Another Plan to "Repair" the Housing Market

John Peterson Preston authored a fairly long housing repair essay on SeekingAlpha.com today:  My Plan to Repair Housing in America.

Although the essay is long, I encourage everyone to read through it.  It resembles a number of other proposals, including one circulating from the Dean of my b-school alma mater.  I dropped a few comments directly on SeekingAlpha, but I'd also be interested in a more detailed discussion here.  I think it's important because a plan of this sort is very likely to be implemented.  Especially with the prospect of a fully Democratic government (though I think even Republicans will implement something, just it would take them a bit longer to do it).

In short, I believe these plans are just further securing a Japanese-style deflationary episode for the USA.

Comments

[randolfe]

John's article is quickly getting buried on SeekingAlpha with the torrent of news. Best to use the link in the OP I provided to find it.

[DebtsNMesses]

If I'm correct, it's the 'graduated loan plan' for the student loans, where the payment increases over time. Honestly, I didn't like it. It sounded good when I chose that option, but it's betting on the rising buying power in the future and is for the optimist. With all the student loan defaults coming in, I would think it's already proven as a bad plan in the long run. IMHO.

My prediction is that it is a bandaid and the end result will still be a depression.

[randolfe]

I just mentioned education debt in the other thread I commented on. It is a good indicator. I'd say this:

Betting on rising income is _not_ an overly optimistic or bad practice. It is nearly always true. The only time it would not be true would be if we were entering into a deflationary cycle, which we may be. When workers, regardless of increased education credentials, face downward real salary pressures, then they are suffering deflation. Student loans should index that (imagining, for just the moment, that the gov't published a reliable non-political deflator index).

Instead I think we're about to see a dramatic decline in tuition rates. That will have the same effect over time. However, it will really screw those stranded to have gone through school at the wrong time. It could well be that in 10 years you've got equivalent degree holders with the latter carrying only half of the debt of the former.

[TunaFish]

I can't help but think that maybe a compelete economic collapse would be a good thing. At least we would all(mainly) be in the same boat. We could rebuild it, stronger, better.... Actually, it would probably be just a screwed up as the current system :'(

[Brand]

At least we would all (mainly) be in the same boat.

Which is nothing better than socialism.

Forgive my rant, but this is AMERICA guys. I've busted my ass to get an engineering degree, to find (and keep) a good job and to stay out of debt. I spend dozens of hours every week reading about investments just so that I can make wise stock choices. And I'm supposed to give all that up because a bunch of banks and boomers have royally screwed themselves?

Forget those people. All of them. I shit you not. If a bunch of fools made bad bets, let them eat cake. They can spend their retirement in a trailer park eating ramen noodles. I'm all for preventing a systemic capital meltdown, but we don't need to "repair" anything in the housing market. House prices will fall, and that is natural after an asset bubble. Cash will be king again at some point soon, and I think it's reasonable that the system recalibrates to a new equilibrium. For a short time it asymmetrically rewarded reckless behavior, and now it will asymmetrically reward prudent behavior. There is no reason to raid the ant's storehouse on behalf of the grasshoppers. My only struggle here is finding a store of wealth that the boomers can't raid via voting, taxes or entitlements.

[astrid]

As this economy melts down, there will no guarantees that it will reward prudent behavior. The prudent people who squirrelled away money in their 401K and dollar averaged into stock indices just got punked. The prudent people who bought AIG annuities as they neared retirement almost lost it all before the government intervene. Right now, the only hot sector of the stock market/economy appears to be ultrashorts -- is that responsible?

I understand the basic points - live below your means, don't buy what you can't afford easily, don't rack up debt, don't treat your house like a piggie bank. But if the government let things get much worse, everyone will suffer the unpredictable fallout, and quite likely it will be the responsible savers who lose the most.

[Brand]

astrid, I think there is a whole lot of room between Peterson's "prop up home prices" plan and TunaFish's "economic meltdown" wishes.

There is nothing irresponsible about ultrashorts. The bulls overate, and now the bears are out cleaning up the carrion. That is the natural stock market process for dealing with bubbles. The more you try to manipulate the market so that nobody gets hurt, the more tension you store for the inevitable reflex.

For example, in Peterson's (asinine) plan, let's assume that most homeowners took the Option-ARM style loans. House prices stop falling today. And what about tomorrow, when their interest rates start to climb again? Will we offer the graduated rate forever? How will the next owners meet your price, when your monthly payment is subsidized to prop up that price? Will the government give everybody the same rate and loan structure, both now and into the future?

