Beyond Uncle Sam’s Big Bailout

Here’s a can’t-miss moneymaking idea, no charge. Quickly surf over to CafePress.com, the mecca for design-it-yourselfers, and create a customized T-shirt emblazoned with this soon-to-be lament of your fellow Americans everywhere: “I just paid a trillion bucks to bail out Wall Street—and all I got was this lousy economy!”

As the kids say, it’s funny because it’s true. Nothing Washington is considering right now is going to change the harsh reality that the stagnant economy will most likely get lots worse before it gets much better. What government action will accomplish, we hope, is avoiding a calamitous shutdown <[lb]>of credit markets that could turn a recession into It-Which-Must-Not-Be-Named. (Hint: It starts with a “d.”)

Let's say, for instance, that preventing a total financial meltdown keeps the economy from falling into a recession like the one back in 1982—by some measures, the worst since the Great Depression. The difference between a 1982-style recession and even so-so economic growth is roughly $400 billion in lost economic output. And given the continuing drag after 2009 from such a meltdown, any Uncle Sam-led bailout or rescue that prevents a nasty recession could actually pay for itself in fairly short order.

Housing crisis. If it works, of course. Wall Street doesn’t guarantee future returns, and neither does Treasury Secretary Hank Paulson, the former head of Goldman Sachs. But are we forgetting something here? Economist Robert Brusca is dismissive of the Paulson approach for one big reason: “It does nothing to solve the housing issue.”

Indeed, falling home prices and the deluge of foreclosures remain squarely in the center of America’s current economic problems. So, what to do about that? Nada, many conservatives would say, explaining that the deflating price bubble needs desperately to find a level that corresponds to financial reality. But 2009 could well bring Son of the Mother of All Bailouts. Some liberals want an interventionist approach, such as having the government buy not just mortgage-backed securities but actual mortgages and then cut homeowners a deal. They point out that the Federal Deposit Insurance Corp. is already doing something like that with mortgages held by IndyMac. Since taking the failed bank over, the government agency has made whole swaths of homeowners eligible for interest-rate reductions or rate caps. Even some on the right want Washington to take direct action to help housing. Former White House economist Glenn Hubbard proposes that the government refinance every U.S. mortgage into a 30-year fixed at 5.25 percent. It would be half the price of the Paulson plan, he estimates, and work better.

Here is another interesting idea: Have the government provide subsidies to struggling homeowners in return for a piece of a home’s future price appreciation. These contracts could then be packaged and sold to investors, here and abroad. Foreclosures would slow, and housing prices would stabilize. Idea author and financial entrepreneur Ralph Liu puts it all a bit more poetically: “If you stop the snow from melting, you won’t have a flood in the valley.” Hey, that’s catchy. Might look good on a T-shirt.