How to Build a Better Bailout: Consider Main Street

3p is proud to partner with the Presidio Graduate School’s Macroeconomics course on a blogging series about “the economics of sustainability.” This post is part of that series. To follow along, please click here. By Sean Middleton It seems to me that the big “government bailout” of banks and selected industries was significantly one sided. Could there have been a more equitable solution that considered all sectors of society and not just the “fat cat risk-takers” and politically entrenched businesses? I think the reply to that question is a resounding yes. The knee-jerk reaction of politicians and bureaucrats did not fully address the problem and left two huge elephants in the room; the issue of a moral hazard trap and hugely unfair and unequal treatment towards non-owners. Now the question becomes, what is considered an equitable distribution of relief funds that maximizes economic fairness, efficiency and judiciously applies remedies for criminal or immoral acts? The answer to that proposition is simpler than you think: build a bailout that considers Main Street as important to our economy as Wall Street. Here’s a plan that could work. Best as I can tell from current figures, $11 trillion of taxpayer money was committed to the “big bailout”. This includes monies dedicated to the Fed’s rescue efforts of restoring liquidity to the financial markets, housing initiatives, various programs designed to rescue the financial sector, as well as FDIC bank takeovers and the AIG bailout. Of that $11 trillion committed, only $3 trillion actually made it to the table. So, I propose that we settle on $3 trillion as our target amount to commit to a new plan I will call the Saving Citizens and Risk-takers Equally (SCARE) fund. The SCARE acronym seemed appropriate because this has truly been a spine-chilling couple of years for Americans. To test how far $3 trillion would stretch, I tried this little experiment. Although, these numbers may seem a bit arbitrary, they are no more whimsical than the current bailouts that have not worked thus far. Imagine that the 2.9 million families that lost their homes in 2010 were to receive equal shares from the SCARE; each family would receive $1,034,482.76. What if we were to factor in all families that lost their homes between 2007 and 2009?  This would add approximately 6.9 million more families requesting SCARE money. Again, if we divvied up the SCARE equally, each family would receive $306,122.45.  Now, just for arguments sake, let’s add the 14 million people that are currently unemployed and actively seeking work. All 20,900,000 parties to the fund would receive a hefty $126,050.42.  This would be a godsend to those 20 million citizens but, realistically, it would not meet our goals of efficiency, equity, and a judicious remedy. Being a realist, I understand that no matter how we divide the SCARE, there are going to be some people left out. The most optimal method of distributing the funds is to do it in a manner that repairs the economy the most. Fannie Mae and Freddie Mac received almost $780 billion from that previous program. So if we allocated $780 billion to transfer to Fannie Mae, Freddie Mac and other mortgage holders on behalf of distressed homeowners, we would bail out the institutions and underwater homeowners would either have their mortgages paid off or principal lowered to the current market rate depending on which distributive scheme is appropriate. To avoid a moral hazard of our own making, only first homes would be considered for bailout and reducing mortgages to current market values would be our preferred route.  We now have a fair distribution of housing bailout funds.  If you divide $780B by the 11 million homes that are underwater, that equals $71,000; seems like a decent amount for deserving families. With that money spent, we have $2.22 trillion left to put to other impartial and efficient economic uses. The old program invested $577.8 billion in various stimulus programs. These range from unemployment benefit extensions to infrastructure improvement. I would triple unemployment benefits from $8 billion to $24 billion. Not to allow the lazy to live off the dole but, rather, to build up the fund and allow for certain emergency extensions that call for trading labor for monetary benefits. Next, I would increase the American Recovery and Reinvestment Act by $141.8 billion, making it a more credible national investment of $500B. There should be no pinching of pennies when it comes to repairing our aging infrastructure; besides, our investment just created tens of thousands of jobs. I would now add a new stimulus program called the Sustainable Technology and Renewable Energy Program (STREP) with a commitment of $264.5 billion. With that, we have contributed $1,000,000,000,000 in fostering job growth and injecting life into the Main Street economy. These new stimulus programs address efficiency and, to some degree, offer the nation a sustainable compass to guide the recovery. All this money spent and we still have $1.22 trillion in the SCARE to save the honest bankers and keep money circulating in the economy; no, I have not forgotten about Wall Street.  Stepping up to the moral hazard dilemma, I would force the most egregious offenders to declare bankruptcy; after all, many homeowners were forced to do the same and true capitalism demands it. Cautiously, I would entrust $220 billion to a select group of banking institutions, who proved the most fiscally solvent, to manage the SCARE lending program. These banks would be entitled to a percentage of the profits at the conclusion of the program based on individual performance. The remaining $1 trillion would be evenly divided between Federal Reserve rescue efforts and the beleaguered auto industry. With these actions, we have judiciously applied a remedy for criminal acts in the banking industry and, once again, operated fairly by spreading the SCARE equally across several sectors of society. Combined with the rest of the SCARE as laid out here, we have attained our three goals of maximizing economic fairness, efficiency, and restored judicious fidelity. To many, this may seem like an over-simplified approach to a very complex issue. However, sometimes the best course of action is elementary; it’s the one that holds guilty parties accountable and always works toward the best interests of the people. Sean Middleton is an MPA/MBA candidate in Sustainable Management at Presidio Graduate School.  Sean is interested in all issues concerning community revitalization and empowering citizens to realize sustainable change at the local level. \