Eight years after the dotcom market collapsed and the shares of my company, NetCreations, plunged 90 percent in nine months, I thought I had finally found some solid ground. Armed with a diversified portfolio of real estate, muni bonds, hedge funds and private equity, I really thought that market meltdowns were a thing of the past.
Until Sept. 14, that is, when the government refused to rescue Lehman Brothers and the U.S. financial system went into a tailspin, sending the stock market on a heart-stopping roller coaster ride that made Six Flags‘ Kingda Ka look like a kiddie merry-go-round. A day later, the government shifted gears, throwing American International Group an $85 billion lifeline, guaranteeing the money market industry’s $3.4 trillion in deposits and rolling out a plan to take $700 billion worth of bad mortgages off the banking industry’s balance sheet.
Memo to Hank and Ben: The next time you guys decide to throw out the rule book and start running the economy out of your hip pocket, could you at least come in for a consulting session first? I know things are tight at the Fed these days, but $300 is a drop in the bucket compared with the trillions you’re going to spend before it’s all over.
If you guys really want to think outside the box, consider this: Why bail out the middleman when you could save billions of dollars by lending the money to businesses and consumers directly? After all, you guys have already nationalized the country’s mortgage lending business and forced Goldman Sachs and Morgan Stanley to become regulated banks.
Think about it: The way that banks have traditionally made their money is by borrowing cash from the government at wholesale prices, then retailing it to the public and making the spread.
Banks justify their profits by arguing that they’re taking a big risk. If the borrower defaults, the banks are the ones stuck holding the bag. But if the government is going to step in and bail out the banking industry every time it makes a bad loan, there’s no reason for Uncle Sam to finance the industry’s inflated executive salaries, overextended branch networks and prime time TV ad campaigns.
Allow me to introduce The Axxess Plan.
Effective immedately, consumers and businesses would be able to borrow at the fed funds rate at 2 percent, just like the big banks do. This means that every cash-strapped homeowner would be able to refinance his mortgage and cut his payments in half, saving thousands of homes from foreclosure. Consumers could also refinance their credit card balances, auto loans and other debt at interest rates they can afford. And the nation’s businesses, flush with affordable working capital, would now be able to hire employees, gear up production and roll out big ad campaigns just in time to save Christmas.
Unlike the government’s plan, the Axxess Plan would cost U.S. taxpayers absolutely nothing. Even if a small percentage of borrowers defaulted, it’s hard to imagine that it would cost the government anywhere close to the $700 billion it’s proposing to spend on loans that have already gone sour.
Sure, certain banks and brokerage firms would go belly up with nobody to take their mortgage assets off their books. But that wouldn’t be a problem since we’d all be banking with the Fed. Unemployment wouldn’t be an issue, either, since tellers and branch managers from the private sector would now have cushy government jobs. (Their CEOs wouldn’t be making $100 million a year anymore, but I’m sure they could sell their Ferraris on eBay and find a way to survive.)
Now, I know what you’re thinking. It all sounds great, but wouldn’t giving everybody government-backed loans at 2 percent interest just trigger another housing bubble?
Maybe it would. But, right now, that wouldn’t be such a bad problem to have.
This entry was posted on Monday, September 22nd, 2008 at 7:57 am and is filed under Business. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.11 Responses to “Memo to Uncle Sam: Small Business Needs Your Help, Too!”
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September 23rd, 2008 at 10:41 am
[...] blogger, Rosalind Resnick on Entrepreneur.com, lays out an alternative bailout proposal. Instead of spending $700 billion on large conglomerates like AIG, the Fed should offer businesses [...]
September 23rd, 2008 at 2:14 pm
Rosalind
This is a creative solution that just might work. How can we get this message to Congress quick?
September 23rd, 2008 at 2:38 pm
Thanks, Lori! Sometimes the simplest solutions are the best ones. Anything you could do to spread the word at Time, Inc. would be great!
September 24th, 2008 at 1:23 am
[...] chance of financial meltdown (less than 5%). If that small chance starts to become a reality, a better plan has been proposed by Rosalind [...]
September 24th, 2008 at 8:33 am
Seems like you would get a lot of people arguing that the government shouldn’t be involved in regulating loans, which is why they have the banks do it. You would need a massive government body to make loans to consumers/businesses (which would cost the tax payer money). It would be bigger than all of the banks combined (if they decided to do this). It would probably be extremely inefficient as most government agencies are.
The fed would have to add in a profit margin on the loans because they would need to account for the cost of the organizational body AND the cost of defaulting, etc else that cost would be passed off to the taxpayer.
So now you have the same loan cost, but from the fed instead of a bank and you have an impossibly complicated process because it is a government organization and since there is no competition no one has motivation to push anything through.
I would love to borrow at 2% and I would pay it back, but this simple solution is a little too simple
Granted there is something supremely wrong with the way the lending industry works, but this isn’t a solution.
September 25th, 2008 at 3:13 am
Shane,
I would not dismiss Rosalind’s neat idea out of hand. Our government already handles millions of student loans. Granted, these are typically with/through banks. However, there could be a new type of banking system designed with significantly more cost controls. For example, the upper limit on rates banks charge consumers should be greatly reduced. After all, why should banks make all the profit? As Rosalind suggests, consumers and small businesses can provide much more economic expansion if they get a greater cut of that low government rate.
September 26th, 2008 at 10:18 am
Shane,
I have to agree with Guillermo. Besides, aren’t the taxpayers already flipping the bill?
September 27th, 2008 at 2:33 am
I have to somewhat agree with Shane, although I really like the idea. We will NEVER borrow at the Fed rate, because costs will need to be covered … or our taxes raised. Either way we pay. Second, the agency to handle this would take a couple of years to get running. If you believe the politicians, we don’t have that much time. I say we let the chips fall. After all, this whole mess was really propogated by the democrats in 1977, 1995 and 2003 the the CRA and re-writing Fannie and Freddie rules.
September 30th, 2008 at 5:10 pm
Wow. I’m not an economist, I’m just you’re average American debtor, worker, and user-of-company-time-for-internet… But, this plan is something everyone needs to hear! Sure, it needs some refinement, a little cleaning up, but its absolute genius in its essence.
October 1st, 2008 at 5:12 am
get the word out! send this to congress…..
January 2nd, 2009 at 1:26 pm
I love this article! Yes, it may be a simplistic approach to a very large problem but maybe just maybe that’s what we need.
Paulsen’s sacrifice of Lehman brothers while bailing out AIG was appalling! Then giving 29 billion so Chase could acquired Bears & Stearns
Then giving 700 billion (unregulated) dollars to the very companies who had a hand in creating this mess in the first place!
Yet through all of this, NO ONE remembered the small business person! or the homeowner!
You’re AXXESS PROGRAM, while it is the best thing for the country, will never fly – - WHY? because it’s too easy!
Thanks for your insight!