“Much Like the War Bonds of the 1940s”
By David Himebrook I begin with the assumptions that a bailout of some sort is necessary and that $700 billion is the correct amount needed to stabilize the system. The current alternatives being discussed are considered government bailouts. They would be more accurately described as taxpayer bailouts under which the taxpayers have nothing to show for their participation other than a functioning financial system. My proposal calls for a government "facilitated" indirect program to be funded primarily by the American tax-paying public.
In general it would work as follows. The Federal Reserve would purchase the securities in a manner consistent with existing plans. All securities would be placed in a pooled structure. All taxpayers would then be able to purchase units of the pool at the price consistent with that paid by the Federal Reserve. These units would be marketed much like the "war" bonds of the 1940's to finance the war of survival for our financial system. A patriotic duty to participate.
In order to enhance the attractiveness of this investment the government would allow a one-time contribution of up to $100,000 per taxpayer to a tax-free, IRA-like account to fund the purchases. These contributions would be fully deductible for federal tax purposes over five years without restriction.
These securities would be hold-to-maturity in nature with the only cash flows coming from collections of the underlying pooled securities.
If only the top 5 percent of taxpayers participated to the full extent the program would be nearly 100 percent privately funded. It would be hoped that taxpayers at all levels would participate giving them a feeling of direct participation in the solution and an improved national savings rate.
Under this proposal the opponents who claim the government is bailing out "Wall Street" would lose standing as most funding would be private and voluntary. For those who think the government actually stands to profit from the ultimate collection of these securities, this plan would allow those profits to flow through directly to those individuals who contributed to the solution in direct proportion to their contribution. For those who think individuals wouldn't buy these worthless securities, let them know that we the taxpayers are buying them under any solution, the only difference being whether or not we have something to show for our purchase. If the securities prove worthless then that loss will be born by those who made a voluntary decision to participate.
From the government perspective, the forgone tax revenue on the IRA-like contributions seems to be a small concession for a direct funding by U.S. citizens.
Let’s recognize some bailout is necessary and try to structure it in an optimal fashion that is not just lose/lose for the taxpayer. The appropriate pricing for the “junk” securities from the financial industry remains an issue but no more so under this proposal than under others.
David Himebrook is a partner with Arbor Capital Management in Minneapolis.
September 26, 2008 |
