Monday, October 3, 2011

Rough Choices

While there is no shortage of half-baked solutions for our trouble economy out there, I should add a few to the mix:

1) Identify the bad mortgage loans currently on bank books, and offer a deal to the current holders of the loans--the Federal government will pay off a third of each loan, provided that the borrower pay off a third and the lender writes down the final third. Pros: this helps spread the pain among the three parties, and also enables the bad loans to be done away with freeing up the borrower and lender. This would be the least bad of all existing alternatives, allowing the housing recovery to come a bit sooner and helps out down on their luck borrowers and wobbly lenders. Cons: the government is already running massive deficits and paying off a third of the bad mortgages would still be expensive. This also wouldn't make banks more likely to lend down the road, having taken a loss on these loans. There's also the moral hazard of subsidizing banks and borrowers who took these risks that didn't pay off.

2) Tear down unsold inventory in overbuilt areas. Pro: this clears up the glut in supply, allowing natural market forces to reach a higher price floor. Plus, the unsold empty houses will become health hazards and public nuisances if left idle too long. Better to take them down so housing can recover. Con: this still costs a lot of money, and seems like a waste of otherwise useful housing that could be put on the market for renters or bargain hunters.

3) Create a financial regulatory oversight board to regulate every sort of financial transaction and entity involved in the lending or investing of money. Pros: a single regulatory body with a broad mission can identify predatory practices, frauds, and excessively risky ventures and prevent the industry from repeating the mistakes made in recent decades that culminated in the financial collapse. Cons: one thing our financial industry suffers from is not a lack of regulators. There are currently five different agencies that regulate banks at the federal level, and of course every state has a bank regulator. The problem instead was the fact that so much financial leverage was based on a widely-held assumption that real estate could never crash in a big way. This is why everyone--from government regulators, to lenders, to borrowers, to consumer advocates--favored increased lending in this area. This is always the way with bubbles, and you can't regulate away irrational decisionmaking.

4) Completely replace our current tax code with a simpler code with lower rates, few deductions, etc. Pros: this would reduce inefficient or counterproductive behavior by high earners (taking losses, business expenses) and lower earners (taking out a mortgage when rent is cheaper), also making the tax code easier to follow and enforce, and prevent the perverse result of very rich people paying very low percentages of their income in taxes. Cons: the code is complicated for a reason. Income is defined in many different ways, and deductions and exemptions are in place because certain behavior is to be encouraged (investing in capital, buying municipal bonds, paying for a child's education). As for "fairness", the truly wealthy will be able to find a way to legally shield their income from taxation one way or another, as they have done so even during times of much higher tax rates. It's worth it to them to find a way around the code.

5) Big cuts in spending. Pros: a government spending less means reducing the deficit, which is good for the bond market, decreases our government's own borrowing costs, and better prepares us for emergencies down the road. It also prevents the need to raise taxes, which would stifle any economic recovery. Cons: while some government spending is more "important" than others, there's not much that can be cut that won't have a severe impact on the economy. Infrastructure spending enables the free flow of commerce, farm spending helps keep our agricultural sector strong and stable so we can have abundant cheap food, and defense spending keeps our military better than any other. While entitlement spending is enormous, even modest cuts will mean pain for a lot of individuals as well as a reduction in their consumer spending. Any way you cut it, there's going to be a negative effect on the country with these cuts.

So, not a lot of great choices out there. But unfortunately this can't all be reduced to a bumper sticker.

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