Green the Bailout
September 28, 2008
New York Times Online
By THOMAS L. FRIEDMAN
Many things make me weep about the current economic crisis, but none more than this brief economic history: In the 19th century, America had a railroad boom, bubble and bust. Some people made money; many lost money. But even when that bubble burst, it left America with an infrastructure of railroads that made transcontinental travel and shipping dramatically easier and cheaper.
The late 20th century saw an Internet boom, bubble and bust. Some people made money; many people lost money, but that dot-com bubble left us with an Internet highway system that helped Microsoft, I.B.M. and Google to spearhead the I.T. revolution.
The early 21st century saw a boom, bubble and now a bust around financial services. But I fear all it will leave behind are a bunch of empty Florida condos that never should have been built, used private jets that the wealthy can no longer afford and dead derivative contracts that no one can understand.
Worse, we borrowed the money for this bubble from China, and now we have to pay it back — with interest and without any lasting benefit.
Yes, this bailout is necessary. This is a credit crisis, and credit crises involve a breakdown in confidence that leads to no one lending to anyone. You don’t fool around with a credit crisis. You have to overwhelm it with capital. Unfortunately, some people who don’t deserve it will be rescued. But, more importantly, those who had nothing to do with it will be spared devastation. You have to save the system.
But that is not the point of this column. The point is, we don’t just need a bailout. We need a buildup. We need to get back to making stuff, based on real engineering not just financial engineering. We need to get back to a world where people are able to realize the American Dream — a house with a yard — because they have built something with their hands, not because they got a “liar loan” from an underregulated bank with no money down and nothing to pay for two years. The American Dream is an aspiration, not an entitlement.
When I need reminding of the real foundations of the American Dream, I talk to my Indian-American immigrant friends who have come here to start new companies — friends like K.R. Sridhar, the founder of Bloom Energy. He e-mailed me a pep talk in the midst of this financial crisis — a note about the difference between surviving and thriving.
“Infants and the elderly who are disabled obsess about survival,” said Sridhar. “As a nation, if we just focus on survival, the demise of our leadership is imminent. We are thrivers. Thrivers are constantly looking for new opportunities to seize and lead and be No. 1.” That is what America is about.
But we have lost focus on that. Our economy is like a car, added Sridhar, and the financial institutions are the transmission system that keeps the wheels turning and the car moving forward. Real production of goods that create absolute value and jobs, though, are the engine.
“I cannot help but ponder about how quickly we are ready to act on fixing the transmission, by pumping in almost one trillion dollars in a fortnight,” said Sridhar. “On the other hand, the engine, which is slowly dying, is not even getting an oil change or a tuneup with the same urgency, let alone a trillion dollars to get ourselves a new engine. Just imagine what a trillion-dollar investment would return to the economy, including the ‘transmission,’ if we committed at that level to green jobs and technologies.”
Indeed, when this bailout is over, we need the next president — this one is wasted — to launch an E.T., energy technology, revolution with the same urgency as this bailout. Otherwise, all we will have done is bought ourselves a respite, but not a future. The exciting thing about the energy technology revolution is that it spans the whole economy — from green-collar construction jobs to high-tech solar panel designing jobs. It could lift so many boats.
In a green economy, we would rely less on credit from foreigners “and more on creativity from Americans,” argued Van Jones, president of Green for All, and author of the forthcoming “The Green Collar Economy.” “It’s time to stop borrowing and start building. America’s No. 1 resource is not oil or mortgages. Our No. 1 resource is our people. Let’s put people back to work — retrofitting and repowering America. ... You can’t base a national economy on credit cards. But you can base it on solar panels, wind turbines, smart biofuels and a massive program to weatherize every building and home in America.”
The Bush team says that if this bailout is done right, it should make the government money. Great. Let’s hope so, and let’s commit right now that any bailout profits will be invested in infrastructure — smart transmission grids or mass transit — for a green revolution. Let’s “green the bailout,” as Jones says, and help ensure that the American Dream doesn’t ever shrink back to just that — a dream.