The consumer needs to feel bad. It's a recession! Just because the economy shifts from consumer discretionary spending to consumer staple spending doesn't imply that the world economy will become a disaster.

We expended a huge amount of labor effort into overbuilding homes. That labor is effectively lost as part of GDP. In some respects the empty McMansions are the modern equivalent to moa on Easter Island.

There is probably nothing the government can do to make this 100% easy on homeowners without creating an even bigger monster 5-10 years down the road.

[astrid]

I agree that Peterson's plan is pretty terrible. This whole "pay less now, pay more later (hoping inflation solves all your problems)" solution is how we got into this mess in the first place.

[randolfe_]

I read Tuna's comments as sarcastically insightful. At least I hope so.

I appreciate your rant, Brand. I occasionally let off a Boomer rant myself, though I recognize that generalizations are difficult and dangerous. It is true that currently we are living through the largest transference of wealth from the young to the old ever seen in history. That is not solely the fault of the Boomers. In a way, they are just the victims of their size as a demographic group. It was actually the GI-generation which set up, deservedly so, the system of entitlements to carry them and their children into retirement comfortably. My parents, the Eisenhower-generation has defended that well. They were the peak AARP generation. Now they're fading, and the Boomers are realizing there aren't enough lifeboats.

[astrid]

The generation I really feel sorry for are the kids born 1982 -1995. These spawns of Boomers have the worst starting job prospects in one or two generations, tens of thousands (sometimes over a hundred thousand) in student loan debt, inflated living costs, and a highly inflated sense of entitlement.

Worse yet, many of them will probably spent most of their lives living with their Boomer parents. In their 20s and 30s because they can't afford to live on their own. In their 40s and on because their Boomer parents ran out of money.

The X-ers at least had a chance to cash in during the good times of the 1990s and 00s.

[randolfe]

X-ers kind of fell into extremes instead of the normal bell curve. People my age are kind of funny. Big risk takers in some regards, hyper conservative in others. But always fiercely independent. I read somewhere (maybe in one of the Strauss books) that Gen-X has almost 3-times the number of "undeclared" or "independent" registered voters from other age groups, and that Gen-X has by far the lowest registered voter percent relative to the size of our generation.

I really can't say enough about the Strauss and Howe books. Those guys nailed it when it comes to generational sociology (in the US at least).

[Brand]

My beef with Congress and the boomers is that they all know the system can't handle this kind of strain. When Social Security was invented, the worker-to-retiree ratio was massively higher than today. Retirees lasted for a decade or so and then passed on. And the benefit was largely to keep penniless oldsters off the streets.

Now we're talking about a system where people live 30 years past retirement. What does the ratio look like in 2020? Probably between 1:1 and 2:1 workers to retirees. And that doesn't include additional benefits like Medicare, nor the fact that boomers paid in pre-inflation dollars and have their benefit adjusted automatically. That money will come from somewhere, and it won't be fairies, kids.

Everybody knows that the system can't withstand it. Either taxes go up, or the Treasury fires up the printing press to replace all those IOUs. Except nobody from the boomer generation will ever vote to reduce those entitlements, because that's their benefit, and they deserve it, whether they're in dire straits or they have two vacation homes and a time share in Cancun. So what if the debt load crushes their kids and grandkids?

The system has been abused. It isn't even socialism, because in many cases the wealth is being transferred from lower income taxpayers to wealthier retirees enjoying the good life. What kind of social justice is that?

[randolfe_]

No, it's not socialism. There has been a lot of squawking about socialism lately with all the bail-outs. That strikes me as odd. It's anything but socialist. Socialism, for all its failures, is at least philosophically about the notion of a fair, just society. I just happen to fiercely disagree with the socialists interpretation of "fair" and "just". However, I certainly recognize the power of their arguments.

What we're doing here with everything from social security to big bank bail-outs is more of a perverted kleptocracy. Crony Capitalism. Modern, hyperscale feudalism.

We're transferring wealth not along any lines of philosophical justification, only along lines of power and control. Misinformed people would say that's just how Capitalism works. No. That is categorically false. Capitalism rewards merit, innovation, insightful risk taking, productivity.

Capitalism would have punished many of those same folks getting social security checks forwarded to their expansive Mexican villas as well as those sitting in the board rooms of failed investment banks. Capitalism would have punished those who bought homes they couldn't afford. Those who sold homes to people they couldn't afford. Those who underwrote loans for houses for people who couldn't afford them.

