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TechnoratiSolve the Credit Crisis With No Bailout
We're in trouble. Although markets and Wall Street institutions are melting down (with the occasional bounce back), the central issue is the real economy, that is, Main Street. With banks and others holding mortgage-backed securities of unknown and sometimes dubious value, credit has evaporated. Banks won't loan to each other or others because they don't know each others' real worth. Companies that need to borrow to expand, or just not contract, start having trouble getting loans. Everyone wants clearly valued collateral, which is hard to come by when you don't know what something's worth. Without credit lubricating the economy, it seizes up.
The proposal that died Monday in Congress, and likely will re-emerge, was one proposal that predictably sought to resolve symptoms. It has the government buying mortgage-backed securities from the firms who created them or now own them. It's viewed as a means to buy these securities on the cheap, and hold them until the market recovers. That way supposedly the government could even make money. More likely though, the securities won't be bought at their true current fair market value because, if they were, the banks selling them would incur huge losses. They'd still be weak, not strong. Instead, the government will pay more for the securities than they are worth today, as a means to help recapitalize the banks. The whole process of buying and selling securities is what Wall Street knows how to do. Some might say it takes care of the lobbyists and the rich. Bottom line, it's a proposal that could work. But it's not the best.
Instead, thinking folks might say why not solve the underlying problem - the cause - not the symptom? The root cause of the crisis, simply put, is homeowners' mortgage delinquencies and foreclosures. When the mortgages backing securities suffer, those mortgage-backed securities suffer, and so do the banks holding them. But, if the government buys the mortgage-backed securities, that does nothing - absolutely nothing - to make the underlying mortgages more valuable or more likely to be paid, stabilize home prices or help homeowners in distress. It does nothing - absolutely nothing - to directly benefit the real economy.
But another proposal does. Use the $700 billion on the table and stabilize housing. Make that money (actually only a fraction would be needed) available to homeowners who live in their homes (not speculators). Here's how: Offer any financial institution (or require it, although no financial institution in its right mind would refuse the offer anyway), that owns a mortgage of an owner-occupied home in distress, to provide that homeowner, in lieu of any penalties or foreclosure, a government guarantee of the current or missed payments under the mortgage. If the homeowner agrees to have the government take over the payments, the financial institution would inform the government, the government would make the payments, and the homeowner in exchange would sign a note agreeing to repay the government some years in the future (say, 10), with interest at the same rate currently required under the homeowner's mortgage.
A few observations: First, the process is simple; it could be implemented without huge new government programs. It relies on regulated and monitored entities who know how to process these transactions, and there is no sudden time pressure to buy billions of dollars of anything over the course of a few weeks.
Second, it is voluntary on the part of the homeowner. No one is forced to do anything he or she doesn't want to do, although the incentives are pretty clear. The bank will want to offer, quickly and efficiently, the government's help to the homeowner, and you'd think in most cases the homeowner will want to accept it.
Third, no one gets a free ride. The existing mortgage remains unaffected (so no one has to agree to change existing agreements), but it is no longer in distress. The real economic terms of the mortgage are in essence reformed to allow the homeowner to work his or her way out of distress, or for the value of the home ultimately to recover enough for it to be refinanced or sold with some equity.
Fourth, offering this program immediately stops the cycle of foreclosures and value destruction currently underway (which buying mortgage-backed securities does not).
Fifth, as important as the above, it will force an upwards revaluation of the mortgage-backed securities as they will now have, in essence, a government guarantee for any non-performing part, thereby immediately restoring capital and liquidity to the financial system. In fact, those securities may now even trade above par as any priced-in default risk that existed at issuance will now be eliminated.
Sixth, and yes, the homeowner would be required eventually to repay the loan - an obligation that will come due in the relatively distant future. To compensate the government further, should it feel it needs further compensation than saving millions of people from foreclosure and saving the global economy, the homeowner could be required to share in some of the upside upon any future sale of the house.
All the above would be documented over time with a standard note and mortgage-type procedure. The homeowner would have granted a second lien to the government and, if deemed necessary, transferred some of the future equity value in the house to the government (the taxpayers) in exchange for not losing the house now. (The amount of sharing could simply be formulaic - for example, the loan being made by the government could carry an interest rate of say, 2 percent, over the mortgage rate, with the sharing comprised of that part of the equity value needed to pay off the higher interest rate; that amount will be forgiven if there is no such equity.)
