And why should we eliminate negative equity and bad investments? We’re in a zero sum game (theoretically anyways). The previous owner of your house made an excellent investment decision by selling it to you for 200k before the drop. It’s in the cards when you invest.

I have an idea too, here is plan pink: Why not give massive handouts to people who have saved over the years. This way they’ll be able to buy some depressed assets (let it be homes or investments).
- This will immediately decrease foreclosures
- It will reward those who deserve it instead of those who pushed the country in the crisis

What’s in it for renters who have lived within their means, saved diligently, and continue to make good on their financial obligations?

Is this 1/3 of the population simply to be taken for suckers?

When fed and treasury made the decision to guarantee or buy many different forms of debt, they were very worried about a loss of confidence.
They made the purchases and guarantees to wait for another day and figure out what to do next.
My assumption is that they cannot back out on those commitments.
I have not read of any serious authority who has said the bank debts can be destroyed. If you have a good source i would like to read it.
There may be a point-of-no-return where bank debt must be destroyed or converted to equity.
The cost of Plan Orange could be made much less expensive if fed and treasury opportunistically purchase mortgage assets.
Also, my guess is that $5 trillion figure is much higher than the actual cost would be. I only used $5 trillion because that is what the math says it is.
The number could be that high given that a 40% fall in values is an $8.5 trillion loss of equity.
Here is a great source on bank crises and they may be advocating your approach. I can’t tell for sure.
http://online.wsj.com/article/SB123362438683541945.html

You plan is to swap 5 trillion of bad debt for good debt so that banks have a claim on “everyone” rather than on their specific (bad) loans. That’s a better deal than the bailout they’ve got now!

It makes more sense for bankrupt institutions to convert debt to equity and move forward rather than mass confiscation of 5 trillion (or whatever your estimate is) by the authorities.

If the bank has assets worth 1B and debt of 1.2B, then equity is wiped out, bondholders get nothing, and that puts us closer to those holding transaction deposits being redeemed at par.

In reality, the entire banking system could be liquidated this way rapidly even with the government guaranteeing transaction deposits because the economy still has the capacity of funding the deposits. But if we allow confiscation of capital which reduces wealth, the capacity to redeem deposits closer to par continues to go away.

The system will clean out and we will move on.

If the government confiscates (even more) trillions in real capital and gives it to the banks, it destroys what’s left. It’s like the government with it’s best friends, bombed out 1/2 the city by mismanagement, forcing the population to crowd into 1/2 the space. Now the recommendation is moving out the people and letting the government’s friends move into what’s left. I like the fact that you are thinking about solutions, but confiscation of capital is terrible.

The market will minimize the cost. Let a new banking system rise up where the old one collapses. It will be better for everyone.

BTW, the government cannot “inject” capital, it can only take it from someone who produces and give it to someone draining the economy of wealth. Said another way, producers are 100% of what makes an economy possible. That is why I can, with assurance, promise you that bailouts like this are a recipe for a worse depression.