But no. We're going to just throw Capitalism under the wheels and steal the fruits of others' labors -- but not for the greater good, as it would be in a true Socialism. Instead we're robbing the worthy simply to defend the status quo for the sake of defending the status quo.

It is utter bullshit. It seems all of us here agree with that.

I'll also point out that I happen to know most everyone who's commented on this thread well enough to state that our agreement is an undeniable, thundering vote of no-confidence on this and all similar bail-out plans. Those commenting here represent some of the most incompatible, diametrically opposed political views imaginable. The sort of people you couldn't hope to get a reasonable conversation out of on nearly any other subject.

But we all agree that this plan is dreadful.

[TunaFish]

"Modern, hyperscale feudalism."

I must till the fields (work at my job) in order to pay ye master(citi) for me quarters(house) lest i defy him (miss debt payments) and am sent to ye racks (no translation needed).

[Brand]

Which wraps us back around to an apparent sticking point. I've heard from a lot of "regular folks" that if the government would just help all homeowners to stay in their homes, that it would solve the problem for the banks and the American people. Quite a few have opined that the government needs to stop home prices from falling, because a lot of people are depending on home equity for retirement. Even some (apparently) educated folks like this Peterson joker think that bailing out housing would make this all better.

Homeownership is glorified in our culture. For better or worse, it's seen as an American right, just like going to college or getting your own car when you turn 16.

I've also heard a lot that the government needs to do something about the stock market. To which I now respond, "The bust is because of the bubble--I didn't hear you complaining when things were going up, did I?" A lot of people retort that "nobody did", but thanks to the wonders of the Internet, we can all reference our own posts on Capitalism 2.0, patrick.net and Zillow forums.

But I digress.

We got to this point via government and private sector manipulation. Most of the "gains" were totally artifical. I commented today to another bubble believer that regression to mean is mathematical gravity; you can only defy it for so long. Now obviously we can't just "let the free market sort it out" anymore. This isn't a typical fall, break an arm and go crying home to mom. Artificial manipulation has led us to something more akin to Wile E. Coyote whipping off a cliff in a little puff of smoke. But the last thing I would consider reasonable at this point is another direct intervention to manipulate prices. The solution to a junkie being in withdrawal is not another hit. The solution isn't letting him go cold turkey and maybe die, either. He isn't entitled to another hit... in a kind society, he's entitled not to die, and that might be a painful process. What's been lost here is the other side of that social contract--that society is reasonable to expect that the junkie will do his best to get off drugs and stay off drugs. But that's not what most people want. They just want that attic ATM to come back so they can buy a 60" LCD TV that's bigger than the Joneses'.

I guess what I'm trying to say is, people need to suck it up and take their losses. It's criminal that most Americans are completely financially illiterate, but it's time to grow up. Piling on a bunch of entitlements is exactly what you said, Randy: throwing capitalism under the wheels. There is such a thing as responsible capitalism, which includes both social compassion to the unfortunate and proper free market rewards for the intrepid.

America doesn't need a bailout, it needs a swift kick in the ass.

The fact that a lot of bankers, board members and hedge funds will profit handsomely from this government bailout... that's just an embarassment to our entire culture. And they will do it under the guise of saving the financial system, via careful lobbying of their government friends. For far too long Americans have taken an attitude that we don't care what happens in government so long as we get ours. Or somebody else's, if that means we get more, or get the guarantee that we "deserve".

Sometimes I wonder if the movie Idiocracy isn't more of a prophecy than a joke...

[astrid]

Now that I have a little more distance from the whole thing, I'm just disgusted by the whole thing. The whole bailout thing was just a distraction and a last minute money grab. Paulson got his $700B and then just sat on his ass. Way to assure the plebes!

I'm not a fan of the Democrats either -- they are overcautious and lack vision. Right now, they have the chance to start things anew -- really truly nationalize healthcare, build a rail based transportation infrastructure, invest in next generation technologies, nationalize education... but I know they won't commit to any of it. They're just the less bad party and I'm voting for them because the alternative is just so unbelievably appalling.

[randolfe]

Brand,

Funny, I was just reading some of the old posts on here, and the cross-ref posts on Patrick.net, from 2006 and early 2007. The web is a wonderful thing. It gives me hope. I might run some of those old threads as classic features, and re-open the comments. Man, we were so dead on it is scary. Really. I wish I and all you guys had been more wrong.

And I hope we're wrong now. About all this. But playing the odds, I wouldn't bet against us anytime soon... Once things have corrected and start recovering -- then I imagine a lot of us will get it wrong. It's very hard to be good at both defense and offense.