The homeowner has an incentive to pay off the government loan and refinance as soon as practicable because the government rate, in essence, will eat into the potential equity in the home - so everyone has an incentive to act responsibly.
On the downside, in the event the home never appreciates enough to pay off the government note (which will be paying off the primary mortgage), then the taxpayers may lose some value if the homeowner does not step up (but not a loss anything like what's being proposed now) and there is a lot of time to allow the economy and its home-owning citizens to recover. The government will have years to determine if it wants to extend payment schedules, or take other actions to mitigate any issues.
Overall, this is a simple proposal that actually works. No one is bailed out, although the government accepts some risk. The system re-lubricates and the global economy is saved. Little money is actually needed to implement this, and if the economy recovers quickly enough with this proposal in place, home values may stabilize enough for conventional refinancing to work, so the government would actually pay very little. There is a win for everyone in this - if only you can get past the politics.
20 Comments so far
Show AllIt’s no secret that the economy is in the trash, and Americans are looking for some kind of relief. We are facing the worst financial crises since the Great Depression; folks are defaulting on their mortgage payments, fuel costs are outrageous, and unless you have a spotless credit history a loan might be out of the question. The middle class is struggling and the notion of the American dream is diminishing. This load doesn’t seem to be getting lighter, especially when politicians, who caused this mess, are trying to ban the one thing that could help you out in your time of need. In Washington, there has been a bi-partisan effort to hinder, even ban, the payday loan industry. These politicians tend to accuse the industry with what they call “predatory lending.” This commonly used term in Washington just shows how out of touch they are from Main Street. I’m sure that these politicians don’t know what it’s like to be a single father living paycheck to paycheck while trying to raise two children. A payday loan can be an excellent financial tool if used responsibly, but I guess they wouldn’t understand that. With that said, please educate yourself on the issues that affect you the most and exercise your right to vote.
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The payday loan industry is in danger because there are politicians who wish to wipe out the entire industry. But that is not what is best for the people. For instance, in Georgia, the bankruptcy filings, bounced checks and foreclosures all skyrocketed after the cash advance product was done away with. With no disregard for these negative statistics, following the closure of payday loans in these states, several other governors continue to try and follow suit. Top national politicians are now stepping out in hopes of wiping the industry completely off the map. Should such politicians succeed, there is a big possibility that there will be increased unemployment rates, more debt, more foreclosures and an even more damaged economy.
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One of the dangerous things that George Bush did was to repeal the UPTICK rule
that was instated by FDR in 1934 to prevent short sellers to cause a market
melt down or depression. 2 years ago George quietly repealed this rule on a
weekend when congress was out of town... Simply stated the uptick rule prevents
a short sale if the last tick was down. Please ask your congressmen to put
this rule back in place.... Ingrid
I don't get why they are pointing fingers as if not passing this ridiculous bill were a bad thing. Those who voted against it should be shouting their victory as representatives of the massive voice of the people who have been calling and writing to demand this nonsense be defeated.
It's nothing but panic. That's the way gamblers work all too often. But look, the corrections are happening. Investors are investing in what they perceive to be the safer courses. Trade goes up and down as it is meant to. I think these people who talk about capitalism often don't know what that word means.
This is not anything but manufactured panic and consequent reactions. Stocks and other securities are still being traded. For all the money lost, money is being made. Companies with assets are buying companies with debits at a bargain. Housing prices are way down. Oil prices are dropping. If you can remain calm while all about you are running around like headless chickens come home to roost, this is not a crisis but an opportunity. For all of us on the low end of the economic scale, it has been bad and will no doubt get worse before it gets better. Now is the time to get out of the mainstream mindset of panic and find creative ways to make our lives work better individually, in our homes and in our communities.
It's not about who is to blame but about not making a bad situation much worse. People complain about how little money we have to stretch. Where do we think the $700 billion or more would come from? Does Congress have that money lying around? It would seriously devalue the dollar to give that much imaginary credit to the investment bankers. It is exactly the people who are barely making it who would fall off the edge. Then the government has a perfect excuse to get rid of social programs because there is no money for them.
I am all for anyone who will put reigns on this incredibly stupid and anti-democratic bail-out plan. It grieves me that the Democrats appear to be so much for it, but then look at how they have ignored the pleas of the people who voted them in for the change we're not getting.
