'd be more than enough to build and fund those schools and clinics. How do I know? Based on the estimated present value of my family dental and medical plan (Oxford, using a discount rate of 5% p.a. and deeming these plans perpetuities, i.e. providing service not only over their lifetimes but forever) , I estimate that giving good dental and medical care to half a million people and their families would require less than $15 billion. So, $320 billion would leave much change to cover with medical and dental services other segments of the currently uninsured population. _______________________________________________ pen-l mailing list [email protected] https://lists.csuchico.edu/mailman/listinfo/pen-l
