Bailout Bafflement

30Sep08

(Reposted from my LiveJournal.)

…Someone explain this to me, because I really don’t see why this solution won’t work.

As Paul Krugman points out in a link to NYT here, the original bailout plan had the government intervening at Step 4: failure of mortgage-backed security sales to adequately shore up cash flow. The bailout plan the House thumbed-down yesterday intervened here and arguably at Step 2: banks need more capital.

Like Wenger, however, I’m tripping over this part of the problem: why the HELL don’t we just intervene at Step 1?

Giving struggling homeowners the means to pay their own mortgages means (a) people pay their mortgages (b) to banks, which then have (c) less bad debt (because the debt is being paid on; ergo, not bad) and (d) capital to (e) make loans and (f) extend credit. Meanwhile, people (g) keep their houses, (h) build equity in those houses, thus providing (i) another potential source of credit, and banks are not (j) made to understand that even if they make bad asset-selling decisions, it’s okay, the government will take care of them.

If you’re one of those cynical bastards who really believes the average American (and that’s who we’re talking about here, the average American) will spend a government handout on booze and cigarettes instead of keeping their own homes, then here’s an idea: either provide the money to homeowners in the form of vouchers “only good on your mortgage”, OR provide the money to the banks (this is a Step-2 hybrid) with the express caveat that the banks must apply it to the mortgages and thus either (a) forgive the homeowners’ mortgage for that amount and/or (b) refund whatever’s left to the homeowner after the mortgage is paid in full.

Also, all those mortgages? REFINANCE. STAT. Something reasonable…say, 6%.

This plan also directly addresses two concerns raised by both Presidential candidates this weekend: (1) that the taxpayer somehow share in any gains from the bailout plan, and that (2) CEO compensation be limited. Here, the taxpayers gain almost immediately, because they get to keep their houses – the largest asset most of us will ever own. (I am not, obviously, of the “dream” that someday I too will be rich – especially as I’ve noticed the entire U.S. system is currently conspiring to keep me in the tax bracket in which I was born.) And CEO windfalls aren’t a problem, as the CEOs will never see a dime of my bailout plan – except as ledger entries.

I admit, I’m not an economist. I am, however, possessed of a pretty damn good set of legal reasoning skills. And I do not see why this would not work. Especially since the failure of yesterday’s House bill proved that we do have time. Perhaps not a ton of time, but time – the Dow did not fall so precipitously that we’re all living in tin shacks (today). (And even if this didn’t buy us enough time to save the overall financial system, we’d have enough time to ensure that people get to keep their homes, and not live in Hoover houses.)

Quick note, as this issue has already come up over on LJ: when I talk about giving people money to pay their mortgages, I’m not talking about a piddling couple thousand dollars, which would pick off only one or two payments. No; I’m talking payments in the five or six figures. (Another reason, perhaps, to adopt the Step-2 hybrid.) I’m talking about payments that would wipe out many tottering adjustable rate mortgages completely and would wipe more than 50% off a great many others. Hell, we apparently have $700 BILLION dollars – why not spend it on something the American people can really use?

And plz, no crap about socialism. A government bailout is no more or less “socialist” when it’s paid to Joe and Jane Homeowner than when it’s paid to CEO Fancypants.

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