[randolfe]

As to the Paulson/Bernanke raiding of the treasure: I noted something very telling --

Paulson was on CNBC. I think it was Kudlow (who I usually avoid, there's only so many times you can here "greatest story never told" and "drill drill drill"). But he asked Paulson how he could guarantee that the big-9 banks getting the hundreds of billions in our money at 5% government notes wouldn't turn around and use that to retire their 9%, 10%, even 12% debt.

Pauslon stammered and then said something like 'well, they know they're not supposed to, they won't, they were told they have to put that money into the system'.

Uh huh.

Well, guess what? The CEO of one of the mega-banks was on today and whoever was interviewing him asked him if he would use the gov't $$$ to pay down their own notes, or to put liquidity into the system. He openly said it was "our responsibility to ... wait for it ... recapitalize our balance sheet. If we're not stable, then we won't ever be able to loan downstream".

In other words -- we just paid off their high-interest bonds. We is you and I and everyone else, and their kids, and their grandkids, and their grandkids yet unborn grandkids.

And the saddest part? If anyone's been listening to the mid-sized regional, and small local banks, they are dying on the vine. And they make something like 80% - 85% of all consumer lending in this country. Not the big money center jokers.

And how much of this Paulson robbery went to them? $0. And how much will the big 9 be giving them interbank anytime soon? $0.

Fear not inflation. We're digging a liquidity trap so deep that no amount of money printing will dent the credit markets.

[randolfe]

One more thing, there is a comment on one of my threads from 2006 from a hedge fund guy who used to post here alot. He predicted the Fed-caused liquidity trap and pursuant deflation way back then when all of us, myself included, were fretting about inflation/stagflation.

He described how the Fed had created a conundrum with auctions that would cause all new issues of Treasuries to result in less lending, not more, thus tighter credit and deflation, not the opposite as intended.

I'll see if I can find his comment and link it. He deserves a beer.

[randolfe]

Here is the link to comment with the Fed paper on illiquidity and deflation caused by the credit/housing bubble.

[randolfe]

Here is the comment I was thinking about.

Reading all those comments again is really telling. I especially like the guy who lost it and started calling me a metrosexual loser because he didn't like the fact we were talking about house prices declining. Also some of the few comments by realtors on my site are in that thread.

Here is the comment if you don't want to link:

One reason I think there is a non-insignificant chance of a rather rough economic patch is the yen-carry trade. With the large functional short on the yen that the hedge funds have, any loosening of monetary policy by the Fed will put downward pressure on the dollar, which will cause more pressure on yen carry trade unwinding. So depending how the numbers work out, the unwinding may soak up any or more liquidity that the Fed tries to inject. More liquidity = more unwinding. Imagine the past few soft patches without the Greenspan put.

[Brand]

I thought the carry trade was SP's favorite bust prediction. :o

So if the Big 9 use the bailout funds to pay off their more expensive debt instead of lend, how does that contribute to a liquidity trap? Obviously it is a mis-use of the funds, but it still diminishes their liabilities, so doesn't that also influence their required reserves?

All complex game theory aside, how dumb would the bank have to be to risk lending out at 1-2% margins when they could just as easily take the guranteed 5-7% difference on their most expensive debt? Especially if it's a one-time injection and there's no guarantee the Fed/Treasury will provide it even in the near future (whereas debt is much longer term).

[Pankaj Narula]

Randy

I was still educating myself in the ways of finance industry and the whole infrastructure just blew apart :D Luckily mattresses yielding 3%-5% have been good for the last year. Couldn't do much to 401(k) though.

There is a phrase that is going around more than I want to hear - the real action is in the credit markets. Is there a book or something you can point on what constitutes these credit markets and how they (used to) work? I do understand that companies raise money by issuing bonds. But I am sure it is much more than that. Few pointers would be good.

Also need for credit in the corporations is not gonna die so a new infrastructure for giving credit (Not the one where Paulson gives public money to banks to lend) would need to developed. Any speculation(sic) on what would it be?

[randolfe]

Brand

I guess the way I understand it can be simplified as *delevering*. The big 9 were levered as much as 40:1. They have to get down to about 15:1. Without free gov't paper they would have to do it by having a fire sale or going bankrupt. They levered up, took big risks, and enjoyed the 40x per dollar exploits. Now they're just using our money to cut their coupon payments.

Net of net, that doesn't add any liquidity to the system. It just lightens the liabilities column of the banks' balance sheets. I guess theoretically, if the banks start feeling all happy again, then they'll start lending.

