Save People, Not Bankers

Seat belt laws embolden drivers to drive faster, causing a net loss of life. It’s the law of unintended consequences, also known as the Peltzman effect: the safer you feel, the more risk you take.

Sam Peltzman, the economist after whom said effect is named, says that government bailouts like the Bush Administration’s $700 billion attempt to stave off economic collapse are no more effective than “pouring money down a rat hole.” Moral hazard–rewarding reckless people and companies while allowing responsible ones to fail (hello, Lehman Brothers) may avert one economic crisis while planting the seeds of a worse one down the road.

“In the long run,” says Peltzman, “you’re just laying the groundwork for more because you’re giving people an incentive to take too much risk, where a big part of the risk gets laid off on the taxpayer.”

I don’t think much of the laissez faire, magic-of-the-marketplace, let-’em-eat-flat-screens school of Darwinian economics flogged by the University of Chicago, where Milton Friedman once reigned supreme and Peltzman is a professor emeritus. But I think he has a point here–with a twist. Government intervention is appropriate and necessary during tough economic times. But not if you bail out corporations.

The 1979 Chrysler bailout is a perfect example. Jimmy Carter’s $1.2 billion loan sent an unwholesome message to Detroit: don’t change a thing. If you get into trouble, the government will rescue you. The Big Three kept selling gas guzzlers. Nimble foreign automakers that spent the 1980s and 1990s developing hybrid technology are crushing them now.

More recently, the government bailed out the airlines after 9/11, notably by limiting negligence lawsuits by relatives of victims. It’s hardly a coincidence that the major carriers haven’t done much to improve security. Similarly, it’s hard to see how U.S. taxpayers will benefit by lending my former employer Bear, Stearns $29 billion to facilitate its sale to JPMorganChase. Bear’s corporate culture, reeking of the testosterone-drenched arrogance of its seven-figure-salaried executives, led it to fib about the worth of the collateralized debt obligations that supposedly guaranteed the payment of its subprime mortgage hedge funds. When traders learned the truth, confidence in the firm collapsed, sealing its fate.

Or would have, if the feds hadn’t come along. Letting Bear go under might have prompted caution among future wannabe Masters of the Universe. If capitalism survives this debacle, we’ll see more like it as a result.

Democrats are asking for some laudable amendments to Bush’s plan. They want to give bankruptcy court judges the power to reduce monthly mortgage payments, cap executive salaries, and increase Congressional oversight of the financial services companies involved. Good ideas, but none go far enough. Besides, they’d expire at the end of 2009. Does anyone think the economy will be booming by then?

At least four million people–nine percent of all homeowners–have fallen behind on their payments or are in foreclosure. And 6.5 million more could go down the tubes next year. “People with poor credit have been defaulting on mortgage payment in large numbers for more than a year,” says Douglas McIntyre, an editor at “Now the problem has moved to homeowners with reasonably good credit.”

Each family that loses their house creates a ripple effect. Empty homes lower their neighbors’ property values. Some dispossessed workers, unable to find a new place near their jobs, become unemployed. Savings are wiped out. Forced to move, parents pull children out of school, disrupting their education in ways that will hurt them and society decades from now. Banks are burdened with the costs of maintaining property they don’t want until they can unload it at a reduced price–further depressing real estate prices. Society, even renters, has an interest in preventing foreclosures.

The unpredictable nature of the current real estate price plunge has created another set of problems. Tobin Harshaw of The New York Times sums up a complicated mess as nicely as anyone I’ve read: “There are a whole bunch of mortgage-backed securities, the value of which is not known, because nobody knows what the default rates on the underlying mortgages are likely to be.” Investors can’t set prices, much less invest, without reliable information. So credit markets have seized up.

Americans are peering into the abyss, a.k.a. the End of Everything As We Know It. So whom are we counting upon to save the day? The same Bushist dead enders and Congressional layabouts who let Osama bin Laden live and New Orleans die.

