Krugman on the Bailout: But Why Not Intervene at “Step 1″?

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57 Responses

  1. gijoe says:

    Now that you mention it, imho… If your house burns and it was non code abiding, you should have to pick up the expenses to put the fire out.

  2. jaed says:

    Graaahhhh.

    If you want to stabilize the mortgages – at the bottom end of the pyramid – it’s pretty straightforward: get these improvident people out of whatever horrific terms they have on their current mortgages and refinance them into 50-year fixed-rate terms. (With one exception to the fixed rate: they get a lower rate at such time as they achieve 20% equity in their homes, but it doesn’t change the monthly payment, only shortens the term.) No discounts – they eat the difference between the original mortgage and the current value.

    This gets them on a stable basis, with a predictable monthly payment and no unpleasant little reset surprises. It also gives them an incentive to hang in there and get their equity up to a nice respectable level as soon as practical. They pay a price for having bought more house than they can afford with the much longer term, but they get terms that let them keep the house, and their credit rating isn’t screwed. If they’re underwater, they’re paying for nothing for a while – but they’d be paying rent anyway, so that’s a wash.

    The homeowners get to keep their houses and have a predictable budget item, the asset stabilizes so the mortgage holders are in better shape, people who were responsible and therefore did not buy too much house don’t get screwed by taxes… I’m not sure why no one has done this already, actually. Is it legal?

  3. Joe Leahy says:

    Great idea. I have been batting around a similar idea in private email conversations for days now. Unfortunately, I still do not have a rejoinder for the best two responses I received:

    1) Bail out lower on the pyramid and the transaction costs become enormous. More money is spent valuing assets/investments to purchase (rather than bundles of assets), purchasing assets, and selling assets — and less money is injected straight into the financial system.

    2) The Paulson plan is not to invest up to $700B, not spend that much outright. So, hopefully the Fed will make some — or perhaps all — of its investment back by re-selling the troubled investments later. By contrast, money simply given to homeowners would never be recouped.

    I don’t think these problems ultimately are fatal to your idea, because it’s just SO the right thing to do. (Talk about promoting “the onwership society”) But it raises the price.

  4. Kaimi, I understand why I have to pay for something. The “Anonymous Coward” who quoted me missed the point. I know that what I lose on a bailout to any party is only to try to prevent the collapse of the system that will take everything I have with it.

    The point is not that I shouldn’t have to pay for anything. The point is that I’m not happy about having to pay for this breakdown, and your suggestion doesn’t make me any happier. Either way I’m paying for someone else’s foul-up, and I want to see more punitive measures in here. Someone needs to go sit in the corner over this, and it doesn’t look like anyone will.

  5. steve@missouri.edu says:

    Or perhaps a ‘trickle-up’ approach might work ??

    As you know the Feds already subsidize homeowners via the Mortgage interest deduction.

    Would it not be easier, quicker, safer and a more ‘populist’ political act to simple adjust our tax laws so that, for example, for the remainder of 08 & 2009 a married-filing-joint couple with an adjusted gross income of under a quarter million could replace their current mortgage interest *deduction* with a sliding-scale 50 to 90% mortgage interest ‘refundable credit’.

    While insufficient to assist some unemployed folks who couldn’t make payments regardless, for most struggling middle-class citizens the promise of a fat IRS refund in April would provide a huge incentive to *make their mortgage payments* as well as provide incentives for new home buyers.

    End result = fewer mortgage defaults, bank stock values soar, home sales skyrocket and the Federal subsidy to eliminate this problem goes to millions of individual taxpaying families rather than to a relatively small group of already wealthy gamblers…

    Your thoughts ??

  6. greg says:

    My wife & I have planned and saved for our retirement since we were 35 years old. We lived within our means, saved money & made responsible choices. Now that I am within 1 year of retirement I see NO need to pay for the GREED of others. Let those who caused the crash, pay……… Let there be a criminal investigation to seek out the guilty.

    Penalize THEM. THE GREEDY THIEVES.

  7. Robert says:

    Instead of looking at house values that would exclude renters, put a requirement of $250,000 combined household income or less. Make it available to all those who file a 2008 tax return and also turn in a credit report. Have the items that are most effecting debt to income ratio paid off directly through the account number of the bill. Put a cap of say $50K on total amount that can be paid. This will free credit, whether revolving or fixed. Allow the American people to shift their own money towards the larger remainder of their own debt (mortgages, medical bills, etc) to prevent repossessions of vehicles and foreclosures of mortgages.