Krugman on the Bailout: But Why Not Intervene at “Step 1″?
posted by Kaimipono D. Wenger
My colleague Bryan Wildenthal circulated this thoughtful analysis to faculty colleagues yesterday. With his permission, I’m reprinting it here for Concurring Opinions readers.
Paul Krugman is a progressive commentator I admire greatly, and a seriously credentialed academic economist. His Sept. 22 New York Times column (“Cash for Trash”) on the proposed Bush-Paulson Wall Street bailout is one of the better comments on this issue I have seen.
But I tripped over part of his argument.
First, Krugman, in a helpful summary, takes “a four-step view of the financial crisis.”
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt….
3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse….
Krugman then perceptively notes that the Bush-Paulson plan is (at
best) designed to intervene at “step 4″ of the problem, by buying up most of the bad mortgage-based securities. Krugman argues:
The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.
But I’m thinking: Why not intervene at Step 1?
Mind you, I’m not necessarily AGAINST an intervention at Step 2, as Krugman suggests, though many people will understandably oppose it as a massive “socialization” of our banking and investment system, as government obtains (in Krugman’s words) “a share in ownership” in such companies.
But intervening at Step 1 would arguably cut more directly to the GRASSROOTS of the problem, while AVOIDING that whole bugaboo of “socialism” raised by direct, top-end, government buy-outs and bail-outs.
I don’t think I’m the only one thinking along these lines. And hey, I’m no economist! But here’s how I would argue it:
If (1) the federal government really has about a trillion dollars to throw at this problem, and (2) taxpayers are being asked to foot the bill, then (3) why not structure the solution so that, as much and as directly as possible, “we the people (the taxpayers)” BAIL OUT OURSELVES? Why not aim at what Krugman calls “Step 1″ by helping millions of ordinary American homeowners (largely the same ordinary American taxpayers who will finance any solution) avoid that “surge in defaults and foreclosures” by firming up the grassroots basis for all those dicey “mortgage-related securities”?
After all, there’s nothing new about government and taxpayers subsidizing home ownership by most Americans of middle incomes and modest means (through tax deductions, creating Fannie Mae and Freddie Mac in the first place, the recent govt takeover of FM/FM, etc, etc).
So, instead of the massive moral hazard — and general unseemliness — of putting taxpayer money on the line to bail out Wall Street banks and brokers at the top end of the pyramid, why not aim at the broad BASE of the pyramid?
The money is there. I mean really, isn’t it funny how when political leaders and powerful interests like Wall Street REALLY need cash, they somehow find a way to pull it out of the federal government’s [ahem]?
To put it more politely: They just stick taxpayers with the bill.
Year after year, there’s somehow never enough money to fund universal guaranteed health insurance (and whatever bailout is passed to deal with this crisis will provide yet one more excuse). But need to invade a foreign country on false pretenses, even in a time of huge deficits? No problem! Need to spend about a TRILLION to bail out Wall Street? Deficits be damned!
America’s population is about 300 million. Divide by 4 (typical household size) and you get maybe 75 million households. Even that doubtless overstates the number of owner-occupied homes covered by bank mortgages, with a value less than, say, $1 million or so (we should exclude the very wealthy — if the $5 million La Jolla mansion is about to be foreclosed, I say tough luck — John McCain, of course, would make $5 million the cutoff, having suggested that anyone under that is middle class — whatever). And remember, you have to exclude the homeless, renters, nursing home residents, all the dependents who live in each mortgaged home, etc.
So, maybe 50 million owner-occupied homes, of middle-class or lower value, with mortgages? Close enough for government work.
Divide $1 trillion by 50 million and you get $20,000 — not to be sneezed at! Over two years, that could cut almost $1,000 off every single monthly mortgage check in America! That amount of mortgage relief targeted directly at the millions of American taxpayers and homeowners of middle incomes and modest means would be an ENORMOUS shot in the arm to the economy (dwarfing the piddly recent “economic stimulus” checks). And it SHOULD mostly solve a crisis supposedly rooted in overextended mortgage lending, and securities built shakily on same.
