My $5 Billion Idea

It took the U.S. government 200 years to finally spend $700 billion a year. It took Treasury Secretary Henry Paulson a few days to propose spending this much to buy bad mortgages and George Bush a few hours to say yes. I have an idea for propping up mortgage markets – and by extension financial markets - that might be less expensive.

George Bush wants to spend another $700 billion of your money. And he needs you to agree to this now - this week. [This with the rest of the week's new spending is equal to about $1.3 trillion. If you are not outraged you are not paying attention.]

How much is $700 billion? To put this in perspective, it was not until 1982 that Reagan approved a federal budget of more than $700 billion (and not until 1985 that he collected revenues greater than $700 billion).

This is more than we spend on all categories* of discretionary spending except for defense.

It seems to me that when a salesman tells you that he needs you to commit to $700 billion (or more) by the end of the weekend, you might be getting rushed into a deal that can't stand much scrutiny.

The economy could slow as a result of financial markets, but it won't be immediate. Call me an idiot, but I don't know why we have to act this week in order to stem economic slow down. In fact, I think that another $700 billion in deficit spending might do as much to hinder economic growth over the next few years as stimulate it.

I'd like to make a more modest proposal. I have an idea that could save you (the American taxpayer) hundreds of billions. Maybe. (And all I ask is 1% of the savings – hence the “$5 billion idea” post title.)

The Bush / Paulson idea is to buy about $700 billion in mortgages, propping up a market that could take down broad swaths of American financial markets. One problem with this plan is that it'll likely drive up the price of mortgage securities - which will make the bailout even pricier. There might be a cheaper way to do it.

When Walt Disney wanted to establish Disney World, he set up a secret company that bought individual farms. Had the farmers all known what Walt was up to, he would have paid a multiple of what he did. Why not do something similar to prop up the mortgage and financial markets?

The Treasury Department could buy mortgage securities, but no one would need to know how much they were going to buy. Prices would stabilize, perhaps even rise a little. And the government could buy a small amount or large, depending on the performance. Everyone would know that the government was going to intervene, but no one would know how much they were going to buy or when. Knowing that the government was intervening should keep markets from tanking; not knowing by how much should keep markets from artificial highs that will just cost taxpayers more and would still need eventual correction. (This would basically be like monetary policy in government bond markets temporarily extended to include mortgage-backed securities.) And this would give the policy makers time to assess this situation and perhaps devise a better plan.

It could be that the government would need to spend $700 billion anyway, but this is not a foregone conclusion. And at a minimum, this would give the next president some room to maneuver. A new bill that increases discretionary spending by 75% in a single week would basically make it impossible for the next president to do anything of consequence – whether it is Obama’s plan for expanded health care or McCain’s plan for more tax cuts. (Which may well be what they want.)

Rushing into this bill seems too reminiscent of rushing into the invasion of Iraq. No one has convinced me that the Paulson / Bush plan is the best option or that it needs to be enacted before it has been scrutinized.

Oh, and I promise that if I do get the $5 billion finder’s fee, I’ll host a most bodacious party for you R World regulars. It may involve renting a small Caribbean island and about 3 months of snorkeling, sailing, and deep and silly conversations.


[*More than all categories combined. That is, the money we spend on the executive, legislative, and judicial branches, small business administration, the corps of engineers (which didn't have enough money to properly protect New Orleans from Katrina), the national science foundation, commerce department, environmental protection agency, social security administration, the departments of interior, labor, treasury, transportation, agriculture, justice, energy, state, homeland security, housing and urban development, veterans affairs, education, and health & human services, and NASA - combined - is less than what Paulson and Bush would like to spend on bad mortgage debt.]