So yeah, we’re toast. But let’s talk about what should be done:

1. Declare a Bank Holiday. As FDR did in 1933, Bush should shut down the financial system–banks, stock and currency exchanges–for a week or so to avoid panic selling, cool down market volatility, and give Congress time to craft carefully considered legislation rather than the spend-a-thon slapped together over the last Black Weekend. It bodes ill that liberals and conservatives alike have so little faith in the plan. Take some time; get it right.

2. Reinstate the Glass-Steagall Act. The current mortgage meltdown couldn’t have happened without Senator Phil Gramm, now a key economic advisor to John McCain. In 1999 Gramm led the repeal of the Depression-era legislation that had separated commercial from investment banks, allowing Citigroup and other companies to sell mortgage-backed securities that blurred the line between Main Street and Wall Street. Let the financiers handle derivatives, structured investment vehicles, and other arcane financial instruments. Banking should return to its dull, staid roots as a business that pays interest on deposits and collects interest on loans without imperiling those deposits.

3. Bail out homeowners, not lenders. Stop doling out hundreds of billions, even trillions, of dollars, to a few banks and issue the cash to the disaggregated tens of millions of Americans who will spend the money and stimulate the economy instead. Which brings us to…

4. Abolish predatory interest rates. Millions of people in danger of losing their homes would not be in trouble if their banks weren’t charging usurious interest rates. Every primary homeowner should be automatically refinanced to a floating 30-year mortgage, with the interest rate set at 1/4 percent point above the fed funds borrowing rate. Similarly, all consumer credit card debt should be refinanced to prime plus 1/4. The same goes for student loans. Secondary and vacation homes don’t qualify. Unemployed homeowners can apply for hardship deferrals, allowing them to skip mortgage payments until they find a job. Payday loans ought to fall under similar guidelines. In Utah, the average interest rate on payday loans is 521 percent! Of course, reforms will cut deeply into lenders’ earnings. Many banks would be at risk of going under, which is why…

5. Banks that fail should be nationalized. As should investment banks and any other institution that needs federal taxpayer money to avoid failure. If we the people fund ’em, we the people own ’em. If and when the economy recovers, the Treasury collects the spoils and cuts our taxes.

6. Withdraw from Iraq and Afghanistan, and slash defense spending. Christopher Whalen, managing director of Institutional Risk Analytics, tells USA Today the government may have to cover $1.4 trillion in bad mortgage debt. That’s a lot of money, but I have good news: we can get it. In 2007, the Congressional Budget Office estimated that the occupations of Afghanistan and Iraq would cost at least $2.4 trillion through the next decade–even more if Obama or McCain keep their pledges to send more troops to Afghanistan next year. Cutting our losses and cutting the $515 billion a year Defense Department appropriations budget would help finance the clean-up of the mortgage meltdown.

(C) 2008 Ted Rall, All Rights Reserved.

29 Responses to “”

  1. Anonymous Says:

    absolutely right on the money! ted proves that one doesn’t have to be an economist to put 2 + 2 together…

    instead of letting the same people who led us into this mess tell us now that we can kiss our vision of a more just and caring society goodbye – since we’re broke (which sort of was the idea for some) – we should escape forwards (Flucht nach vorne!)

    btw this also applies to our visions for a green future – and yes, military imperialist “defensive” spending needs to be reigned in for any of this.


  2. Anonymous Says:

    Ted has a great idea. Unfortunately it's A. Outside the mainstream and B. Not designed to give those with money & power more money and power, so it won't be adopted.

    Of course, the idea of doing nothing does sound good. At least the big bad guys will get soaked, and the US Government will have to make some tough choices…

  3. Aggie Dude Says:

    Bwah-Voe Ted, this is excellent. What you're proposing is a government system that works for its citizens as a whole and not for those who just play in the big game.

    The closest we got to it was the 1930s, when FDR was FORCED (people should stop treating him so reverently) to do something REAL, because the American elites were staring down a full-scale social revolution.

    It was also hijacked by a war. Wars always set us back, because they ship young people off to military service, and distract everyone else. The business elite began dismantling the New Deal the moment the US went to war.

    The one thing repugs never talk about when cutting spending is the military budget. Nobody EVER talks about the military budget.

    Ted, the people who need to listen to you most aren't going to get through reading your name before dismissing everything you say.