It appears that most Americans want nothing to do with this "bailout." Amazingly we have the Socialists agreeing with the Conservatives that this is a very bad idea indeed. Yet, Congress seems determined to go ahead with some minor adjustments. When did Congress decide the will of the people no longer matters?
It really burns me when I hear about needing to give all these breaks to the upper crust so they will give us poor slobs jobs. As if they give anything not absolutely required (and then find ways to get out of those). Working people are the true heroes, the true creators of wealth. Yet, we get no respect.
Turned from distracting smoke and mirrors, the real problem belongs not to "Wall Street" and those whose game of choice is trading in what they like to call a "free market" but to the neighborhoods of "Main Street" losing credit and credibility to empty, unmaintained properties foreclosed upon in a frenzy of insanity.
These properties are "real" estate. They have value. Not so high as the bubble tried to make us believe, but real value, especially to those who thought of them as "home." A real cure for what ails US economy would encourage the profit motive and sanity, enlist investors (looking desperately for somewhere to put the money they have taken out of karmically challenged investment banks) to buy these properties and work out mortgage or rental arrangements with those who want to live in and maintain them, by-pass the whole evil episode and get back to market trade based on real values that can be easily understood by Main Street and learned through experience by Wall Street.
Congress ought to demand unbundled mortgages be sold at bargain basement prices to local financial institutions and groups then required to work out equitable arrangements with homeowners/residents to keep them in those homes. This is how it should have been, mortgages held by community lenders who have a stake in keeping the community healthy and the authority to work out compromise arrangements with their customers.
Attacking the underlying problem rather than the cascading effects is just so simple. Of course all the lobbyists will be against such a bottom up solution. It will also work since the currently deteriorating real estate markets will rebound during the next ten years, due to the deflating value of the $ if nothing else.
This is an idiotic solution if I've ever heard one.... For one thing, the housing market has resulted in grossly overvalued properties...... these values need to be adjusted to real world values..... someone has to "eat" this difference...... This is burden entirely rests on the home owner under this plan. Secondly the current interest rate is not a realistic rate to to place on these assisted loans..... the total principle value of the debt will increase rapidly and the home owner will end up over his head again. Thirdly.... The inability to pay these mortgages stems from many factors. Not the least of these is the fact that buyer was NOT advised as to the effect on payments when interest rates increased by a point or two..... add to this the job market, and the income losses many of these people are experiencing........ The radically increasing tax burden in many areas, and skyrocketing insurance premiums...... And you have a problem far deeper than the author seems to comprehend. In addition, health care issues are a significant factor in driving many of these people beyond their means.
This ill conceived "solution" is no solution at all, and is as deeply flawed as the bail out it proposes to replace. There are multiple problems which have contributed to this crisis, and they are deeply rooted in our current economic system.... in our way of life and our expectations as Americans. I am not at all sure there is a "solution"...... but I know this is not that "solution".
The homeowner/buyer needs relief..... it is a necessity if our way of life is to continue..... but this is NOT relief, this is an increased burden and no solution to the array of problems that created his individual crisis....... and the crisis of the financial world
I personally find the notion that home buyers are at the root of this problem offensive to say the least.... they really are the victims of this crisis, not the cause of it. The real cause of it was fast talking sales people, dishonest mortgage brokers, and greedy manipulators of securities........ The root problem is the "greed is good" school of thought which had it's origins under Ronald Reagan and culminated in a virtually universal orgasm of greed throughout the financial world under Bush. Frankly I feel that the author of this piece is an idiot.
Howard Wilkinson
It is obvious that whoever thought up this proposal doesn't work in Washington or on Wall St. It is practical and simple and gets straight to the point.
How about - let the banks go bust. Mortgages to a company that has gone bust evaporate. Deposit insurance covrs 100K, which is all anyone really needs (anyone with that much cash in a savings account has assets elsewhere).
Alternatively: government buys the homes outright and they become government housing. The mortgagees are recorded as bunkrupts. Credit may not be offered to bankrupts, and bankrupts may not apply for it. Bankrupts are not liable for any - *any* - debt for the term of their bankruptcy (say, 15 years). If they apply for credit during that term, then they have committed fraud and may face criminal charges, but the lender still does not get their money back. Of course, a person may attempt to have that 15 years reduced.
