Jim Cramer’s $500 Billion Bank Bailout Plan

Should the government start buying mortgage-backed securities to help the banking sector?

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NBC's Today Show featured a segment this morning in which it brought in three economic experts—investment strategist Liz Ann Sonders of Charles Schwab, Steve Forbes, and CNBC's Jim Cramer—to give ideas about how to boost the economy. The threesome was set up with an easel and a big pad of paper so they could write their suggestions down. Then Matt Lauer interviewed each in turn.

1) Sonders had no real policy proposals. She said she wants to see a stronger dollar and thinks a recession would bring down inflation and purge excesses from the financial system. Overall, she urged America to be patient while saving more and spending less.

2) Forbes wants to cut taxes and break up Fannie Mae and Freddie Mac—once they were recapitalized by taxpayers—into 10 or 12 smaller private companies with no government guarantee, implicit or otherwise. He also wants to strengthen the dollar, although in attempting to explain how to boost the greenback in a way that the average American would understand, Forbes ended up being completely incomprehensible.

3) Cramer wants to kill government ethanol programs to bring down food prices. More interestingly, he also wants to replicate the Resolution Trust Corp. from the 1980s S&L crisis and have this 21st century version buy up mortgage-backed debt in order to strengthen the banking sector.

Me: I have also given my suggestions on this topic. But as for the above ideas, Cramer's RTC: The Next Generation idea might actually happen. And it would cost a lot, like maybe half a trillion buckaroos. (Add that total to a possible second economic "stimulus" package and you can throw out the window any idea of balancing the federal budget anytime soon.) Michael Mandel of Business Week blogged about this recently:

I think the next president, whether it's Obama or McCain, will be looking at a $400-$500 billion bailout of the U.S. housing sector. This will encompass not just Fannie and Freddie, but a wide buy-up of bad mortgages—just getting them off the books of the financial sector at a substantial discount.

It's worth looking at the S&L crisis of the 1980s to see how that might work. The total size of the bailout back then was $225 billion (see the GAO report, Appendix I, page 31). The Resolution Trust Corp. recovered $140 billion, so taxpayers had to put in roughly $85 billion (these numbers are very rough).

Assuming that the same ratio holds this time, a $400-$500 billion bailout would end up requiring $150-$180 billion of taxpayer money, spread out over several years.

That's a lot of money—which is why I don't think anything major can be done with the presidential election looming, though [Treasury Secretary Henry] Paulson went further than I thought he would.