If Secretary Paulson is about to start cutting similarly huge taxpayer-backed government checks to various banks and Wall Street brokers, to take all their bad mortgage debt off their hands, why not
– INSTEAD — impose on them a legal mandate (backed up by serious criminal penalties to prevent misuse or misdirection of the money) to:
(1) Direct half the money to subsidizing, for the next two years, in some flat amount X per household per month, the mortgage payments on all owner-occupied homes in America worth less than some amount Y. The mortgagor could simply pay X less per month (down to zero, in some
cases) and the bank has to use the subsidy to make up the difference; if the mortgagor happens to pay more, perhaps their full original amount owing, the bank would be legally obligated to refund the homeowner up to amount X (out of the subsidy provided).
(2) Direct the other half of the money to pay off directly, up to some flat amount Z, some or all of any mortgage debt owed on every home worth less than Y.
Voila! Homeowners don’t default or get foreclosed. Banks and investment firms will still get full value on their mortgages. All that “bad mortgage debt” will suddenly BE (and be viewed AS, market psychology being all-important) very GOOD and SOLID debt.
This GRASSROOTS BAILOUT would be PROgressive because it would, as noted, exclude homes above value Y (maybe $1 million?). And X and Z would be flat amounts, thus effectively PROgressive in providing a greater relative subsidy for lower home values and mortgage amounts (just like a flat tax is effectively REgressive because it has a greater proportional impact on lower incomes).
Some lower-income people with small mortgages would be paid off entirely (at least over the next two years). Upper middle income people would get substantial marginal relief. It would benefit ALL homeowners (other than the very wealthy who do not need help), including those who planned carefully and are not in danger of default
– thus not creating the moral hazard and inequity of targeting only those facing imminent default (the problem with a “foreclosure holiday” or similar measures).
Some type of relief should be thrown in for renters (who also pay taxes!), for equity purposes — perhaps the long-overdue reform many have proposed of allowing renters to fully deduct rent payments from federal taxes — maybe even an immediate cash credit to renters to further boost the economy and match the immediate cash relief to mortgaged homeowners.
Finally, this proposal would NOT tend to “socialize” the economy (in the way that direct, top-end, government buyouts of banks and investment firms and insurance giants DO amount to “corporate socialism”). It would leave the private economy and free market in place. Taxpayers would just be using our collective financial muscle to give the entire system a HUGE shot in the arm.
Am I missing something? Doubtless, but this seems like a much better starting point for debate than the Bush-Paulson top-end bailout.
September 23, 2008 at 7:33 pm
Posted in: Current Events
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Responses (57)
John Armstrong - September 23, 2008 at 8:04 pm
Overall not bad. But some of these scratches on the back of the envelope seem sketchy.
owner-occupied homes covered by bank mortgages, with a value less than, say, $1 million or so
As I understand it, part of the problem is people using these fast-and-loose mortgage rules to buy much more house than they could otherwise afford. That is, a house that would have gone for $750,000 is now well over a million. These are a fair chunk of the houses people are walking away from, and thus cutting the legs out from under the mortgage-backed securities, no?
The other part is this: now I (a renter) am not only getting nailed by my inability to take big tax breaks, but I have to pay for some guy’s house he should have known he couldn’t afford? Sure, it’s better than me having to pay for some hedge-fund manager’s third Porsche, but it still doesn’t sound very good to me.
Mike - September 23, 2008 at 10:26 pm
As I have been thinking about the problem, I have come out pretty much at the same place but by a different route. From what I can understand of the Paulsen approach it is that any financial institution, whether on death’s door or not, could offer their worst assets to the government. But at what price?
The real problem is that nobody knows the value of these complicated financial packages because they have been sliced and diced so many ways as to be unrecognizable. So all of these packages are suspect and there is no way to figure out what the value of any of them are, with value meaning the likelihood that the underlying mortgages will be paid off in a timely fashion.
So, it seems the only way to do anything other than guess at the present value is to start at the other end. Not at the top of the financial institutions but at the bottom with the mortgagors. Redoing all the existing mortgage deals where the mortgagor is in trouble is itself difficult and time consuming.
So, something needs to be done in the meantime. I guess that the Fed may have to set up within each financial institution an entity separate from the parent and isolated financially from the asset value problems of the parent. The Fed lends money to the bank to continue in business, with, of course, pretty careful scrutiny of how that business is operated.
