A different bailout
I recently read 'Trillion dollar meltdown' a book about the current financial crisis.
http://www.amazon.com/Trillion-Dollar-Meltdown-Rollers-Credit/dp/1586485636/ref=sr_1_1?ie=UTF8&s=books&qid=1223004732&sr=8-1
It covers from the 1970's to November of 2007, and is a very very interesting read.
Today it sounds like the $700 billion bailout is a done deal, although I notice the stock market fell another 4% anyway. Many informed observers think that this bailout will not solve the problem, there will be more bailouts (or worse) in the future.
So maybe I'm naive but here is my question or proposal for the fed:
The proposed bailout consists of buying from Wall Street packages which consist of thousands of mortgages bundled together, and then sliced apart in arcane ways. The fundamental problem in the whole meltdown is that since more mortgages than expected are defaulting, these packages ("mortgage backed securities") are worth a lot less than expected.
So let's not buy those packages from the banks, which seems unlikely to solve the problem. Instead, let's go to the source, the mortgages themselves.
If the government could guarantee that the mortgages would not fail, wouldn't the values of all those packages and tranches rise back up? Let's call it trickle-up economics.
Let's have the government step in and help any homeowner who meets certain criteria. Maybe it has to be your principal or only residence, not a home that was purchased to "flip". But let's make the criteria pretty easy -- we're trying to solve the crisis, not trying to sort out the slightly stupid homeowners from the ones who were truly misled by the banks.
The government "help" would take the form of converting the nasty adjustable-rate mortgage into a plain old fixed-rate 30 year mortgage at a reasonable rate. That's all. In my personal opinion the government should force the bank to accept the new terms. Shove it down their throats. Sure they will get less interest money from the newly-renegotiated mortgage. Tough. But, key point, that mortgage will be secure. The homeowner won't default. So the high risk goes away, and that reduced risk trickles up the chain, restoring the value to all those mortgage backed securities.
OK, maybe since they guaranteed the loans the government will be on the hook to buy the few houses that eventually do foreclose even at the new terms. But I think that's a very small number compared to what Wall Street expects the default rate to be on the adjustable rate mortgages.
And maybe to satisfy the banking lobby the government has to pay off the banks some of the "lost interest" on these usurious (my opinion) loans. I'd argue against that -- make the banks "write down" the income from these loans in exchange for knowing that the income is secure. The writedown is much less than if the loans default in the numbers that are looking likely. It's a good deal, the banks should jump at it. But of course they won't.
Anyway this solves the mortgage crisis and the credit crisis that stems from it. If the mortgages are guaranteed good, then the securities based on those mortgages do not have risk, and their value should rise back to where it was. Trickle up.
Please ignore the fact that this proposal actually helps poor folks and middle class homeowners. That's not the point, the point is to rescue Wall Street and the big banks. If it happens to have other effects along the way, that shouldn't cause us to reject the plan, should it?
OK, now it's up to you, dear readers. Tell me what's wrong with this plan. But please, don't tell me that they'll never do it for political reasons. I know that perfectly well. Just tell me whether or not it would work economically.
http://www.amazon.com/Trillion-Dollar-Meltdown-Rollers-Credit/dp/1586485636/ref=sr_1_1?ie=UTF8&s=books&qid=1223004732&sr=8-1
It covers from the 1970's to November of 2007, and is a very very interesting read.
Today it sounds like the $700 billion bailout is a done deal, although I notice the stock market fell another 4% anyway. Many informed observers think that this bailout will not solve the problem, there will be more bailouts (or worse) in the future.
So maybe I'm naive but here is my question or proposal for the fed:
The proposed bailout consists of buying from Wall Street packages which consist of thousands of mortgages bundled together, and then sliced apart in arcane ways. The fundamental problem in the whole meltdown is that since more mortgages than expected are defaulting, these packages ("mortgage backed securities") are worth a lot less than expected.
So let's not buy those packages from the banks, which seems unlikely to solve the problem. Instead, let's go to the source, the mortgages themselves.
If the government could guarantee that the mortgages would not fail, wouldn't the values of all those packages and tranches rise back up? Let's call it trickle-up economics.
Let's have the government step in and help any homeowner who meets certain criteria. Maybe it has to be your principal or only residence, not a home that was purchased to "flip". But let's make the criteria pretty easy -- we're trying to solve the crisis, not trying to sort out the slightly stupid homeowners from the ones who were truly misled by the banks.
The government "help" would take the form of converting the nasty adjustable-rate mortgage into a plain old fixed-rate 30 year mortgage at a reasonable rate. That's all. In my personal opinion the government should force the bank to accept the new terms. Shove it down their throats. Sure they will get less interest money from the newly-renegotiated mortgage. Tough. But, key point, that mortgage will be secure. The homeowner won't default. So the high risk goes away, and that reduced risk trickles up the chain, restoring the value to all those mortgage backed securities.
OK, maybe since they guaranteed the loans the government will be on the hook to buy the few houses that eventually do foreclose even at the new terms. But I think that's a very small number compared to what Wall Street expects the default rate to be on the adjustable rate mortgages.
And maybe to satisfy the banking lobby the government has to pay off the banks some of the "lost interest" on these usurious (my opinion) loans. I'd argue against that -- make the banks "write down" the income from these loans in exchange for knowing that the income is secure. The writedown is much less than if the loans default in the numbers that are looking likely. It's a good deal, the banks should jump at it. But of course they won't.
Anyway this solves the mortgage crisis and the credit crisis that stems from it. If the mortgages are guaranteed good, then the securities based on those mortgages do not have risk, and their value should rise back to where it was. Trickle up.
Please ignore the fact that this proposal actually helps poor folks and middle class homeowners. That's not the point, the point is to rescue Wall Street and the big banks. If it happens to have other effects along the way, that shouldn't cause us to reject the plan, should it?
OK, now it's up to you, dear readers. Tell me what's wrong with this plan. But please, don't tell me that they'll never do it for political reasons. I know that perfectly well. Just tell me whether or not it would work economically.