Who gets bailed out?

Well, the legislators are hard at it over the weekend, and it looks like they are on a path to a solution.  I hope so.

The bailout operation seems to have several distinct areas, and they can each be considered separately to a certain extent.

The primary need is to provide short term loans to businesses, which requires a massive infusion of capital.  However, this money would fund profitable loans, so it would not be a total loss.  It would be an actual investment.

Next there are the mortgages.  There are two groups of borrowers.  Those who took out reasonable loans but got caught by developments.  We should do something to help those people.

There are those who took out mortgages that they had no home of supporting, that were just gambling on housing prices. They cannot afford the homes they are living in, and we should just let them lose their homes.  Let them walk away from them, no strings.

Now we have the banks that made the loans.  They had no business making the bad loans, so if they are still holding the paper, they should get the foreclosed homes, with no claim for the upside-down shortages.

Most of  those loans were packaged, though, and the banks are no longer involved.  It’s the people and organizations that are holding the paper that we need to consider.  Basically, we need to let those investments find their own level.  The big investors should, at least in theory, have exercised due diligence, and figured out that there was a problem.  It is my understanding that there were plenty of warnings about these investments.  If there are small investors with these securities, they should have been part of a diversified portfolio, and so they will have to accept the loss, too.

What about the managers that created the problem?  First of all there is no reason they should keep their jobs.  In a normal situation, they would be out the door, and there is no reason to treat them any other way.  What about their bonuses and severance payments?  Bonuses?   Zero.   Severance payment?  I don’t know how the contract are written, but I would be surprised if people dismissed “for cause” are entitled to severance pay.  Certainly there is cause to let them go. I suspect none of them will suffer to much if they don’t receive their expected bonuses and severance pay.

So, the main thing, to keep the wheels of commerce greased is to provide the short term credit needed for day-to-day operations.  I believe that requires a whole lot less than $700 billlion.

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