Sounds harsh, but it's only what would be happening anyway if lenders were responsible.
http://www.users.bigpond.com/pmurray
http://www.paulmurray.id.au/ageofworms
The root cause is the American consumer going deeper into debt to support a lifestyle their meager wages can no longer support.
The root cause is 1 percent of Americans controlling 90 percent of all the wealth leaving the vast majority to struggle to pay for food, energy and education let alone housing even with two incomes and "The good old american way having three jobs".
The root cause is a system that allows people to buy and sell instruments of debt to one another and make tremendous profits in an hours time taxed at the lowest of rates, while the greater segment of the population works harder and harder to earn a paycheque only to see wages for WORKING taxed at a higher rate.
The root cause is Americans going bankrupt due to health care expenses as the companies they work for cut their benefits in order to return a greater return to their shareholders by forcing their workers to pay for ever more of their health care bill.
The root cause is millions of jobs that used to pay a decent livable wages being off shored to China where a worker can earn less then 2 dollars a day, while the US Government in an alliance with Industry guts labor and Union protections, telling the worker that they now have to compete with China.
And the fix? Bail those bankers out and get the poor old American worker to borrow even more money from them.
I would not be surprised if the next fix suggested by congress, is that the debts of the parents be passed on to their offspring. The company store can then own you body and soul along with your children and your childrens children.
pk
I've discussed this proposal elsewhere on the internet and it was pointed out to me that this article is seriously stupid. With so many mortgages underwater and housing set to drop another 20% no one in their right mind would buy into that.
You cannot artificially prop up values.
Toxic loans need to be sold at 10¢ on the dollar to the gov. That's the scale of deflation needed.
At that value 700 billion goes a long way .....why it even buys a national social housing stock....fancy that. Taking $5 trillion+ in artifical bubble money out is exactly what is needed - it just flips over the fractional lending.
Bank gets real money - loans out at 10 x -
THAT isolates the bad money/economy from the underlying economy which is relatively fine and banks can then go back to fractional lending and recoup.
Why not separate the bad mortgages by the reason why people are in
bad situation. If I remember correctly medical expenses are
#1: bail out the people with foreclosures caused by medical bills
( at least they are not reckless ). And in future
create separate medical loans and never allow to put the on your house.
The next big problem will be health care bust: big pharma &
bad food causing the illnesses.
Good solutions are being offered at a faster rate every day. But the monopoly marketeers want to scare you into buying theirs right now.
If America had more CEOs just like this author, Corporate America wouldn't be the shit that it is today. We need a trustworthy Corporate America, not a bastardized one like the one that has existed these past 28 years.
"The root cause of the crisis, simply put, is homeowners' mortgage delinquencies and foreclosures."
Your proposal might be worth consideration if it wasn't so absurd. You want to swing from one bailout to another. Remember this whole corporate giveaway started with the $300 "economic stimulus" trial balloon that hardley anyone objected to.
Yes, on the surface, it would be a great idea for the government to pay my rent for the next ten years, as that's probably all the rest of my life expectancy... or I just walk away. I assume that you're not foolishly suggesting that covering a few months of arrears will solve anything? That would be a joke. That proposal does not address the reason for the debt.
The root cause is NOT homeowners mortgage. It is the cost of energy. Why did the bubble burst? Simple. Homeowners could not afford to pay a mortgage and at the same time, stuff all their income into their SUV's gas tank (or pay for winter heating or increased food prices or any other product that had transportation costs added).
This economic failure was engineered.
Address affordable energy and suddenly the cash is back in the economy's pocket... instead of big oil's safe.
Requiring government to "pay the rent" does nothing to address the root cause.
A 1.5 MW capacity generator at a good wind site will cost about 1.5 to 2 million dollars installed (on the lower end for wind farms), and produce enough energy for about 300 to 350 typical households.
For the sake of argument, let's be conservative and figure $2 million each with land lease and maintenance and each powering 300 homes.
$600 billion buys 300,000 wind turbines installed.
300,000 turbines, each powering 300 homes will power a total of 90 million homes. About three hundred million people with 2.5 in each household equals about 120 million homes.
$600 billion could power about 75% of the homes in the US with renewable clean energy... and if Congress allocated it for that use, it could power those homes (and electric cars) for practically nothing.
This would leave $100 billion dollars to initiate a new national power distribution network.
