So let’s think about this economic crisis for a minute (as if you aren’t thinking about it quite a bit already). First of all, we need a solution, not a bailout. To me the notion of bailout indicates that we rescue the organizations that made the mess out of their woes. I don’t think that this should be the case. They — government and business — need to pay a price for their lack of accountability and responsibility.

Second, make the starting point of the solution the debt relief of the household, not just the institutions.  Maybe it seems like a small step but American households are buried in debt whether it is home loans, car loans, credit cards, student loans or home equity loans. And this debt burden just keeps growing. Fiscal solutions such as tax rebates, though they sound good in campaign debates, will not clear away the debt overhang. And if we bail out the institutions so that they can lend again, but provide little direct help in getting households out from under debt, then we still have a problem.

Nouriel Roubini, in his RGE Monitor blog:

So any unsustainable debt problem requires debt reduction. The lack of debt relief to the distressed households is the reason why this financial crisis is becoming more severe and the economic recession – with a sharp fall now in real consumption spending – now worsening. The fiscal actions taken so far (income relief to households via tax rebates) and bailouts of distressed financial institutions (Bear Stearns creditors’ bailout, Fannie and Freddie and AIG) do not resolve the fundamental debt problem for two reasons. First, you cannot grow yourself out of a debt problem: when debt to disposable income is too high increasing the denominator with tax rebates is ineffective and only temporary; i.e. you need to reduce the nominator (the debt). Second, rescuing distressed institutions without reducing the debt problem of the borrowers does not resolve the fundamental insolvency of the debtor that limits its ability to consume and spend and thus drags the economy into a more severe economic contraction

A similar thought is posted by James P. Pinkerton in Let’s Bail Out Main Street NOT Wall Street. Here’s How.  Pinkerton describes a plan put forth by Mallory Factor, a South Carolina businessman who suggests the establishment of a guaranteed low interest rate of perhaps 3.5%. This rate would be available to home buyers or for refinancers. He calculates that just being able to reduce payments down from a standard 30-year mortgage of 6 percent could gradually release liquidity back into the market. According to the plan, the government would do the buy-down on the interest rate and this would benefit the homeowner first. And only after the homeowners benefit would the banks benefit. Also because this would only be for qualified homeowners, the banks would still lose some money. This is the price the banks would have to pay to be reminded that they can no longer make dubious loans because there will no longer be a Fannie Mae or Freddie Mac to buy these mistakes.

Pinkerton estimates this solution would cost the government $200 billion. Not cheap, but definitely not $1 trillion either.

I would also keep the pressure on lending institutions to return to a fundamental social responsibility that they have – that is to be a good steward of the financial resources that have been entrusted to them by being careful to loan to qualified people. And by qualified, I guess it has to be reiterated that we mean financially and legally qualified as well as of good character. The institutions must also desist from all manner of predatory lending which includes inundating college students with easy credit card offers. (I’ve got two in college.) We should stop trying to sustain a nation of debtors, and develop a nation of wise stewards instead.

We also need to deal with the easy credit habits of the average American household. I know of families that as a part of their long term financial pattern go into Chapter 7 bankruptcy every 6 years just like clock work.  They then build up credit card and other debt all over again. Lenders should use much better judgment  as to who does or not get credit. On the other hand, it is almost farcical to hear financial reporters call the 11% interest rate the government is charging AIG usurous and loansharking when many Americans pay well north of 20% on credit card debt.

Let’s have the solution trickle UP for once from working people to the institutions by bringing direct debt relief to American households, without letting anyone get away with irresponsible debt or credit habits.  Everyone needs to be accountable to meet their obligations. And financial institutions must regain their footing, not by being bailed out, but by becoming much more responsible and accountable to serve their clients, helping the households climb out of debt, and then to make sure that they continue to act as a responsible accountability partner in the future issuance of credit.

The word economics comes from the Greek word oikonomia which literally means the “management of a household.” The fundamental economic unit is the household. Help the household directly and you will help the economy.  The Biblical solution to indebtedness was always very direct and personal, aimed at the individual and the household, not an institution or “system”. (see InsideWork’s Scriptural Roots of Commerce series to learn more about the Biblical worldview on work, economics, and commerce)

Many years ago my wife and I found ourselves in a position of overwhelming debt due to a series of catastrophic events. As these debts mounted, we could not earn enough quickly enough to get in front of debt. We did not declare bankruptcy, but we did manage to restructure our debt to an interest rate that enabled us to take care of our obligations and within a few years we were debt free. If our current solutions included the opportunity for American households to get the sort of second chance we got — and the sort of second chance financial institutions may need in order to restore liquidity to the economy — we might go a long way toward revitalizing Wall Street, Main Street and the streets where we live.

I once heard the story of a father reading the Sunday paper. But his quiet Sunday pleasure was constantly being interrupted by his little boy who wanted Dad to come play.  Finally in a moment inspired by his frustration, he tore a page out of the paper on which was printed a map of the world. He tore the map into little pieces and then handed the pieces to his son as a puzzle. Satisfied that he would now have peace and quiet for a long time, he settle back to reading.

Within minutes he was jarred when his son announced that he was finished.  Astounded, he asked his son how he had finished the puzzle so quickly. His son replied, “It was easy, Dad. On the back was a picture of a man. And when I got the man fixed, then the world was fixed.”

There are other dimensions to the problem. I understand. But here’s a modest starting point with some potential to get us moving toward a more fundamental and ultimately, I hope, a more comprehensive solution.