I disagree with his assessment. This entire financial crisis was caused by:
- Too much total consumer debt including real estate and non-real estate debt.
- A natural waning of housing prices after a "too good to be true" run up in real estate prices.
- A decline in the secondary market for debt instruments largely due to concerns about issues above.
In order to properly address this current financial crisis I think a simpler solution would be for the Federal Reserve to take all the debt off of all the banks' books at current market value by:
- Swapping out all the residential mortgage debt held by US Banks (totals approximately $11.3 Trillion) in exchange for US Treasuries with a guaranteed yield of say 2.5% with provisions for the banks to sell of the Treasuries in controlled allotments in order to raise cash. Currently the total value of all US Federal debt is $10.76 Trillion. Therefore, this plan would essentially double the national debt. However, since it is really a debt swap the total of all US public and private debt would remain the same at about $53 Trillion.
- The Fed would then alter the terms of all the mortgages "purchased" so that all people current on their mortgages and have equity would receive a reduced interest rate of 3%. People who are current, but have no equity would receive 3.5%, people who have equity, but are delinquent (assuming they can pay the mortgage after the reduction) would get 4% and people who have no equity and are delinquent (assuming they can pay the mortgage after the reduction) would get 4.5%. Any people with negative equity would have been dealt at the time of the Fed's "purchase" of their mortgages since the Fed would be paying a discounted amount for their mortgages (i.e. the banks would take a haircut by reducing the face values of these assets). The delinquent homeowners with negative equity would also share the pain by agreeing to pay the Fed 10% of future home appreciation in order to make up for the higher rate of default.
The initial cost of this plan would be very little. The long term cost to the Fed (and US Taxpayers) would be the risk of mortgage default, which would be spread over time anyway. Since the banks would now have 100% performing and guaranteed assets on their books instead of non-performing mortgage assets they would be saved. Since there would be a provision for the banks to sell off the Treasuries in controlled amounts their capital would be replenished in an organized fashion thus leading to a return of normal lending. Since the problem in the economy was and is too much consumer and business debt including, but not limited to, real estate and the near complete evaporation of the secondary market for debt instruments this plan would work by creating the secondary market (the Fed) and reducing debt payment levels by reducing interest rates of homeowners. In short this would be the same as a tax cut for homeowners thus putting more money back into the economy, some of which would surely be spent. Since my plan is a debt swapping/debt shifting plan it will not increase total debt, thus not creating any additional burden on taxpayers or the economy. Conversely, the President's plan of borrowing more money to spend will increase debt and probably make things worse in the long run.