Already we see massive liquidity "conundrums" popping up. Agency debt -to- Treasury spreads are huge. Spreads to bank paper are twice to three times that. But all those rates should be theoretically the same now, right? They're all "backed by the full faith and credit of the US".

But no one is in a position to do anything other than take Treasuries and horde cash. Everyone is eying everyone else wondering when they'll go belly up.

[randolfe]

Pankaj

I'm afraid I'm no expert on credit markets. They are complex. I used to have a reader who worked for Pimco, and I still have a bud who used to work there as a bond trader. That's where I've learned most of what I know outside of academic stuff.

Any corporate finance or capital markets text book will have something in there about the mathematics of bonds, which is a first principle. Durations, yields, yield-to-maturity are concepts which drive basic debt instruments.

But all this is much more complex. It involves massive derivative markets, not just the credit markets. Arguably the problems weren't really the subprime mortgages themselves. Those were just junk bonds, and junk bonds are well understood. Instead, we used all kinds of CDO's and CDS products to theoretically offset the risks, magically turning junk mortgage backed bonds into AAA credit. But alas, you can't turn lead into gold, even with the best alchemy.

If you watch CNBC during the trading day, try to listen to Rick Santelli or the other Chicago guys they have on. They talk straight about the credit markets.

You might also check The Economist web site. They usually have some good primers on this sort of stuff.

[Brand]

Ok, that's simple enough. Is the 40:1 to 15:1 conversion happening voluntarily, or just because so many I-banks are becoming commercial banks? And if the delevering is so massive, won't we face serious deflation once the regional and smaller banks start folding?

CR has been hammering on the TED spread a lot lately. It's pretty obvious that a lot of paper is tracking LIBOR and not the FFR, which puts the effective interbank lending rate beyond the Fed's direct manipulation, even when it's in dollars.

[randolfe]

That's how I understand it. The delevering isn't mandatory from a regulatory perspective (though I could be wrong about that, since regs are changing daily now). But it's rational survival. If you're a commercial bank, you're going to solidify your balance sheet before you do anything.

I did hear that a couple of the big banks were lending interbank today. But it was short-term, and only to privileged counterparties, and I think it was all money markets related.

I don't think that will help the regional banks who do all the consumer lending. And no big bank is going to give them a dollar for that, since they all know that the consumer debt is the next subprime fiasco to erupt.

To wit, I was in Best Buy last weekend. They are running fire sales on everything. It's a great time to be a cash buyer, and it's where you can see deflation in all its glory.

But I saw some guys who almost surely couldn't afford the $9,000 plasma HDTV they were buying, all on that magic instant-credit, no money down, bad-credit-no-problem Best Buy card you can get issued in the time it takes to check out.

Funny, I think I've heard that song before, only about houses.

[Brand]

So is it time to start shorting MasterCard and Visa, or are they really only the transaction brokers between lenders and strapped-out consumers?

[astrid]

Don't worry too much for them. Flat panel TV is one place where prices have really come down. A top of the line Pioneer KURA 60" is only $4,300 at Costco and most mainstream 40-50" models are $1,000-2,000.

[randolfe]

I've been trying to short Capital One (COF) for almost eight months now. It's been tough. They are a "well run" organization. But they are about the biggest of the bottom dwellers in consumer credit.

Visa and MasterCard are just transaction facilitators. They don't have any debt from transactions on their balance sheets. They are basically big brands with networks for txns. I actually like Visa quite a bit, though not so much after they went public.

[randolfe]

*debt = assets in the case above, but you know what I mean.

[Brand]

Are you using covered shorts or puts? It seems to me that these are long-term events, so maybe buying a pile of puts for 09 might be useful.

I've been averaging into an S&P 500 index over the past two weeks (possibly I caught the absolute bottom, but we'll see). A few puts against consumer credit companies might be a great hedge. I agree that it's very likely to be the weak link if the liquidity freeze deepens into a mini-Ice Age.

[randolfe_]

I was using puts about 6 months ago, but sold those out when volatility doubled the prices of all options. I saw that as a gift horse. Then I was using a much smaller naked short position, but I covered that and took profits as the short-ban started dragging everything down.

I also ran a pretty nice complex spread trade between FXE puts and TLT & SHY calls, which I started about 10 months ago and unwound again when option volatilities shot to the moon.

I wish I could say all that made me some sort of investment genius worthy of 2+10. But in actuality my inexperience at trading always cuts out most of my potential profits.

