Diary

The Huckabee-Ramsey Plan

If you don’t do the Paulson plan, what do you do?

There are several options. The first is to do nothing and let the economy slide into a hole. Not really a responsible option, but one that House and Senate Democrats are looking at if they can’t get enough Republican votes. Senator McCain said it best on this point:

But when he was asked by ABC News’ Ron Claiborne what he would do if the fate of the bill was in his hands, he said Senate Democrats should not use his vote as the determining factor on the success of the bill.”This issue should be – and their vote should be determined in how we can resolve this crisis and get America going again,” McCain said. “This is a huge crisis. We know, in the words of many experts and mine, this is the greatest financial crisis since World War II. So to somehow, for the Democrats to say that their vote is going to be gauged on my vote frankly doesn’t do them a great deal of credit.”Their first and only priority should be making sure this economy recovers and get back on our feet again,” McCain said.

True, Senator, but that whole, “country first” thing ain’t their motto. For starters, both campaigns have asked for modifications of the plan. John McCain asked that there be a bi-partisan board to oversee implement of the program, that there be a path to taxpayer recovery of the bailout money, that there will be transparency in the process as to what companies are bailed out, limits on executive compensation set at $400,000 per year for companies that are bailed out, and finally, that no earmarks get included in the bail out.Obama’s demands are similar except he didn’t specifically raise transparency on the companies being bailed out and didn’t object to the possibility (i.e. probability) of earmarks being inserted into the bill and an insistent that the bill include help for people to stay in their homes.If the changes Senator McCain proposes were made to the bill, I could live with it. I’m not a big fan of the Senator’s, but I do appreciate the seriousness with which he’s coming at the issue, and I think Senator Obama is closer to the right track than usual. Though, the insertion of bailing out people who are facing foreclosure is actually a bit of a poison bill. The point of the bail out is to stop the economy from having a train wreck and at $700 billion, the price tag is high enough.Of course, there is a third option to do nothing or to letting the economy go down the tank, based on proposals from the Republican Study Committee, Mike Huckabee, and personal finance guru Dave Ramsey. We’ll call it the Huckabee-Ramsey plan as a compositie of the three ideas:

1) Suspend the Capital Gains Tax for 2 years. Yeah, it’s really expensive and will run a deficit. But guess what, it’ll be a lot less expensive. The RSC says, “By encouraging corporations to sell unwanted assets, this provision would unleash funds and materials with which to create jobs and grow the economy.” Adds Mike Huckabee, “If Congress is going to lose money, let them lose it with lower taxes, not with public dollar bailouts of private market mistakes.”2) Authorize a temporary change to accounting rules to free the market up. Says Ramsey:

However, it (Sarbanes-Oxley) does make each company each day restate what their assets are worth if sold on the market. This accounting procedure is mark to market accounting–you need to remember that. It’s a good concept and keeps companies from having loaded balance sheets.However, it’s part of what’s caused this in the news now. Merrill Lynch was sitting with $30 billion are tied up in sub-prime loans with houses. Stupid! They get what they deserve for doing that, and I’m with you on that. Those houses didn’t become worthless all of a sudden because those people couldn’t sell their bonds. Since they couldn’t sell them, they basically gave them away for 22 cents on the dollar. Now do you think all those houses lost 80% of their value underneath that deal? No, they didn’t, so they gave them away for 22 cents on the dollar (about $6 billion total) because there was no market for them. Nobody wants to buy sub-prime bonds because they suck. They’re junk bonds. But at 22 cents on the dollar, it’s a bargain because even if you foreclosed on every one of the houses in there, you’d probably get $20 billion back out of $30 billion, and so the company that bought those for $6 billion got a deal! But there’s no market for them. That’s where these companies are stuck. They can’t sell this stuff, but accounting-wise, they’ve had to mark it down to market and it’s frozen the marketplace.

Economist Wesberry is saying that if we change that one rule and don’t force them to market down to market and just let them hold on to all the stuff, and say just on sub-primes for this period of time you can change that rule — a temporary change — that’ll free the market up. It’s seized right now; it’s frozen. This will thaw it out and get it going again. He says that’ll solve 60% of the problem … and I think he’s right.That one accounting rule is what made Merrill Lynch sell out. That one accounting rule is what’s driving other ones into the dirt. Would you rather let them change their accounting rule or loan them $700 billion for us to buyout their bad paper?

I think I’ll let them change the accounting rule, thanks. Huckabee goes even further and suggests a repeal of Sarbanes-Oxley, which ain’t a bad idea, but is perhaps beyond the scope of this situation. Ditto to the RSC’s proposed privatization of GSE’s

3) Cover Sub-Prime Mortgages with FHA Insurance

Again quoting Dave Ramsey:

Why don’t we just take the FHA insurance program and extend it across these sub-primes? What that means is that you and I are guaranteeing the lender that they’re not going to lose as much or any money on those mortgages. Now I don’t like guaranteeing them, but I like it better than buying them. In other words, instead of $700 billion in tax-payer debt going out there to bail out these companies, just extend the insurance out. You could probably do that for less than $40 billion. It’s like a 95% savings!

Ca-ching. With suspsending the Capital Gains Tax for 2 years and covering sub-prime mortgages with FHA insurance, even assuming it’s a Zero Sum result on the revenue base (which I doubt), this would probably end up costing less than the bail out and be better for the long-term health of the economy.

The problem is that it makes far too much sense to pass in this current Congress.