After committing over $7 trillion into the finance sector, the market continued to fail and the economy heading downward. If just $2 trillion of the $7 trillion the government has so far committed for the financial sector were to be channeled directly to the unemployed, each worker would receive $200,000 (the equivalent of four years at average wages) to tie them over their jobless phase to kick-start the economy.
The same amount would support for one whole year 40 million middle-income families with an annual income of $50,000. If government funds were directed towards people rather than institutions, consumer demand will revive immediately and companies will sell again to make profits. The recession will end within 18 months.
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There’s one little problem with this analysis. The $7 trillion committed to the financial sector thus far is BACKED BY ASSETS. We can debate the quality and value of the assets, but at least there are assets there. When you give $2 trillion to a group of folks – with no assets in exchange – you’ve just got a $2 trillion hole in your balance sheet. The first stimulus package ($300 billion) went directly to the consumer. This second proposed stimulus package ($500 billion?) will go less directly to the consumer, but will get there in a roundabout way.
Now, if the government decides to write checks directly to folks, then so be it. (And, in fact, if mortgage balances are reduced by fiat then this is doing just that. And the numbers will likely be a couple of trillion dollars.) But don’t be confused – that’s a lot different than putting up money backed by assets.
Finally, if there’s no financial sector, there’s no economy for all intents and purposes.
Again, we can debate what the right mix is between sending money directly to taxpayers and taking on debt backed by financial sector assets. But let’s at least distinguish between the two. Otherwise we can’t have a coherent discussion about the options.
As a thought experiment, I propose the following. There’s a family earning$75K/year. Family has a $250K mortgage. Freddie lowers principal due to $175K and lowers the interest rate. Govt. backs Freddie, so this is a direct hit to govt. (and taxpayer). What’s the difference between sending this family $75K straight from Washington, and reducing their mortgage balance by $75K through a principal reduction plan? There isn’t any. Trust me, a whole lot of middle class (and other) yahoos are going to get the equivalent of a huge stimulus payment courtesy of Uncle Sam (and the taxpayers) once these mortgages start getting re-underwritten. Therefore, I question the wisdom of just sending everyone a check.