    What I'd like to know (as someone who was pretty young at the time) is how different this appears from the S&L issue in the 1980s. The economy in the 90s took off (not that this was good for the environment or ecological sustainability).

    Beyond it all, we're still hosed, it's just an agonizing wait. The alternatives are always worse.

  4. Anonymous Says:

    I would add one big idea: universal employment.

    Anyone who can’t find a job in the private sector would be guaranteed a job on the payroll of the Federal Government. All jobs in the Federal Government would pay living wages and have health benefits and a pension program.

  5. Marion Delgado Says:

    Peltzman is self-proclaimed, a scion of the AEI as well as the Chicago School. Even he, a market fundamentalist of little merit, only claimed SOME drivers MIGHT drive faster, Ted. SOME. MIGHT. Then HE named that SOME. MIGHT. “effect” after himself, and AEI and Heritage went along. Woo hoo. And now Ted Rall.

    Even Peltzman didn’t say he had proof they cause a net loss of life. Ted, You’re rapidly becoming the kind of gullible person that AEI depends on.

    What’s caused the libertarian/capitalist swing lately? Can you at least entertain us with some Ron Paul reprints?

  6. Anonymous Says:

    It is probably a safe bet that:

    1) There will be a great deal of indignant posturing

    2) No one who understands the problem and the solution and has spoken up in the past will be allowed to testify.

    3) The “solution” will only delay the inevitable.

    4) We will get to witness yet another abuse of power.

    5) None of those who will make this decision will lose a dime. At worst, they will have to retire a bit sooner. Oh well.

    These folks don’t just throw individuals under the bus. They will throw whole countries and populations under the bus.

    Maybe there will be enough bipartisan push back to derail their train. Doesn’t look like it. It looks like it is a done deal and all we will see is an appropriate amount of high drama.

    Biggest heist in history. Dillinger would be very impressed.

  7. devil Says:

    hey Ted, when i win the lottery and buy an island and start my own country, you wanna come be prime minister? i’ll totally hold the position open for you while you think about it.

  8. Kurt Says:


    The true measure of genius is how much somebody agrees with you… You are a freaking brilliant guy. I am an economic development guy with a degree from Indiana, which has an economic school similar to Chicago’s, except a few bright shining stars. You are absolutely right here. The real problem is the bullshit credit card industry with its 11% unless you are two days late on a payment (that you get 3 days after the statement is issued to pay), then it goes up to 34% for a year, plus you get $75 in fees, and the fake loans the mortgage banks pushed on people that saddled them with 10-15% mortgage rates after reset (that is a crazy rate on a 30 year loan). The only thing I would add is to suspend the mark to market rule for 30 days after the bank holiday to further cool the market.

    To the “it doesn’t help the powerful so it won’t happen” types… There are a few thousand powerful people and millions of middle class shmoo’s. Talk to your friends, get pissed off, buy a torch and go to the neigborhood with all the mansions and demand that this gets fix right. Email your senator. It works. The reason we get fucked by the rich guys is that we bend over, send them an engraved invitation and lie back and enjoy it when it happens. Stop taking it and tell several other people to stop taking it. The rich count on all of us middle class people to be disengaged, lazy and stupid and so far we are proving them right.

  9. Anonymous Says:

    Those who say that the “Risk Takers” should not be bailed out are missing the most important point in the current mess. That point is that there was no “risk taken”. The whole disaster was planned. It is nothing but a scheme
    in the continuous transfer of public money to the wealthy class.
    Those who borrowed the money and did not pay it back are winners.
    And thoses who are holding the bag right now will be bailed out and also will be winners. In the process of lending the money more
    than 100 billion Dollars were paid
    in bounces and stock options in both sides of lenders and borrowers. That is more winning.
    After some pousturing and theatrics
    from the Democrats they will go along as usual and the bail out will go through with minor cosmetic modifications and the super rich will be richer and the middle class and the poor will be poorer.
    You had some very good ideas but
    unfotunately none of them will be

  10. Sean Says:

    Lol dude, if I were king I’d let people choose whether they wore set belts or not too. However your opening paragraph is, you know, the opposite of the truth.

