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September 29, 2008

BAILOUT BABYLON

So, we DON'T have a deal.

Actually, I'm glad. My dear departed Old Man said many times in his life, when reflecting on wasteful or frivolous spending, "What this country needs is a damn good Depression!"

The Chief and I came to pretty much the same conclusion while chewing the fat after work tonight.  The Chief is an experienced and astute businessman, one who has both won and lost risking his own money. We concluded that maybe it's time we learned to live our parents lifestyle for a while. Our cars should last us 8-10 years, not 3 or 4. We should skip the fancy built-in BBQ, the French doors, and other unnecessary upgrades on the house that we used to finance on a whim against diaphanous home equity. We need to save and invest conservatively, rather than speculating on stuff we don't know.

OK, fine, belt-tightening, sure. But what's my big idea to fix all this? People who know me know that I don't shy away from grandiose pronunciamentos that I nevertheless realize could never come true. But the process of talking them through is sometimes amusing and always instructive. What brought this next idea out of the fog and into the light was something the Chief said, which he learned from his Old Man - invest only in things you know and understand - stay away from things you don't know.

In that spirit, I offer this scenario:

Assume we go another two days (which is the current plan) with no action from Congress. Assume also that during this time, we have a stock market meltdown of Biblical proportions. We lost 750+ points today after the deal tanked. Lets say we double that tomorrow, and double it again the day after - 1,500 points followed by 3,000 - putting us at about 6,000 at the close of the market Wednesday - a loss of about 50% from the historic high.

Now everybody knows the assets behind the market are worth more than that, just like everybody knows that the assets behind the distressed sub-primes and Mortgage Based Securities are actually worth more than what the buyouts and  takeovers have reflected. The now-failed Fed bailout was designed to allow the market players the time and cover they needed to confidently restate the core values of these assets by covering the really bad investments with Fed credit in the meantime.

Problem is, bringing the government into this process is creeping socialism, making it easier for the next time, encouraging politicians to become managers and arbiters of who wins and loses in the market. This is the way Europe works. All the big-money sectors in the EU - finance, health care, pension, insurance, etc - are run by the government, through which they control everything else. It's why they have 15% unemployment - it's cheaper and simpler to warehouse people like farm animals rather than finding them jobs and making the productive. It's also why they prefer their negative birth rate demographics - fewer kids, less money on schools, housing, etc. With the exception of immigrants, they are rapidly evolving into a nation of bachelors and spinsters, soon to disappear as a people entirely, replaced by the "asians" from India and the Middle East.

No thanks.

Now since the property re-assessment can't happen in the next two days, the bailout won't ever be needed. And, even better, neither will Congress. After the crash, the market can take all the time it wants to re-establish believable asset values. But the downside is that cash, credit, jobs, sales, purchases, shipments, etc. will all grind to a halt while panicked buyers and sellers enter the financial thunderdome to battle over the core values. And every news camera and microphone in the country will be in front of some sob-sister singing the blues about how she lost her house that she had no business buying in the first place.

So I propose that the President and his advisers pick a Dow number - let's say it's 7,500 - at which point Bush declares a national emergency on his authority as President, and orders the equity markets closed until Monday the 6th. (Can he do this, legally? Yaddoknow - but I'm assuming he can - he could invoke FDR for cover - that'll piss everybody off).

He then picks a small group of advisers that he knows are competent, and who he trusts to tell him the truth. I would suggest, among others, turnaround expert Mitt Romney, and ecomomists Walter Williams and Thomas Sowell, and wire-puller extraordinaire Newt Gingrich (no admirer of Bush) .  They should make a short list of essential market sectors that are fundamentally sound, and then announce that the Fed will provide all the liquidity needed to keep these operations moving. Those markets, and the banks and financial institutions that support them, will open Monday.

This would include agriculture, manufacturing, transportation, retail and most private services - everything essential to life and growth. The panel of advisors would make judgments on a case-by-case basis. Remaining frozen would be real estate, stock market, insurance companies, and other credit based or real-estate based industries. Basically, anybody not spending their own money on day-to-day living activities. No new mortgages, stock trades, buy-outs, M&A, etc. Consider it a big “Time Out” for a misbehaving child

He will also furlough at reduced wages all non-essential Fed employees, and urge the state governors to do the same. Since the Fed is already on a continuing budget resolution, he can keep this going as long as needed to save cash. I believe it should last through Christmas and into New Year, giving all the non-productive federal employees a taste of what the rest of the market economy has always lived with - layoffs and uncertainty. This will also demonstrate that he is serious about concentrating on a fix above all other non-essential activities. The sooner the fix is done, the sooner everybody comes back to work.

In the three months between now and New Year, the advisors will evaluate and re-set all real property values, essentially assessing and benchmarking the core value of every private property in the country. They would work with the insurance companies (who already know pretty much everything needed about all properties) and look back in recent history (back before sub-primes were authorized by Fannie Mae - around 2003) - and find a point in the history of each market where the property values were well substantiated.

The Chief was especially good about how to do this right - start with  the raw land value (determined as explained above) then add the cost to replace the building and landscape - essentially, the dollar amount the insurance company would have paid for the improvements on the land had they been wiped clean.  An inflation factor would then be added to this value to establish a mid-point market value in current dollars.

Once this benchmark value had been established, all properties that had performing mortgages, or were owned outright, or were otherwise not financially distressed, would be re-assessed at these values, and then released back to the market for sale, refinance, etc. on Jan 1, 2009.

However,  new mortgages on these properties could be offered only under rigidly conservative formulas, what used to be known as  "compliant" with the reasonable Fannie Mae rules in the 80's - let's say 25% minimum down payment (75% max loan to value), with income verification so that the loan & property tax payment is no more than 25% of gross income, etc. Mortgages outside these parameters would be considered strictly speculative, and ineligible for financing through financial institutions, only through individuals.

For all the non-performing properties, the team of advisers will come up with a selection of settlement packages from which the interested parties will have to choose – convert mortgages to leases, straight foreclosure at reassessed value, market auction, etc. Anything except a new mortgage to the current non-performing owner. Any proceeds from auctions, foreclosures, leases etc would be shared pro-rata by all interested parties.

So if Mr. Slick Investment Banker is holding paper with a face value of $500K for a ¼ interest in a property now bench marked at $200,000, he can chose to convert it to a ¼ participation in lease income, or auction proceeds, or take it as a loss in foreclosure. Note – only the re-assessed value will be eligible for losses, not the original paper value.

Once this mess is completely brought to current status, the team of advisers steps down, and the emergency is declared over. With everybody involved focused solely on getting this done, this process should be complete by New Years, and the market goes back to normal.

Bush has nothing to lose doing this. He’s a lame duck, with no influence on the election, and couldn’t be hated any more than he already is. This would be a great service to the country, and would be a fitting capstone to his otherwise pretty good presidency.

With Bush handling the financial problems, the people can concentrate on the causes of the problem, and focus on electing those who will not repeat it. This would be a golden opportunity for McCain to step up and promise to do the same thing with Social Security and pension funds, which are a problem many times greater in magnitude than this credit crunch.

But he won’t. Obama will win, the socialists will make their play to create a managed economy, and the ensuing political war will finally allow us to throw off the burdens of the New Deal, the Great Society, and the madness of the political & media elites.

Or maybe it’ll be the 1930’s all over again - Hobo City for 10 years, and then a world war with China.

God help us all.


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