Bernake and Paulson’s $800 billion plan cannot get any dumber. McCain's freebie homeowner bailout is no better.
The mortgage crisis is created by what? People who cannot afford the escalating mortgage payments. So we force them out of their homes, and the banks consider the mortgage to be worth what? Zero? Banks go under, property values of nearby homes plummet, jobs are lost, and the American people get stuck with a $800 billion bailout that, has not restored confidence in the markets, has not restored liquidity, and will not pull the economy out. As a matter of fact, further bankruptcies have occurred ahead even outside the banking sector.
Why not let these people stay in their homes, and let them continue making whatever payments they were able to afford? Yet, nobody should get a free lunch. The Fed (US taxpayers) can pay the difference of the mortgage, and take partial equity on the value of the house. In other words, if the Fed needs to pay 40% of the new mortgage (based on a 30 year fixed rate), then the Fed takes a 40% equity position on the house when it sells later. The banks become liquid again because there will be no more defaults. The housing market becomes stable again because the glut of empty homes disappears. Our own property values will bounce back to near what they were a year ago because there won’t be For Sale and Foreclose signs everywhere. When the houses are eventually sold, American taxpayers reap the rewards of shared equity, leading to the possibility of reducing taxes in the future.
The KEY difference between this plan and McCain's homeowner bailout plan is that the taxpayer is treated as an investor, as he gets something back for his generosity. Another problem with McCain's plan is that it allows the homeowners to renegotiate the principal portion of the loans. Since each defaulted loan is treated differently, that subjectivity opens up the field for further abuse. My plan is simpler. Since refinancing is a simple mathematical task, it is straightforward, not open to further abuses, and gets liquidity into the banking sector much more quickly than Bernanke's bailout.
Another tenet of my plan is to require an automatic deduction of the homeowner's salary for the pre-negotiated mortgage payment. That way, he has to pay the taxpayer first before he can ramp up his credit card payments in the future. The only way he can default again is if he should lose his job.
Bailing out Credit Default Swaps is an entirely different story. Companies like AIG that bet against credit defaults participated in an insurance game. The failure of that portion of their business should stand or fall separate from the mortgage related instruments like CMOs and derivatives of CMOs.
Stabilizing the economy has as much to do with confidence as substance. As of today, the DOW has fallen every day after the $840B was approved. Congress must get its act together. Before any further bailout, Congress must pass a law preventing ANY bank or agency to make the kinds of loans that are unsustainable – the kind that got us where we are today, and the kind that I continue see advertised on TV every day. They must also have preconditions to AIG. The fact AIG paid $400,000 for a jaunt the day after the bailout indicates that no further controls were put in place. That no doubt lead to further loss of confidence that the Fed is in control, and has caused further tanking of the markets.