I'm avoiding options right now because the premiums are through the roof. I wouldn't buy an option for anything right now unless I had tomorrow's paper.

I am considering doing some simple buy-writes now, though. I have been playing around with a simple model focused on fundamental values of monopolistic/oligopolistic companies like T and MSFT. I think with premiums so high you should be able to write options and collect historically high premiums.

[randolfe]

Also, a former Morgan Stanley guy who I went to b-school with and I tried to set up a short-financials and short-consumer-credit trade about a year or so ago. We were both dead sure where this was heading. It was there that I learned it is possible to be 100% right about something yet still lose $20K. We fell victim to the sin of rational analysis, when the trade value was ultimately determined by behavioral economics.

So, once again, I'm stuck sitting here knowing with incredible certainty the long-term direction of a company like COF, yet unable to profit reliably off of that.

I've found it exceedingly difficult to transition from being a defensive investor to an opportunistic one.

[Brand]

Well, your strategies are far more complex than I would attempt as a novice at options. I do note that the ask/bid of the calls and the puts seemed to be at odds on COF. But a few options daytrader types have commented to me that options are more about volatility than direction, which you seem to confirm in your own analysis.

After looking at the puts for COF, it seem that they are now priced beyond easy money.

[John Preston (not Peterson)]

It is always interesting to see the comments to my Plan. From my perspective, this is like paving streets.

We do it to make things safer for all. If you drive a 4x4...who cares....

We pave the streets for the customers who buy your goods and services and drive a Toyota Previa,

Repairing housing is like investing in the broader economy...and done right, the cost can be minimal.

Left to its own, this economy can get a lot worse, and then it will be every ones problem..

The economy is a unique and unusual partnership between consumers and providers...it has to work for all on the way up...and, when there are problems, it was also work to resolve the problems...

If there is a better way to address the current issues....email me at [email protected]

[randolfe]

John,

Thanks for the comment. I apologize for the mistake in your name; it has been corrected.

Obviously, many here take exception to your viewpoint. I don't think that a negative-utilitarian philosophy serves the greater good in this case. Thanks for the invitation to contact you directly, and I hope that some of the more motivated readers of Capitalism 2.0 do so.

[randolfe]

John,

Further on your comment: I am not a fan of analogies because they tend to create false logic. But, since you offered one up, allow me to elaborate what I think describes the thinking most here have:

From my perspective, this is like paving streets.

We do it to make things safer for all. If you drive a 4x4...who cares....

We pave the streets for the customers who buy your goods and services and drive a Toyota Previa,

The problem isn't that we have been and continue to need to "pave the streets". If you're implying I and others have taken a reckless, libertarian perspective, then you are wrong.

The problem is that, by the end of the bubble, the streets were being paved with gold. Not only is paving them with gold unnecessary, it created streets less durable and useful than boring old asphalt paved roads.

But paving them with gold created great, albeit largely false, wealth. And it employed a great many people. Far more than necessary had the streets been paved the old-fashioned way. Once that cycle started, we became locked in a feedback loop demanding ever more precious paving materials for ever more costly roads.

Repairing housing is like investing in the broader economy...and done right, the cost can be minimal.

I agree. Your plan is neither minimizing costs nor risks. It is arguing to keep all those roads valued as if they were paved with gold, even though you are proposing to revert to paving them with crushed gravel and tar. The risks and long-run costs inherent in that plan are many multiples greater than the alternative.

Left to its own, this economy can get a lot worse, and then it will be every ones problem..

It is already "every ones problem", and always has been. System risks affect us all. I have yet to hear anyone on my blog (though I know there are plenty about on others) advocate allowing the entire shootin' match to burn to the ground. One of the more doomsday of my readers even advocates backstopping the commercial/retail banks and personal savings accounts.

What you are doing by transferring the results of risky behavior by some onto others who were more conservative is simply guaranteeing the premise you are invoking.

In other words, you can't use "it's everyone's problem" as justification to make it everyone's problem.

The economy is a unique and unusual partnership between consumers and providers...it has to work for all on the way up...and, when there are problems, it was also work to resolve the problems..

I disagree that the economy is either unique or unusual. It is the mechanism by which socially organized creatures allocate scarce resources. There is an economics backbone in everything: money, commodities, war, love, art, memes...

What I take exception to is the notion that avoiding negatives trumps all else. That ignores the very real emergence property economic downturns play within the longer-run system. If you managed to hypothetically cure all the ills and eliminate all downs, then you will have ironically created a static system intolerant of any new real growth. All growth stems from emergence. Solow demonstrated that long ago.