There has been a lot of talk over the past few days concerning the bailout. I am no economist nor do I have any superb understanding of the current crisis, but I do believe that I can see idiocy when I see it. As such I want to quickly go over my understanding of the situation and my idea of a potential solution. Those who are more economically savvy please join me over the fold and correct any errors I may make.
(Note: First Diary please be gentle)
The Crisis
The current economic crisis is a relatively direct result of flooding the market with inflated crap. Basically, subprime mortgages, with little chance of repayment, combined with a over inflated (and rapidly deflating) housing market filled the market with worthless debt that got passed around the financial industry (and further inflated during that time). This mainly occurred due to the endless Republican deregulation that allowed all of the bad mortgages to get lumped into large packages and deemed "good." Because every mortgage could get lumped together and did not sit on the books of mortgage brokers or banks, there was little reason for brokers to perform due diligence to make sure that people really could repay their loans.
We now face a potential systemic financial collapse. Creditors are pulling in their horns, small businesses are facing credit difficulties, etc.
The Solutions
The Paulson-Bush plan is a continuation of the same failed trickle-down economic policies started during the Regan administration. They want to buy the crap, while pretending it is good, to free up credit among the upper echelons of the financial industry. Now the current iteration of the plan does provide for some equity investment that could repay the $700 billion price tag; however, the plan, as I understand it, does little to help struggling homeowners let alone the average taxpayer (beyond potentially opening up some credit).
So my thought is to take a more populist route. Think of the Paulson-Bush plan as a plan to provide more sunlight for the canopy of the tree. My idea is to water the ground instead.
If my assumption that a large portion of the market failure comes from massive amounts of bad mortgages on the books, then I propose that we make those bad mortgages into "better" mortgages. Take some portion or the entire proposed $700 billion bailout package and use it in multiple areas:
- Get those holding the ARMs that are hurting so many homeowners to renegotiate the terms to fixed-rate mortgages. Do this by either compelling the mortgagors to do so or give judges the power the power to do so (as I've read suggested in various other diaries).
- Offer government assistance to those who are TRULY struggling under the condition that the government becomes the landowner in a structure similar to a community land trust [CLT]. This way the homeowner would keep the home and be able to, potentially, build some equity. At the same time, the government would also build some equity in the investment and would keep a percentage of the proceeds upon resale of the home to repay the initial investment by taxpayers. The government could either keep the home on the books for a number of resales in the same CLT format, thus providing low-income housing, or the government could release the house to be sold at market value taking a share of the return. If the homes were kept in the CLT format they could potentially be used to offset the need for future low-income housing creation (at least temporarily).
By doing both of these things the crap mortgages would theoretically be better than they were because people were no longer foreclosing at breakneck speed. Anyways, I cannot remember everything else that I wanted to say about this right now, so I'll leave it at that and see what type of response I get about this. I know this may be a ludicrous proposal, as I said before I am a simple layperson, but I think that some populist approach is better than giving a blank check to Wall Street.