As was reported widely yesterday the Treasury Department has a new plan of what to do with the bailout money.  Whatever one thinks of the basic idea of the government spending 700 Billion of our dollars to shore up the financial industry,  the newest plan is actually good news.  Well, not exactly good news, but better news than it could have been.  For starters, we are better off owning preferred debt and equity in a few dozen companies than ultimately being the landlord of a million financially dysfunctional properties.

Essentially, the government needs to use our money to prevent the banking system and financial world from collapsing, then step aside and let everybody take their lumps.  And, they need to do this quickly.  The Treasury Secretary should go even further than he did and say they have no intention of ever buying bad assets from any business.  He may have more egg on his face, but that will at least draw some lines and set some rules.  Once everyone knows the rules, the economy will move forward.  It may go down a little more first, but at least it will move forward.

The previous plan to use the money to purchase bad loans was terribly flawed.  Among the many problems:  They couldn’t be priced properly.  Once purchased, the government had no ability to manage them.   Nor would politicians have the stomach to liquidate them.  You can imagine the headlines if two hard working elementary school teachers were being thrown out on the streets by foreclosure of a government owned loan.  (There would be no mention that they made $110k but claimed to make $250k per year to get a low teaser rate loan to buy a $900k dream house.)  A law would be passed to stop many foreclosures and we would never see our money again.

Because banks have been thinking they would unload all of these non-performing assets on to the backs of the taxpayer, they haven’t been as inclined to sell them to anyone else at market prices.  I know of a recent situation where an investor tried to buy a bank-owned home with a mold problem that had previously dropped out of escrow twice.  The investor said he would give them cash and close in a week if they dropped the price by 5%.  The bank said they would rather keep the house.  They must have thought you and I would pay them much more.  Hopefully, this thinking will now stop.