  11. Says:

    Ted, I like your comics and I consider you a real patriot. Thank you.

    Please answer these opinion polls.

  12. Anonymous Says:

    5. Banks that fail should be nationalized.

    How about a plan for a U.S. Mutual Trust Fund where every American taxpayer would be given $2,300 in shares of the companies that would benefit from the bailout?

  13. Sean C. Ledig Says:


    I can’t find one chink, one flaw in the logic of this article. It’s brilliant!!!

    That’s why it won’t be implemented. It’s also why I’m stocking up on ammo and canned goods while I look for some nice rural land.

  14. Truth Says:

    Peltzman effect debunked:

    Peltzman argues that wearing a seatbelt makes you feel safer and so drive more dangerously and this causes more accidents
    that offsets the gains from wearing seatbelts. They conclude that one should ignore the direct evidence that seatbelt use and traffic deaths have a -0.9 correlation.

    However, there are studies that use the same approach and find a much weaker impact and even find no evidence for the Peltzman Effect. On is a study by Alma Cohen and Liran Einav,
    Cohen and Einav even suggest an alternative thesis that the act of putting on a seat belt makes a driver think about how dangerous it is on the road and leads to them driving more carefully–
    just the opposite of the Peltzman Effect.

    The Peltzman Effect contents that sealtbelts cause more accidents. But when I look at the accident data I find that the data shows falling accident rates. The first data series is a very old series on the number of accidents from the National Safety Council — I found it in the Statistical Abstract. It shows that accidents have fallen since sealtbelts were first started to be widely used in the early 1960 and really fell sharply after laws were passed at the state level in the 1980s making sealtbelt use mandatory. That is when seatbelt use also jumped sharply.

    The second set of data is a new series from the National Highway Traffic Safety Administration
    that shows traffic crashes since 1989. It can be found at

    The people doing the Pelzman type studies think that the accident data is unreliable and do not use it in their studies. Maybe, but if it is biases, it probably has the same biases year after year. For example both data sources could easily under-report minor fender binders that are never reported to the police.

    But I have now found two independent sources of data that clearly show that since 1964 when sealtbelts were first required to be installed in new cars or since the early 1980s when state laws requiring sealtbelt use became widespread that the traffic accident rate has been falling. This data or evidence directly contradicts the Peltzman Efeect thesis that depends on rising accident rates.

    So, for all the people who believe in the Peltman Effect and are teaching their students that seatbelts cause more deaths then they save I have two questions. One, why should I ignore this evidence that traffic accidents have been falling? Two, where is your evidence of more accidents.

    If Peltzman is right, it should not be hard to find evidence of a sharp rise in accidents that the thesis implies, right?

    So where is it?

    P.S. I failed to point out that the accident data is based on data collected by the insurance industry while the crash data is based on police reports to the Transportation Department.
    So they really are independent data.

    PPS.. Several people have raised he issue of demographics. this Chart shows that in the mid-1960s when seatbelts were required to be installed in cars their should have been a big jump in deaths due to young drivers. But it barely happened — the jump in the early 1960s precedes seatbelt installation and should have continued into the mid-1960s to the late 1960s. this data implies that seat belts actually prevented higher deaths in the 1960s due to baby boomers starting to drive — again jus the opposite of the Peltzman Effect.

  15. Anonymous Says:

    In 2003 the Bush administration tried to reform Freddie and Fannie. The Democrats shot it down:

    “These two entities—Fannie Mae and Freddie Mac—are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. “The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.”

  16. tyke Says:

    not to worry children ,Gordon Brown is flying over today to discuss the situation with your people as if they have nothing else to think about.Can you keep him please ?

  17. Angelo Says:

    dicir Aggie;
    The closest we got to it was the 1930s, when FDR was FORCED (people should stop treating him so reverently) to do something REAL, because the American elites were staring down a full-scale social revolution.

    And the only way we will get back is another full scale collapse. But now I see the problem with my theory. This particular parasite also knows how to keep the host alive just enough. it used to be the Dems job, which is why I want McCain, but now even he is talking regulation.

