Back in September, the journalist Jim Pinkerton picked up one of Mallory Factor’s ideas for an alternative bailout and discussed it extensively online and on Fox News. Factor is a financier, financial writer, and founder and co-chair of The Monday Meeting, a nationally-recognized monthly gathering of elected officials, journalists, writers and conservative leaders in New York City. Although not a proponent of bailouts, Factor believes that this plan—to bail out homeowners to get the credit markets and housing markets working again—would be better for America than the bailouts proposed by Congress. Factor proposes that any qualified buyers who want to buy or refinance a house could get a 30 year bank mortgage guaranteed by the government with an interest rate of 3.5 to 4 percent. Because the US government can issue 30 year Treasuries at low rates right now to back the mortgages, the plan would not cost the government much at all. Now this idea has been picked up by Senator Mitch McConnell as a proposed.
“With the Federal Reserve’s policy decisions, TARP (Troubled Asset Relief Program) and the new stimulus bill, America is experimenting in so many directions that it becomes difficult to predict our economy’s future,” We might find a way out but we have to realize that such experimentation carries “enormous amounts of unintended consequences.”
For individuals, explains his wife, Elizabeth, who designed complex financial products for an investment bank and was a tax specialist in derivative products at an international law firm in New York City before moving to Charleston, “People need to take defensive positions in their finances and prepare for the future in diversified ways. The pace of this crisis is extremely rapid, and people must consider all the possibilities. A year ago, few people thought we were heading toward a major breakdown in our economy; unexpected things have happened and unexpected things will continue to happen.” She notes that this makes it very difficult for anyone--no matter how expert in financial matters--to know what to do with their money right now.
Her husband adds, “The future will require drastic cutbacks. Eventually we will have to inflate our way out of this crisis. Modest inflation is considered healthy for modern economies. Rising inflation benefits the borrower because the dollars they have to pay back are worth less than the dollars they borrowed. So, inflation would benefit people who have mortgages and other debts. And of course, inflation would benefit the United States which is a huge debtor and would harm those that hold U.S. Treasuries such as China and the Arab oil states.”
“The U.S. government will also have to change its spending polices and objectives,” Factor continues. “We are living in a tough political time because the steps that need to be taken are extremely painful, and leaders (and I’m not just talking about President Obama) don’t want to take these hard steps on their watch. Something however, will have to change soon. For example, our government will probably perform fewer feel-good humanitarian projects in the future—particularly abroad—because people will not be as happy about paying for them.”
“Occupancy in hotels is only up in one place in America—Washington, DC, Factor further observes: Government is growing while the economy is shrinking. This is not good for our economic future because growth in our government doesn’t really make our economy healthier or create new goods. It does, however, increase our Gross Domestic Product—but only because of the fallacy of the “broken window.”
The parable of the “broken window” was first explained by French economist FrÃ©dÃ©ric Bastiat in 1850. For the modern economy, this parable teaches that if I break the windows of my neighbor’s house and he pays another neighbor to come and fix the windows, the nation’s Gross Domestic Product will actually increase—but no meaningful increase in our nation’s assets will have occurred. At first, it seems that the economy benefits because the neighbor that was paid to fix the window now has more money to buy things. But this observation is a fallacy because it ignores the fact that the other neighbor had to pay him for the repair—and so, has correspondingly less money to spend as a result.
Of course in this complicated day and age, I expect that my neighbor would actually hire illegal immigrants instead of domestic employees for his local window fixing business. After government officials on government salaries shut down my neighbor’s business for employing illegal labor, the neighborhood representatives would then ask for government subsidization of a new window fixing company along with welfare and housing for the now unemployed migrant workers. The new window fixing company would then be forced to unionize and its workers forced to pay union dues, requiring even further government subsidization to keep the company in business. I would then sue my neighbor for the cuts I sustained breaking his windows employing two teams of lawyers and clogging up the entire government-funded legal system. But that’s my insight, not the Factors’.
The Factors believe that one problem with TARP is that the billions of dollars that are going into stabilizing the banks are replenishing the banks’ regulatory capital—instead of creating additional lending which would stimulate the economy. While replenishing their capital is necessary to keep these banks going, Factor notes that the consequence is that “TARP dollars are not stimulating anything.” Nor do the Factors expect the stimulus bill to actually stimulate the economy much since only a reputed 12 cents of each dollar to be spent by the bill can be considered real stimulus—the rest is pork.
The Factors also note that there is a regional aspect to the current financial crisis that the media has not focused on much. The Factors explain that we need to keep in mind that TARP and other federal bailouts are to some extent wealth transfers from states like South Carolina to New York and the rust belt. They explain, “TARP is bailing out mega banks principally in New York. This is great for New York because New York City will be able to keep more financial jobs. But is very costly and not so beneficial to states like South Carolina. Same for the bailout of the U.S. auto industry which is a subsidy for union jobs in northern states.” Of course, South Carolina will receive some spoils of the stimulus bill, but the cost of the bailout would be much greater than any benefits coming in.
About the coming changes, Factor offered this final insight, “The financial world will begin to look more like it did in the 1950s. People will have to become more self reliant, more responsible with their economic behavior. Fewer people will buy that extra house, that extra car, hold the super-large wedding or take that extra trip.” He concluded, “For many people, these cutbacks will bring a return to simplicity in their lives. And that will not be all bad.”
This article was first published in The Charleston Mercury on February 12, 2009. www.charlestonmercury.com