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Free Liberal: Coordinating towards higher values

Free Liberal

Coordinating towards higher values

If you're going to bailout anybody …

Money to the People!

by Fred E. Foldvary

As this articles is being written on Sunday morning, Sept. 28, 2008, Congress will soon pass the $700 billion bad-mortgage bailout requested by the executive branch. With a majority that includes both of the establishment political parties, the bailout will not become a partisan issue. Congress and the administration sought to finish an agreement before the Asian financial markets opened on Monday, as a crash there would again infect the US.

The purchase of mortgages by the government-sponsored enterprises, Fannie Mae and Freddie Mac, and their packaging and sale to financial firms, was supposed to provide safety via diversification, but when the whole real estate market crashes and many mortgages go into default, the slicing and packaging of bad mortgages instead becomes a financial waterfall.

With a real estate crash, financial insurance also fails. One type of debt insurance is called “credit default swaps.” Insurance companies, hedge funds, and others sold insurance for defaults, but did not have sufficient funds to back up that insurance against large losses. When the losses occurred, the firms collapsed.

American voters and taxpayers are angry about this biggest bailout in world history. Somebody who pays much of his income to a mortgage is justified in being outraged at the prospect of the government bailing out irresponsible financial companies while they struggle to make the payments. In response, Congress modified the proposal so that the government will obtain stock warrants, giving the federal government a share of the gains when the stock prices of the firms rise. There will also be an oversight board to supervise the program and some help for homeowners.

It is not clear whether there would be a financial catastrophe if the bailout were not passed. Credit is still available; millions of people are still using their credit cards. Businesses are still getting loans. However, it is true that many firms can’t obtain funds except at quite high risk premiums, or not at all. The credit markets are somewhat stuck, but maybe that is because lenders are waiting for the government to act.

Any plan that bails out banks and mortgages is going to favor some at the expense of others. Many who have been dutifully paying their mortgage payments, or fully own their homes, will not get any aid. If there is a major liquidity problem, and if government has to step in to prevent financial chaos, the egalitarian solution would be to provide money to everyone equally. Money to the people!

The US Treasury Department would print $1000 bills and give each American national (citizen or permanent resident) 6 of those bills, so $6000 in currency to each person. With 300 million Americans, the total would be $1.8 trillion. The egalitarian bailout would avoid more government debt, as it would be paid for by printing money rather than borrowing.

Everybody would report to their local post office and get six crisp $1000 bills after recording their names and IDs. Most folks would then deposit the funds into their bank accounts, and poof, the banks now have more money to lend out. People would use the funds to pay debts, buy stuff, and possibly invest in stocks. The stock markets would zoom up, and we would not be rewarding irresponsible financial chiefs.

Of course this would be inflationary, but that would have a benefit of reducing the real value of all debt denominated in US dollars. Lenders would lose some of the purchasing power of the loan payments they receive, but that is better than defaults.

It would require several weeks to set up the egalitarian bailout, as the government would need a data base of all US nationals, and it would take a few weeks to design and print the currency. But the anticipation of everyone getting $6000 could itself already unfreeze the credit markets.

However, this will not happen, as the mortgage bailout seems imminent. Once again, the real estate interests and their financial symbiants will get rescued from the folly of ignoring the inevitable real estate cycle. The real estate cycle is caused by government and gets rescued by government. This indicates the real purpose of government: to protect and subsidize the landed interests, including lenders who use land as collateral. Since land values periodically crash, the real interests need to be bailed out if they are to keep being protected. Meanwhile, worker-tenants pay not only taxes but higher rents to the landed royalty.

A government of the people rather than of the landed royalty would require either anarchism, so that all state subsidies to landed interests cease, or else the public collection of all the economic rent, and its equal distribution to the people as cash or as civic services. That rent would replace all punitive taxation, would eliminate recessions and depressions and poverty, and would remove the suffocation of enterprise now taking place. But the very system of land royalty also controls education, so few will learn the right lesson from the great real estate crash of 2008.

This article first appeared in the Progress Report, Reprinted with permission.

Dr. Fred Foldvary teaches economics at Santa Clara University and is the author of several books: The Soul of Liberty, Public Goods and Private Communities, and the Dictionary of Free-Market Economics.

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Constituent Rebellion Now!

Millions wrote and called to say No! and still the Senate said Yes? It is time for a housecleaning! Time to show them that they work for Main Street, not Wall Street.

Based on quick analysis, it looks like there are 2-4 Senators who voted Yes who are in tight races, and 3 or 4 more who are vulnerable.

In the House, the analysis is similar, 7 or 8 vulnerable races where a little bit of influence might make all the difference.

Targeting these so-called representatives of the people, with print and radio ads highlighting their betrayal, could really make an impact on their chances for re-election -- and put the fear of constituency back into the Washington elite.

Are you interested in making it happen? There isn't much time before the election, so it will take funds and effort. Can you participate by offering time, skills or funds?

Let us know.

Contact the Constituent Response Team at

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