Agenda for the Generous Trillionaire
Let’s say you are a trillionaire with a social conscience. You see the disaster afflicting the US economy, and spreading rapidly throughout the world. You want to make a difference, but how?
If you’re a trillionaire, you probably have people on your staff who know something about financial markets, business cycles, and tax policy. And you probably have some experience making deals with strong and weak businesses.
Everyone’s clamoring for help. The banks say credit will freeze up if you don’t shell out. The auto makers say millions of jobs are in jeopardy if they don’t get some free money. But you know that when they get the money, they use it to pay themselves first, and then to fatten their companies by acquiring weaker players. If there’s anything left, they might just do what they promised to do.
Surely major investors don’t put up with that kind of crap. Venture capitalists don’t just give money away — they demand a big share of the company, seats on the board of directors, and guarantees of how the recipient of their largesse will behave. An investment bank like, oh, say, Goldman Sachs doesn’t just drop money in the box either — it looks at balance sheets, income projections, and detailed evaluations of how the company manages its core business. You’d think Hank Paulson would remember some of that when he’s investing the taxpayers’ money.
So when our trillionaire gets into the picture, what does it do? Well, if its chief operating officer is Hank Paulson, it takes the money and ignores the strings attached, and hands out billions without even disclosing where the money went. If its board of directors is a Congressional committee, it postures, pleads for special favors for the districts of the committee members, and largely fails to understand what it is doing or rein in its rogue manager.
Republicans have long insisted that government should operate like a business, but when they get the chance to do so, they ignore all their business training and throw money into one bad deal after another. Evidently clearer heads are required.
The first thing to do is to get an accurate picture of what is going on and where the economy is headed if no intervention occurs. Clearly the financial industry is in trouble, but there are two kinds of trouble: that which impacts individual companies, and that which impacts society. It is the latter on which our attention should be focused. Unregulated greed led to imprudent behavior fueled by the apparent ability to externalize risk to a level approaching 100%. This was so astonishingly brilliant, it’s no wonder their executives were compensated so handsomely. They deserved everything that was coming to them, but the nation did not deserve the consequence: a broken commercial credit system and a system of private homeownership that has left millions destitute and simultaneously laid low thousands of private and public pension plans.
The auto industry’s problems are of a different order entirely; those companies operate on very long timelines and their troubles originated in decisions they made years ago. Car makers have lost sales for several reasons: production of gas guzzlers, a distribution network that forces prices up to generate profits for dealers, and of course a drastically reduced ability of consumers either to buy cars or to get car loans. Although the effects of a depressed auto market will be serious, they are not different in kind from the experience of many other industries that either sell big-ticket items to consumers or supply the basic materials with which those goods used to be made. If Detroit firms went through Chapter 11, they could cut back on dealerships or even sell direct to consumers at the factory (as they once did, many years ago).
In each of these cases, our trillionaire needs to make hard decisions about what kind of concessions it needs to extract from those it assists. This is not unfair; people who receive unemployment compensation are required to look for work, and those who receive food stamps are required to spend them on food, not lottery tickets. Nor is it analogous to government regulation which is imposed on an unwilling industry; these companies are begging for our money.
What’s the best way to unstick the credit system? We could open our own bank and lend money directly to businesses and individuals, in competition with the private banks. They’re skittish about lending money right now; our trillionaire sees social value in taking those risks when they are needed most. If we decide instead to funnel our money through existing banks, it’s entirely legitimate to tell them they have to run the way our state enterprise would run: low executive pay, a requirement to shove money into the credit pipeline, and restructuring of consumer loans to put individuals back on their feet. And no mergers, dividends, stock buybacks or expensive “conferences” for the duration.
And what do we want from the auto makers? Most of the above, plus retooling the plants to produce smaller and greener vehicles, or even (heaven forbid) trains. Big investors follow the “golden rule” — he who has the gold, rules. That’s how our trillionaire should think.
As a small contributor to the trillion, I have a say too. My top priority would be to bail out state and local governments before they begin to cut essential services like education, police and fire protection. The wave of foreclosures is causing a loss of revenue from income, sales and property taxes, which are the backbone of most state governments (other than Alaska, apparently). And the fall in stock prices is putting retirement pensions in peril. Before it gets worse, we ought to inject revenue there — say, $300 per inhabitant. That would cost only $90 billion. Surely after we’ve helped out the poor investment banks and auto makers, that much should be left over.
Now, how to get more money into the consumer sector so someone will buy those cars, refrigerators and homes? One way is to write down their mortgages so they can afford them, and perhaps have the trillionaire take an equity stake in the home in compensation for its generosity. Another is to create jobs as was done in the New Deal — building roads, bridges, train lines, schools, national parks and water supply systems and forward-funding the future costs of maintenance.
A third priority would be to reward savings and reduce the demand for loans. Unfortunately, there’s no direct way to do this, although proposals for a consumption tax have their appeal. The best way, short of that, is to force a tightening of credit standards and terms. Here are three ways to do that: Bring back state usury laws (which are now outlawed by federal preemption) to shrink the credit card tumor. Have Fannie and Freddie change the basic home mortgage term from 30 years to 20. Change the tax law that excludes gain on the sale of a home, to exclude from taxation only the gain that is attributable to the cash investment of the homeowner.
How could Hank Paulson say no to that?
