bailout thoughts
While I do know some economics, I'm not a macro or finance expert, and no one reads this blog anyway, but I still can't resist making a suggestion regarding the mortgage mess bailout: To minimize the ultimate cost to taxpayers, the government should demand equity shares from everyone it helps. In particular I would propose that:
1. Any company that sells its bad debt to the government must also give the gov't stock in the company. This essentially takes money away from the bank's owners and gives it to the taxpayers. The government sells the stock in the future for a profit if/when the bank recovers, thereby recouping at least some of the losses from the bad debt. It has been argued that this would interfere with quality of debt auctions by reducing the number of participants, but this won't matter if, as is currently proposed, debt will be priced based on the quality of the underlying mortgages rather than by bidding.
2. Homeowners who can't pay their mortgage be allowed to appeal to the government to refinance the mortgage at more favorable (fixed) rates, in return for giving the gov't something like a 10% share ownership in the house. When the homeowner sells the house in the future, the government gets 10% of the sale price, again recouping in the future at least some and perhaps all of the costs it incurs by rewriting the terms of the mortgage. The now gov't owned Fannie Mae could administer this program.
1. Any company that sells its bad debt to the government must also give the gov't stock in the company. This essentially takes money away from the bank's owners and gives it to the taxpayers. The government sells the stock in the future for a profit if/when the bank recovers, thereby recouping at least some of the losses from the bad debt. It has been argued that this would interfere with quality of debt auctions by reducing the number of participants, but this won't matter if, as is currently proposed, debt will be priced based on the quality of the underlying mortgages rather than by bidding.
2. Homeowners who can't pay their mortgage be allowed to appeal to the government to refinance the mortgage at more favorable (fixed) rates, in return for giving the gov't something like a 10% share ownership in the house. When the homeowner sells the house in the future, the government gets 10% of the sale price, again recouping in the future at least some and perhaps all of the costs it incurs by rewriting the terms of the mortgage. The now gov't owned Fannie Mae could administer this program.