PrintNovember 16, 2008
A Modest Proposal to Solve the Financial Crisis
Satire
I've just realized something: I've solved our financial crisis. Since media are already preparing their copy for stories about the Great Collapse of 2008, I've decided to share it with you instead of calling them.
Don't worry -- we'll avert another Great Depression once my plan is implemented. There won't be any Okies invading the Left Coast (God forbid more yokels from flyover country clogging the 405). We won't need a 21st century postmodern version of John Steinbeck. The BoBo's won't have to cross a breadline to get to the Whole Foods. And I'm about to join the ranks of Nobel Laureates Robert Mundell and Milton Friedman.
We can avoid any upcoming deflationary bust with one simple solution: legalize arson.
Yes, it's time for the government to legalize that age-old solution to unwanted factories and warehouses. What was once called fire-raising in Scotland is the best way for us to raise the standard of living for all. I've even drafted a bill for my legislator called The Opportunity & Reification through Charred Housing (TORCH) Act. It'll be introduced next week. What was once the malicious burning of dwellings will become de rigueur for correcting poorly-issued mortgage debt.
The root of our financial conundrum is this: banks made loans which they shouldn't have made to persons buying homes which they shouldn't have bought. These loans were issued as mortgages secured by the purchased homes as collateral. Unfortunately, the "value" on these homes was grossly inflated due to the housing market bubble. Now, due to falling housing supply, an overcapacity of housing, and mark-to-market accounting of debt obligations, the value of these mortgages is rapidly depleting-meaning that the banks' balance sheets aren't strong enough for the banks to issue more credit. Furthermore, foreclosing on these homes isn't an option since the amount owed on them is often more than what the home is worth, and with a rapidly deteriorating housing market, adding more "for sale" signs in the yards will cause a further collapse in prices.
The housing industry is indeed "too big to fail" and the impetus behind the TORCH Act is to save the housing sector by destroying the overcapacity in the housing system. By burning down unwanted homes, the aforementioned overcapacity will be reduced, home prices will increase through the reduction in supply, the mortgage debt market will stabilize and the owners of the properties-whether banks or persons about to default-will collect the proceeds from the insurance policies on the homes.
Voila! Home liquidity is improved and home prices will firm. "Take it off the books" will be replaced by "burn it off the books" as banks destroy unwanted assets seized through foreclosures and replace them with cash from insurance claims. All that government money going to AIG will be injected into the economy after property owners receive their checks to make them whole for bad real estate purchases. The bad loans "clogging" up the financial system will be eliminated.
"But I never bought home insurance!" you say. The TORCH Act includes a provision forming a trust fund for noninsured homeowners. So get the matches ready.
"But I have no experience with arson!" you whine. The Act calls on the Department of Labor to implement job training for the construction and proper delivery of the Molotov Cocktail. Also included is training on how to submit insurance claim forms. Tying a rag around a bottle and writing "it burned down" on a triplicate form are job skills which last a lifetime.
"But what if people and banks use the insurance proceeds to buy more homes?" you wonder. That's OK -- when the time comes, we'll apply the TORCH Act to these homes too. But in the meantime we'll have a near-term boost to GDP from new home construction. It will do wonders for the share prices of Toll Brothers and Lowe's.
"But this whole thing is silly!" you shriek. "What about Henry Hazlitt's ‘Broken Window' fallacy? You can't break things to promote economic development!" Ah, yes. Henry Hazlitt. The gentleman who told us that smashing windows and subsequently purchasing replacements wouldn't lead to economic growth. The author of Economics in One Lesson. As if one could really master collateralized debt obligations, credit default swaps and naked puts in one college lecture, even one at the Wharton School.
Did Mr. Hazlitt's Potemkin Village rife with these new, sparkling windows ever face a liquidity crisis? Were the windows on those idyllic homes ever threatened by foreclosure? Fool me once with your fallacy of destruction as an economic non-advantage. Burn the houses, pay their insurance claims and build anew. Sometimes priming the pump is best served with a can of kerosene.
We'll need a new federal administrative agency to implement the TORCH Act. I'm not sure HUD is up to the job so we'll need to revive the old Agricultural Adjustment Administration. Some file cabinet in Washington must have memos containing their lessons learned from paying farmers to destroy unwanted crops to reduce farming overcapacity during the Great Depression. With the ascendancy of Barack Obama to the Presidency, I suggest William Ayers as the first head of the revived AAA. Perhaps he never got the revolution he craved, but he can ride out his twilight years with a pogrom against those symbols of bourgeoisie oppression: unwanted supplies of brownstones, McMansions and vacation homes.
My fellow Americans, we can burn our way out of this mess.
(This article is a work of satire. The author firmly believes the "Broken Window" fallacy and in no way endorses or approves of arson as a means to an economic end).
