Now as far as bailing out the financial sector ... I say we should have let 'em go under.
I disagree. Not bailing out the banks would have been a disaster. Most businesses large and small depend on loans from those banks to buy merchandise to sell. If they go under,or stop lending,the economy grinds to a halt. Without those businesses whether they be large retailers or small mom and pop operations,even more jobs are lost and even more businesses go under. It would have been worse than the great depression.
The solution however should not have been to bail out the banks. The problem was that sub prime mortgages were pulling banks under. The solution,which would have cost less and done more should have been for the government to buy up any failing sub prime mortgages for a reasonable price. They are not worth face value,but not worthless either. That way,people who invested in these mortgage backed securities (which would now be regulated so you could not create more of these things to exploit the government bailout. In other words,we deal with whats out there,but you cant make any more) . The problem was not that they were even worthless,but that they were over valued and in fact no one even knew their value. If the government would have simply bought the failing ones,the melt down never would have happened. No take overs of banks,no buy outs and no crisis. Im sure someone is going to chime in that it would be a terrible mistake for the government to just let all these sub prime borrowers off the hook and that it would make an incentive for the borrowers to just not pay if they would get to keep their house. I agree 100% and that's why I never suggested such a thing.
Once the government had bought the loan,then you owe the government,and the best way to handle that would be to craft some rules to let the IRS deal with it. They have the infrastructure to do it. If the government buys your loan that you owed $100k on ,then you would owe the IRS that money. In fact,It could be structured as a 100% tax on the money that was used to pay off the house,which would count as income. It would be up to the IRS,as per the regulations set by congress to determine if you could make payment arrangements, if they were going to seize the house (their version of repossess it) to pay the debt or if it was just not worth the trouble,or if a partial forgiveness was in order. (the house was for instance in a terrible market and in bad shape and it would actually be a net loss to seize it) My preference would be that forgiveness would be very very rare and instead you would have deferment of the debt until the property was sold. The IRS is very good at determining where there is money,and whether you can pay,and is also very good at applying regulations to determine if you meet criteria for things like repayment plans.
The total value of sub primes were about 1.2 trillion dollars. About 10% defaulted,so that's about 12 billion dollars. Compare that to the amount the tax payers lost on the bank bailouts. Perhaps some assistance would have been needed,but nothing like what was done. Of those some could be saved by restructuring becuase it was the crazy terms that were causing the problem. In my scenario,the "restructuring" would be paying the IRS. No more variable rates. You owe taxes and so long as your paying you keep your home. If you dont,the IRS will be coming for you and the feds no longer have to beg the banks to fix the problem while at the same time dumping buckets of money on them. (Why would they restructure the loans,they already got enough money to stay afloat,now in addition to that,they can wring as much money out of the borrowers as they can,while we all foot the bill)
In short,the most cost effective thing for the US taxpayer would have been for the government to pay off your loan ,tax that income at 100% and have the IRS guided by some rules crafted by congress figure out how best to minimize the losses the program would cause by collecting as much as was feasible while not being totally inhumane and ignoring peoples individual situations. Criminal penalties for not paying this particular tax would be taken off the table so long as there was no fraud involved (if you hid assets and then let your house go into foreclosure to get the government to pay and write it off or you try to hide income to keep your tax payments low,your tax bill is now due in full and if you dont pay, your going get your room and board for the next five years on Uncle Sam) and deferments would be the preferred solution to writing it off. You can imagine the IRS might give you a deferment if your unemployed until you find work. If you sold your house,the IRS would want their money. The best part is,there would be little additional overhead in administering the program becuase the IRS already does these things.