And all the economic benefits from jobs for American manufacturing, installation, servicing, management and the additional savings of dollars and environment over the cost of existing power sources and fuels would be staggering... especially when calculated over the same time period that the loss of that $700 billion to greedy corporatists or homeowners would negatively impact the US. The differential is enormous. The installation of those turbines would charge our economy like no other initiative.
Okay... this is just an example. Of course that $700 billion could be spread out to several renewable technologies... but I'm just trying to help us all visualize what that chunk of change could buy.
Or we could submit to the demands of CheneyOilCo and cough up the dividend payout ransom... or socialize housing for all Americans. I mean, really... who needs clean renewable and independent energy sources... it's not as if the fuel we now depend upon is the source of all our problems... right?
Real solutions for real problems... bust the energy monopoly that is squeezing us all. Put the money to good use.
"Homeowners could not afford to pay a mortgage and at the same time, stuff all their income into their SUV's gas tank (or pay for winter heating or increased food prices or any other product that had transportation costs added)."
What ??? Sorry. There were many home buyers who couldn't even save a penny for a down payment or to cover closing costs. Why is a person who has $0 in savings buying a home worth several hundred thousands of dollars ?? Why were people taking out interest-only loans ? Why were people taking out balloon mortgages, or ARMs with such short terms they could only come out of it alive if their property appreciated at some ridiculously high rate ?
No, the problem is not cost of gas or anything else. The problem is that people thought they could make money from real estate and they took a gamble. I am not interested in helping them. It's no different than going to the casino and throwing away $100,000.
This is the best solution I've heard!
Nevertheless, there is still an underlying problem: that home prices in much of the nation are considerably higher than local wage levels can support. In SoCA where I live, home prices average about 50% more than two average wage earners can manage.
The underlying problem then is stagnant wages. Unionization and the threat of strikes are the only historically proven way to "persuade" employers to raise wages. Our government should initiate a policy of encouraging across the board unionization in order to bring balance to the marketplace and to better enforce legal guidelines for the economy.
bligh4
This sounds like a better solution than the one offered.
The way I see it though, the underlying problem is that a lot of these mortgages shouldn't exist to begin with. On one end, we have the Community Reinvestment act that requires that banks lend to people with credit problems or low down payments- things that would usually disqualify buying a house. No problem, Fannie and Freddie will insure the mortgages with as little as 3% down (or less). On the other end, we have home prices that far outpaced the historical appreciation rate of 5-6% for the past few years. No problem! Housing will always go up, right? But like the stock market in 2000, this was an unsubstaneable bubble that was sure to revert back to the mean at some point.
Problem is, if you are lending 90% on a property that has tripled in price- to say 600k- in the past 10 years, then if the value falls towards the mean of around 350k the homeowner is "upside down" to the tune of $190,000. ($600,000 minus $60,000 down payment, minus $350,000 current value = $190,000) and is likely to just walk away and leave it to the bank even if it means losing the down payment. Now the bank is left holding a property valued at $350-,000 (and falling) that it lent $540,000 to purchase. No payments are coming in and the bank will, in reality, dump the house at whatever it can get for it- further driving down the prices. The local property tax base then collapses, the banks have to write down these bad loans, and once enough of this crap hits the banks balance sheet- the bank is insolvent.
God knows what will happen if property values don't stabilize soon- but if history is a guide and they revert back to the level where they SHOULD be at 5-6% appreciation, then they have a lot further to fall.
What a friggin mess. My seven year old could have seen this coming. What the hell were the "smart people" doing?
There are so many good progressive ideas out there right now. We need to be kicking and screaming at the corporate media to include our ideas. Democrats need to abandon and let go completely their fantasies that their party is going to help us - we need to start pushing our progressive agenda with real progressives.
hahahaha. Are you kidding? That will never happen. True progressives need to stand up and simply do it themselves.
Government not hearing your idea for solar or wind power? DO IT YOURSELF
Government making heating costs too high? Get a woodstove and DO IT YOURSELF
Food prices getting too high? Grow a garden. Lack the land? Guerilla garden or learn to forage. There's a surprising amount of edible food, even in cities. Not to mention dumpster diving. America is very wasteful.
Mainstream media not being progressive enough? DO IT YOURSELF. Indy media is the only thing that will work.
This is the solution I'm pushing!
It will only use a fraction of the money they are talking about.