by TW Collins

by TW Collins

7.7 trillion won’t be the final tally, either.  Given how much the Fed, Treasury and other federal entities have pledged it’s really hard to understand how little they’ve accomplished.  7.7 trillion is, well, real money but credit in the real economy is still constricting and jobs are melting away faster than an ice cube in a blow torch.

The money has largely been wasted because it was used mostly to lend companies money for lousy assets rather than being used to set a floor under housing prices by resetting such prices with new mortgages, then determing prices for various options through either using cash flow (a security paying $10/year for 10 year is worth $100 discounted by expect inflation) or by resetting those without cash flows by discounting face at the likely default rate, which can be determined simply enough by looking at the market for liquid securities and seeing what sort of default rate is assumed for securities with the same return.  Since most Credit Default Swaps have very very high implicit returns, they’d probably have default rates in the 20%+ range.  That’s fine, discount them that way.

Inasmuch as this is a confidence crisis, and it isn’t primarily, until everyone knows what the actual damage is and where the floor is, the lack of confidence won’t go away.  More to the point, until financial institutions know they aren’t going to be able to buy up rivals for cents on the dollars, they’re going to horde money.

Taking over a few banks and using them to lend directly to the public at whatever rates the Fed thinks are appropriate (a few percentage above prime) is, at this point, the only way to get lending going.  It sure wouldn’t cost more than 7.7 trillion, but even if it did, it would actually accomplish the goal of getting real credit into the real economy.

This game of giving bankers money to do what they want with (i.e., horde it) has not solved the economy’s real problems.  It has, however, cost ridiculous amounts of money, much of which will never be seen again.

There’s an old saying that if you want something done right, you have to do it yourself.  It’s past time for the government to do it themselves.  Use the banks they’ve taken over to start making loans, issuing credit cards, offering reset rate and face mortgages.  If the banks still in private hands don’t join in, they’ll lose all that business, probably more or less permanently, since the banks doing the lending will keep the customers.

Add in a home ownership loan corporation style plan which buys and resets mortgages to fixed rates at lower face amounts (30% of average income in the area, at most) to set a floor under the housing carnage, force securities to actually be priced at something reasonable, then insure those prices through the government, and you’ll have unfrozen the credit markets, restored quite a bit of confidence and actually received something for all the money you’ve received, rather than just allowing executives at banks to keep their jobs despite their corruption, venality and incompetence.

Ian Welsh

Ian Welsh

Ian Welsh was the Managing Editor of FireDogLake and the Agonist. His work has also appeared at Huffington Post, Alternet, and Truthout, as well as the now defunct Blogging of the President (BOPNews). In Canada his work has appeared in and BlogsCanada. He is also a social media strategy consultant and currently lives in Toronto.

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