Wright Rescue Plan by Professor Robert Wright

The Wright Rescue Plan For the original plan and its evolution, see: http://financehistoryandpolicy.blogspot.com/ The Problem  The financial system is not efficiently channeling resources from savers to entrepreneurs and other businesses.  Devoid of credit, businesses have begun to cut back production, leading to lower output and employment.  If left unchecked, the worsening real economic situation will cause yet further difficulties for the financial system, initiating a nasty negative cycle. Robert E. Wright, October 29, 2008 2 The Government’s Solutions  Thus far, the U.S. federal government has:     eased monetary policy (a good thing indeed) bailed out specific institutions such as AIG tried to cover problems in the financial system with a $700+ billion TARP provided some Hope for Homeowners  Many observers, including The Economist and major economists like Zingales, Hubbard, Shiller, and Feldstein, think more needs to be done to help out homeowners Robert E. Wright, October 29, 2008 3 The Wright Rescue Plan  The government should provide refinancing for any existing mortgage at 7% APR for up to 50 years.  Owners of foreclosed homes (i.e., mortgage lenders) may do likewise.  The IRS and other existing state agencies should be used to verify the existence of a prior mortgage and enforce mortgage terms. Robert E. Wright, October 29, 2008 4 The Plan’s Advantages  Politically astute: homeowners get the first option but are not rewarded for risky behavior  Economically palatable: the government can borrow for much less than 7% right now and already has the personnel and information necessary to execute the plan  Stability inducing: MBS, CMOs and other “toxic assets” could immediately be priced and traded again, reducing the balance sheet uncertainty that plagues the financial system at present Robert E. Wright, October 29, 2008 5