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We should bail out the people in need -- not the ailing banks

Last week, I heard a smart, rational, simple proposal highlighted on The Pat Kenny Show. A caller drew attention to a letter that had appeared in the Irish Independent concerning our current banking, mortgage and financial crisis. The proposal was one I was well aware of, indeed, I thought I'd come up with the concept myself until I heard other like-minded lost souls mutter it under their breaths.

Okay, it was one of those ideas that sound completely daft initially -- but when you actually pull it apart and examine it, you realise that it's only your own conditioning, your pre-conceptions if you like, that prevents you from seeing its logical beauty.

There was a big problem with it, however -- this solution was so bleeding, blindingly obvious that there must be a fatal flaw within it. Otherwise, it would already have been implemented, right?

Pat thought so, too. So he racked his brains. And he thought and he thought. And he couldn't come up with a reason why this plan hadn't been tried. Nor could he figure out why it wouldn't work.

So he asked the listeners. Anyone -- preferably some clever financiers or economists -- who could see the damning flaw in this oh-so-cunning plan, could they please call the show and enlighten him.

No one called. No one texted. No one even used the Twitter machine. And the poor man ended the show in intellectual misery with neither him, nor the rest of us, any the wiser.

The idea? Instead of bailing out delinquent banks, bail out the homeowners instead. (And just park those 'moral-hazard' arguments there for a moment; I'll get to them later). Instead of pouring billions into institutions that have failed spectacularly and have no idea how to change their spots, shunt the bailout plan to individual citizens instead.

How? Give people credit that must be used in their bank.

They can use it to pay off the difference between what they owe and what the house is now worth if they are in negative equity.

If they're not in negative equity but are still having problems paying their mortgage, they can use the credit to cut the monthly cost of their payments. If they were prudent and paid off their mortgage or rented, give them a small amount of shares in the bank -- so that they don't feel their neighbour is being rewarded for reckless borrowing (and they'll shut up about the moral hazard of helping the economy by helping their neighbour).

So the banks are recapitalised and the ordinary Joe Soap now has a few bob more in each pocket each month -- allowing him to spend it in the local economy. Thus, your butcher, hairdresser, restaurateur, taxi driver, publican, etc get to make some money instead of seeing their businesses shrink each month because no one has any disposable income any more.

Because it's not just the banks not lending to SMEs that is the problem at the moment, it's that local industry and services are dying because no one can afford a bean beyond paying the mortgage any more. And in more and more cases, not even that.

So I asked a financier friend what he thought of the idea.

"It won't work", he said. "Why not?" I asked. "Because it won't," he said, shaking his head sadly at my economic naivety. "It wouldn't be good for the country -- you'd suffer in the end. Believe me, it's a terrible idea."

I felt like I did as a child when I asked the head nun at school why divorce shouldn't be allowed when I should have suspected that she may not be completely objective on the subject.

"But why not?" I asked my friend. I kept it up.

"Because it's just far too complicated and you wouldn't understand -- but just believe me when I tell you that it won't work."

Then he told me to be a good girl and if I ate up all my broccoli I could have a tiny interest-rate reduction after dinner.

Okay, I'm sure that there are probably a zillion reasons why economists believe that the above idea won't work. Some will say that it's unworkable, irresponsible, 'populist' and pure daft.

But it can't be any more insane that the plan we're following at the moment -- which is to pour even more billions into black holes, burden ourselves with unsustainable debt, increase unemployment and mortgage default and ensure that the economy will never be able to recover.

Yet we're being told the opposite by guys like Olli Rehn, Jurgen Stark (ECB executive board member who last Wednesday "warned" us of the "consequences" of attempting to solve our financial problems at the cost of the bondholders), Jean-Claude Trichet and people who work for Goldman Sachs.

And you've got to ask: what's in it for them? What's their angle? What do they want to achieve/avoid/make you believe?

Because I may not be an economist or a financier -- I studied the humanities, not hard sums -- but one good lesson I learned was to always check where your information was coming from -- and what was the bias or ideological bent of the person supplying it.

So Frankfurt says we have to keep pumping money into zombie banks, that there can be no question of burden sharing.

Well, they would say that, wouldn't they? It's in their interest. They're terrified of contagion and they want their stupid investors to get paid back every penny that they don't deserve -- moral hazard be damned.

As David McWilliams wrote earlier last week: "We are being told from all quarters -- by the vested interests who insecure commentators refer to as 'serious people' -- that we have no choice but to put more money into the banks."

Let's consider these "serious" people. These are the same people who got us into this mess in the first place. These are the people who are so caught up in a very specific way of thinking that they are prepared to destroy our economy and society because they long ago lost the ability to see things from a different perspective.

They are the delinquent aristocracy who, in 1918, failed to realise that their way of living, their way of seeing the world, was over for good. And like all frustrated bullies who have lost control of the situation, they threaten their serfs: "If you don't do what we tell you, we'll stop the money coming out of your ATMs. You won't be able to pay for your nurses, your teachers, your policemen etc. You'll descend into anarchy."

Really? Well, that wouldn't be very good for the integrity of the euro or the great European project as a whole, would it? Who would be next to get the chop, eh? Portugal? Spain? What would the markets think then? Go on, go on -- I dare you!

It's time to discard these mandarins and start thinking outside their tired old box.

We need to listen to and discuss new ideas. But who can we trust? Who can we believe?

How about experts who are not part of any 'vested interest' group? How about people like Nobel-winning economist Joseph Stieglitz, who said: "The solution (to the financial crisis) is not bailing out banks by eliminating 'toxic' debts but rather helping homeowners renegotiate conditions of their mortgages."

Or another Nobel winner, Paul Krugman, who said: "Ireland is now in its third year of austerity and confidence just keeps draining away. And you have to wonder what it will take for serious people to realise that punishing the populace for the bankers' sins is worse than a crime; it's a mistake."

Here at home, of course, our most independent voice of reason is David McWilliams. He wants a referendum on whether the State should take responsibility for all that private bank debt.

We have academics like Morgan Kelly, Constantin Gurdiev, Brian Lucey, Stephen Kinsella and more, all arguing that the path the vested interest crowd are insisting we take is completely nuts -- to paraphrase them bluntly.

And we have the Irish Independent letter writer's idea about funding homeowners, not banks, who will invariably be told to shut up, sit down and eat his broccoli by the "serious people" who supposedly know what they're talking about.

Except that they don't. They haven't a clue. So let's tell them that. Loudly.

Sunday Independent