At first, I was hesitant to dismiss the massive bailout. This bailout goes against everything I believe in, however I am also a strict believer in pragmatism. Many times a situation warrants an action you normally wouldn't take, and you should never dismiss something out of hand just because it doesn't fit your world view. Certainly, I disagree in principle with the concept of bailouts, however most politicians that were privvy to meetings with the Bush administration said that this situation is far too dire to go without one. I can't dismiss their fear. As such, I have tried to give some thoughts to alternatives to this bailout. Are there ways to try and stimulate the markets without a bailout. My answer is yes and here are my favorites. Please note that most of these are copies of ideas I have heard others so don't think I am such a genius.
1) Suspend FASB 157
This rule which forces companies to value illiquid financial assets has perpetuated this crisis and helped turn it from a mortgage crisis into a financial crisis. By forcing companies to put a current fair market value on illiquid assets, like mortgage backed securities, it also forced companies to write off such securities and made it more difficult for companies to hold them long term. As such, the panicked selling was perpetuated by selling to avoid write downs. This will continue unless the rule is suspended.
2) Suspend naked short selling of financial stocks
Short selling is the process of selling a stock first and buying it back later. Normally it is done by borrowing the shares from your broker. Let's say you are working with ETrade. ETrade finds those shares in another client's account and uses them as part of the short sale. Naked short selling does this process without even borrowing them. The shares are simply found later. It is the ultimate tool of speculation. Right now, speculators are using the crisis to beat down financial stocks even further. Eliminating this activity will calm down some of the speculatory behavior.
3) Suspend capital gains taxes for any investment made over the next three years.
Right now, we need to give individuals, corporations, and private equity firms any reason to invest in real estate and mortgages. Suspending the capital gains tax gives them an extra 15% reason. The suspension of this capital gains tax will be that extra motivation necessary for a private equity firm to buy up some of these poor performing mortgage paper. The way this suspension would work is like this. Any purchase of any investment in the next three years would face no capital gains tax whenever that investment is sold for a profit. That includes any real estate investment and any securities investment, including investment in mortgage backed securities.
4) Extend the capital gains exemption to $500,000 on primary residences for homes purchased in the next three years
Currently the exemption for capital gains on primary residences is $250,000. That means any profit less than a quarter million dollars is exempt. Bump that up to half a million and you give an added incentive to purchase a primary residence.
5) Eliminate penalties and taxes on early withdrawals from IRAs and 401K for down payments on properties
Right now, the market is evolving from real estate purchased with no money down to one purchased with a minimum of 20% down. That is why real estate can drop much further. There are of course many less folks with the ability to put twenty percent down then there are that can put down nothing. A way to add buyers to the market is to allow folks to tap into their retirement plans with no costs in order to use it to purchase a property.
6) Extend the annual mortgage interest tax credit to $5000
Currently, the maximum you can write off for mortgage interest is $2000. Bump that up to $5000 and you give extra motivation for people to become homeowners.
7) Make the Bush tax cuts permanent and reduce the rates 3% more for another three years at least. The best stimulus right now is to make the Bush tax cuts permanent. If you want even more stimulus, you cut tax rates three more percent. If you want to spawn home investment, put another $4,000 in the pocket of someone making just over $100k. Those are the folks most apt to buy property. Another healthy tax cut will get them to buy property. This is the way to make this happen.
Keep in mind that a lot of these are extreme and expensive, but then again, so is investing $700 billion in bad securities. I think these are the free market way of getting out of this crisis.
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6 comments:
My husband has a brilliant idea for solving this awful situation. He figured the size of the bailout would equal a payment to all US citizens of maybe $2 million each. He says give that to the people—less any outstanding mortgages anyone has. The banks will be flush with cash and consumers will have lots of money to spend. The government could even take taxes out of it first. In other words, give the money to the people—not to investment bankers.
The only problem with that plan is that at 2 million per person the bailout would actually be exponentially larger than 700 billion. That would be in the number after trillion whatever that is.
At 700 billion it would be somewhere in the neighborhood of about fifteen k give or take a few thousand. That would give everyone a good year though a lot of people would stop working as a result. in other words, that is a horrible idea.
Wall street should help pay for the
bailout directly.Simply impose a 1%
sales tax on every transaction.
Merrill-Lynch charges a 2% fee buying
and selling, but most brokers charge
far less. Surely 1% on the sell side
(not on the buy side) will encourage
investors to buy and hold. Presumably most of the sales taxes would be incurred by professional traders.
The rest of us who pay the sales tax
would be helped further if the capital loss (income) tax deduction were increased from $3k to something
more helpful (much larger!).
$700 million divided by 305 mil US citizens is just over $2 per person not $2 million per person you could only give 350 people $2million before you run out of money
Except it is $700 billion. It seems no one can get their numbers right. It works out to about $2500 per person.
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