I'm no economist. I, like many, am struggling to grasp the complexities of the house of cards built on top of the simplicities of bad lending decisions and a housing slump. As a believer in demand-side economics, I am inclined to support a plan that devotes the $700 billion being talked about to solutions that bubble-up, rather than trickle down. The hucksters that got us into this mess cannot be trusted to ensure that the hundreds of millions of taxpayers and homeowners that are on the hook for their bad decisions get a return on our "investment". My admittedly amateur solution to this crisis goes something like this:
- Screw the securities; Buy the houses; and
- Repeal the 2005 Bankruptcy Bill and allow people to keep their homes, but declare bankruptcy.
Follow me over the jump for further details...
First, if the underlying cause of the current mess is declining home values coupled with crappy mortgages that people can't get out from under, then let's attack the cause, not the symptom. There's plenty of finger-pointing going on blaming the homeowners, the banks, the Wall Street execs for this mess. But at its root are something tangible and concrete: houses. All the rest is paper and bullshit. If the taxpayers are going to purchase something, purchase the property, not the debt on the property. Buy out the homeowners, but the next part is even more important.
The 2005 bankruptcy bill, as I understand it, has been partially blamed for homeowners inability to pay their mortgages. They have so much other debt they can't get rid of, and they can't declare bankruptcy anymore, so the only option is to stop paying their mortgage. This situation is no longer tenable.
So, the second important part of this solution is to repeal the bankruptcy bill, allow homeowners to declare bankruptcy, and let each individual story be sorted out by a bankruptcy judge. By doing this, everybody involved in the transaction (creditor and lender) takes a bit of a bath, but all of the underlying debt is restructured locally and transparently, in public proceedings. Part of the bankruptcy proceedings should include an attempt to keep people in their homes by negotiating with the government owners of the home a fair rental price until they get back on their feet to get a proper mortgage; one they can afford.
Now, like I said, I'm no economist. And the plan I've laid out is probably fraught with problems and flaws that make my lack of training in high finance painfully obvious. However, if we could find a way to alleviate the devastation to so many families that are the root cause of this mess, reducing the scope and size of this cancer on our economic system, then the benefits accrued to the least powerful will bubble up to the greater financial system.
A bottom-up model is called for here. It was supply-side, Adam Smith invisible middle finger, gamed-market capitalism that caused this mess. The solution should be a demand-side, bottom-up bailout of those least likely to be OK once this mess finally shakes out. The shareholders of Goldman Sachs, et al.. will be just fine no matter how this happens. Save the homeowners, save the world.