The bottom-up bailout: Pay off all delinquent mortgages Helping average Americans fixes fundamental problem
Oct. 1, 2008, 10:02PM
By JONATHAN G.S. KOPPELL and WILLIAM N. GOETZMANN
The theory underlying the bailout plan stalled in Congress is that rescuing the finance industry will restore market stability and that the benefits will eventually trickle down to average Americans. Thus, solving the subprime mortgage crisis has morphed into a much larger challenge: reassembling the architecture of the financial markets, which seemingly requires giving the Treasury secretary nearly a trillion dollars and extraordinary latitude to pick winners and losers.
There is an easier and more politically palatable fix: Pay off all the delinquent mortgages.
The financial crisis is a liquidity crisis, yes, but it is ultimately a product of homeowner failures to pay. Unless this fundamental problem is fixed, we will continue to see — and need to treat — the symptoms. The proposed bailout ignores this. Yet the sum being demanded from taxpayers is almost certainly more than sufficient to pay off all currently delinquent mortgages.
If the government did this, all the complex derivatives based on these mortgages would be as good as U.S. Treasuries. Their fair value would jump to 100 cents on the dollar, rescuing teetering financial institutions. The credit markets would be resuscitated overnight. Foreclosures would stop.
Some will argue that it is grossly unfair to pay off the mortgages of borrowers who took risks and lost. In other words, why should my profligate neighbor be rewarded for overleveraging himself?
Because such unfairness is a small price to pay to avoid a rapid transition to a socialist economy, the collapse of our financial system (and its related global implications) and a frightening shift of economic power toward the executive branch. Why shell out $700 billion to Wall Street deal makers and the companies they managed into this mess? Wouldn't it be preferable for individual homeowners to benefit directly?
Implementation could follow the example of the Home Owners' Loan Corp., which in the 1930s issued new mortgages to a quarter of American homeowners. The government could offer to refinance all mortgages issued in the past five years with a fixed-rate, 30-year mortgage at 6 percent. No credit scores, no questions asked; just pay off the principal of the existing mortgage with a government check. If monthly payments are still too high, homeowners could reduce their indebtedness in exchange for a share of the future price appreciation of the house. That is, the government would take an ownership interest in the house just as it would take an ownership interest in the financial institutions that would be bailed out under the Treasury's plan.
All this could be done through the Federal Housing Administration, with the help of Fannie Mae and Freddie Mac, which have the infrastructure to implement this plan rapidly. An equity participation structure would prevent thousands of foreclosed homes from being dumped on a strained housing market and would allow prices to reach a new equilibrium that is based on realistic demand for houses rather than on easy money or impending foreclosures.
Like the administration's proposal, this plan would result in the government owning assets. But these assets would be real estate, not complex derivatives whose true value would take weeks to discern. Homeowners would become partners with the government in resolving the crisis.
When Congress returns today, lawmakers are likely to modify and then pass the administration's bailout proposal. They should consider ways to implement this bottom-up solution. Combining this approach with the government's proposal could greatly benefit taxpayers. Yes, the government's swift purchase of illiquid securities would stabilize compromised financial institutions and the credit markets. But the notion that taxpayers would benefit in the long run is pure speculation, particularly if the government overpaid for the securities. On the other hand, once a government-sponsored refinancing wave kicked in, the full value of the securities in the government's portfolio would be restored, and they could be sold off in an orderly manner, with Uncle Sam taking profits that would cover the cost of the bailout.
The public is rightly concerned that the administration's bailout would benefit only powerful financial institutions. No matter how it's done, rescuing the financial system is a large, complex gamble.
This solution would start by helping ordinary Americans and would quickly spill over to revive the financial markets. Directly addressing the underlying cause of the crisis would help ensure that we would not be facing the same crisis again down the road.
While Wall Street has only recently felt the bite of foreclosures and delinquencies, communities across the nation will face greater financial and social fallout if the foreclosure crisis continues.
Koppell and Goetzmann are professors at the Yale School of Management. Koppell is director of the Milstein Center for Corporate Governance and Performance and Goetzmann directs the International Center for Finance. This article originally appeared in The Washington Post.