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Saturday, February 14, 2009

Budget Cuts

Your editorial writer is wrong when he/she states "And using millions of federal dollars to raise the base of the $833 million school budget, which is comprised largely of salaries, could be disastrous when the stimulus money stops flowing" (Crash course in budget cuts, Boston Globe, February 6, 2009: A14).

That is exactly the purpose of the stimulus money. It is to replace local funds that have dried up in this recession. It is to save jobs. After all in the precipitate decline in this economy, saving a job is just as good as creating a new job.

The stimulus money will only cease to flow after it has worked its magic and local revenues have reverted to their pre-recession levels.

The tragedy is that the stimulus money is arriving too late and beginning to look like being too little.

Sent to Boston Globe

Executive Pay

As President Obama has already discovered, it is hard to change a culture; yet this is what he proposes with regard to executive compensation (Executive Pay Limits Seek To Alter Corporate Culture, New York Times, February 5, 2009: A1, B4). It is much easier to bring about change by issuing rules that firms must obey.

I would suggest a rule that if a company decides to provide any fringe benefit (with the exception of basic health care) then that benefit (bonus, stock option, restricted stock, automobile, country club fee, etc.) must be provided to each member of the company from the CEO to the research scientist, to the janitor. The amount each person gets should be the same percentage of base salary rather than the disproportionate percentage given to the CEO compared to the janitor: CEO's seem to get multiples of their salary in fringe benefits while ordinary people might get a bonus of 10% in a good year.

Such a rule would soon curb the excesses of Executive compensation.

Sent to New York Times

Bailout Alternatives

Your discussion of the bailout seems to follow the agenda of the previous administration. Your editorial and op-ed writers talk in great detail about how to make the banks whole by removing their toxic assets (for example Max Holmes, Good Bank, Bad Bank; Good Plan, Better Plan, New York Times, February 1, 2009: 10).

You rarely talk about options that might make the banks whole and also help individual homeowners and their communities. The best option would be the Shared Appreciation Mortgage (SAMs).

SAMs are the perfect instrument to bail out lenders, prevent foreclosures and restore confidence. In a SAM, a government agency would join with the distressed homeowner in meeting payments on the mortgage. There is no write-down so that lenders and derivative owners are made whole again. There is no foreclosure so that the individual homeowner stays in his home. There is no foreclosure so that neighborhoods are not hollowed out by a proliferation of empty homes.

There is risk to the government. As time goes by, the homeowner and the government build up equity in the home; the share of equity based on their proportionate contributions. There is however no guarantee that the total equity will exceed the homeowner's original purchase price before the house is eventually sold. In the best case scenario, both government and homeowner would recover their investments; in the worst case they would not. The risk of government losses might be reduced if the government part of the mortgage stayed with the house after an underwater sale, though that would reduce the attractiveness of the house to the new owner and consequently reduce the funds received by the seller. But this would work -- the government has infinite patience; early payoff is not a necessity.

Why don't we intensively discuss this solution, or something similar (as suggested by Andrew Caplin of New York University), as part of the recovery efforts that are being made?

Sent to New York Times

Monday, February 2, 2009

Fehrnstrom's Words

Eric Fehrnstrom should choose his words more carefully (Guantanamo: A symbol of US resolve, Boston Globe, January 27, 2009: A11). In the middle of his unsupportable paean of praise for the extra-legal excesses of the Bush administration he said: [the enemy] call for ... the collapse of the United States, economically and militarily.

It seems to me that Mr. Bush is that enemy; for he has accomplished just that.

Boston Globe