    I’m gonna miss Bush’s pro-life ass. He never would have aborted this supply-side baby.

  18. Anonymous Says:

    Want to save $400 billion from this save the rich plan?

    Give every American $1 million dollars to pay off their mortgages or go out and buy a house/condo/whatever.

    Talk about your economic stimulus.

    Personally, after paying off my mortgage, I would have close to $900,000 to invest where I see fit. Plus I would have $850 dollars a month to pump into the economy.

    A side benefit, of the the 300 million Americans (approximating for this rant), many are kids.

    My two kids would have a million dollars each to go to college and have enough left over for a nice nest egg.

    Oh wait, the capitalists need $700 billion to remain capitalists. My plan would be socialism.

    I sorry. Carry on Congress.

  19. Ted Rall Says:

    Um, $400 billion makes is equal to $1,333 for every American man, woman and child.

  20. Anonymous Says:

    My mistake.

    I left out the money we are pounding into that rat hole named Iraq.

    If you put that money into the mix, you could easily do my plan.

    Plus have an army at home to defend
    America, like it was intended by the fathers of our country.

  21. enfueago Says:

    I agree on some points but not all. Why help out most homeowners who are in trouble? Unemployment is relatively low, there have been no sweeping and unexpected layoffs and most people who are in trouble are the ones who acted foolishly or dishonestly when they bought more house than they could afford. Avarice and dishonesty aren’t anymore attractive on a small scale than a big one.

  22. Anonymous Says:


    I agree with you that we shouldn’t bail out the owners of McMansions or small time real estate speculators. People have to live within their means.

    Still, its not entirely the homeowners’ fault. The government created a perverse incentive by making mortgage interest tax deductible. To best protect your wealth under our tax code, you were required to buy the largest house you could possibly afford.

    Removing this deduction would be a common sense reform to prevent future real estate bubbles.

  23. Jon D Says:

    Yeah cutting back on the Military budget would help. They just passed a new militart budget (seems like every month a “new” budget is passed) which is the largest ever passed in US history. $630 Billion! Part of the reason it is so large is because part of the money is going to the car companies to help them for start making products people want.

    Once this Bailout frenzy starts to cool down or people can get over the price tag I wonder how many close family friends of G.W.Bush/Bush, Inc. that were screwed over and went crying to the white house for help.

    You hear about them but G.W. doesn’t call them friends, they are “Finacial Experts”. I can’t prove any of this but my gut is telling me that were can’t see the forest throught the trees right now.

  24. Anonymous Says:

    Still, its not entirely the homeowners’ fault

    Yes it is their fault. It is each persons responsibility to ensure they can afford something before they buy it.Geez I have to point that out? I think I’m losing IQ points talking to some of you nitwits.

  25. Ted Rall Says:

    Watch it, anonymouse. The rule here is, spirited debate and discussion, not ad hominem attacks.

  26. huh Says:

    How is bailing out the home-owner any different than bailing out wall-st. In both cases you are nationalizing the risk/loss. In both cases you encourage bad behavior. I disagree that the majority of defaults on mortgages are due to innocent unknowing homeowners. Their risk was as questionable as the mortgage company that sold the loan and the markets that used the loan in a MBS. You need to start acknowledging that this was facilitated by all involved, not just McCain ( who I agree is culpable) and the Masters of the Universe.
    How does your plan unfreeze credit?

  27. huh Says:

    john d
    You can’t cut the military budget. How will our great Christian nation be able to fight the devil’s army in the battle for our salvation.
    God Bless America…

  28. Ted Rall Says:

    My plan could unfreeze credit as follows:

    Homeowners are indemnified from default.

    Therefore, banks don’t foreclose and continue to receive (reduced) debt service payments.

    End of foreclosures stabilizes housing prices, allowing analysts to valuate mortgage-backed securities, allowing investors in same to make informed decisions about buying and selling.

    I believe the credit markets would respond, probably by unlocking capital at higher interest rates, but unlocking it nevertheless.

  29. Anonymous Says:

    Homeowners are indemnified from default.

    What happens to people who don’t/can’t pay their mortgage?

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