House Republicans this week rejected the bailout plan presented to Congress by Secretary Paulson and Chairman Bernanke. The original plan would have given Paulson $700 billion dollars to
use as he saw fit with no oversight and no reporting requirements.

The House modified the plan to provide oversight, disburse only $250 billion up front with another $100 billion possible with Presidential approval. The last $350 billion could be rejected by Congressional vote.

Many influential people, including Warren Buffet, thought the plan would pass. The question is not, is a plan needed, but rather what is the best plan to put in place. Surely, giving Paulson or anyone else for that matter, a blank check with no oversight is not a good idea. What made Paulson think this would fly anyway? But what is a good plan? Well, to draft a good plan one should look at the root cause of the problem. The problem began with the housing crisis and the subprime mortgages.

So, does buying $700 billion dollars of foreclosed houses solve the problem and incent banks to begin loaning again? Does it make banks more liquid? I’m sure that it makes them feel better that they don’t have those dead loans on their books anymore, but will it make them throw caution to the wind and begin loaning money with no change in their former lending practices?

Banks will not want to get into this situation again. Their lending policies are going to become much tighter, making it extremely difficult for the average person to get a loan. Interest rates are going to increase simply because the rates banks are lending to each other has increased dramatically, meaning they’ve got to make up the extra costs somewhere. And what does a business do when their costs go up? They pass it on to the consumer. So is buying $700 billion worth of foreclosed houses going to spark a lending frenzy to jumpstart the economy?

And what about those foreclosed houses? The government is expecting to buy these things at a reduced rate and turn around and sell them…for a profit. Have they read about the housing market lately? They admit that they may have to sit on these properties for awhile, maybe years before they sell and recoup their (our) money.

If you’re a home owner you know that upkeep and maintenance on a home is ongoing, a daily project if you want to keep it looking nice. So, who is going to do maintenance on millions of houses until they sell…and who is going to pay for that? If the government has to ultimately condem the houses and level them, what does the property become worth then? Do they really have any hope of recovering the $700 billion or even a fraction of it? Will this plan eventually bankrupt the country?

How will the stock market react to this plan? Maybe positively at first. But if the plan doesn’t restore confidence it will make the recent historic 777 point plunge look like a day at the park. The new plan calls for FDIC insurance to be raised to $250,000 from $100,000. I’ve got to tell you, I feel better knowing there is $30 billion in FDIC insurance to cover the $9 trillion dollars in deposits.