Mike - September 23, 2008 at 10:26 pm
As I have been thinking about the problem, I have come out pretty much at the same place but by a different route. From what I can understand of the Paulsen approach it is that any financial institution, whether on death’s door or not, could offer their worst assets to the government. But at what price?
The real problem is that nobody knows the value of these complicated financial packages because they have been sliced and diced so many ways as to be unrecognizable. So all of these packages are suspect and there is no way to figure out what the value of any of them are, with value meaning the likelihood that the underlying mortgages will be paid off in a timely fashion.
So, it seems the only way to do anything other than guess at the present value is to start at the other end. Not at the top of the financial institutions but at the bottom with the mortgagors. Redoing all the existing mortgage deals where the mortgagor is in trouble is itself difficult and time consuming.
So, something needs to be done in the meantime. I guess that the Fed may have to set up within each financial institution an entity separate from the parent and isolated financially from the asset value problems of the parent. The Fed lends money to the bank to continue in business, with, of course, pretty careful scrutiny of how that business is operated.
Logical Extremes - September 24, 2008 at 1:39 am
Philosophically, bottom-up is the way to go, and has the lowest risk of abuse. But I agree with John… those of us who weren’t stupid enough to overextend ourselves are going to be pissed off with whatever solution is adopted.
craig - September 24, 2008 at 8:35 am
Yep, those of us who paid off our house by living below our means are going to get stuck with everyone else’s bill. I guess that’s typical of “progressive” solutions, though….
Kevin K - September 24, 2008 at 8:39 am
As an apartment renter who has been saving for a house this suggestion screws me in so many ways.
Kevin K - September 24, 2008 at 8:40 am
As an apartment renter who has been saving for a house this suggestion screws me in so many ways.
Alfonzo S. Tangerine - September 24, 2008 at 8:41 am
Great idea. Everybody (the vast majority of homeowners) who was honest on their loan applications and paid their bills on time gets to foot the bill for the deadbeats and liars who weren’t and didn’t.
Yeah, typical “progressive” thinking there.
weffie - September 24, 2008 at 8:44 am
Assuming you are serious, I don’t understand your position. The Treasury plan is not to give away $1 trillion, but to buy up to $1 trillion in assets. Admittedly, that is up to $1 trillion at risk, but it’s not the sure-fire money out the window plan you suggest.
Your plan, more so than the Treasury’s, is outstandingly inflationary.
A Stoner - September 24, 2008 at 8:51 am
I got a better Idea, how about giving the money to people like me who have not done anything bad at all. I have sat out the housing bubble waiting for a chance to buy a house at a price that is reasonable for the incomes of the people who work in my area. Unfortunately, those houses went up way above what the community can afford, the prices are finally starting to drop, but only on foreclosures where the family who vacates them leave them so trashed that it would cost too much money to fix them and still come out with a nominally affordable house. So I am still waiting for the housing correction to actually finish. How about giving me the money, so I can afford a nice foreclosed house and be able to fix it up?
NC Reader - September 24, 2008 at 8:55 am
I’m at the other end of the spectrum from John — I bought a house within my means, took a shorter term mortgage and then paid it off early so now own my home outright. So do I get a rebate check?
Believe me I’m not happy about the bailout and think that everyone should just chill for a bit before making any decisions. However keep in mind that after all in the end these assets have value (ie real estate) and that value is down but not gone so the government will get some (probably a huge chunk) of its money back and might, just might, even make money (not likely but possible). Not so with your proposal which is just a handout.
Doug - September 24, 2008 at 8:55 am
The homeowners in many cases are just as guilty as the idtiots who gave them their mortgage. Anyone foolish enough to take on a loan that they had little chance of paying back does not deserve $20k from the Feds. All that does is punish those who borrowed what they could afford to pay back, me for instance.
Partisan - September 24, 2008 at 9:01 am
I have zero equity in a house thats too big, too overpriced and with a too large a monthly payment. Or, I have an interest only adjustable and I’m looking at a HUGE payment in a few months or years on a house thats overpriced which I have no equity in.
Even if you give me 20,000 dollars, why would I pay down a mortage on a house that is still overpriced with a monthly payment I can’t afford? Wouldn’t that be throwing good money after bad?
Partisan - September 24, 2008 at 9:01 am
I have zero equity in a house thats too big, too overpriced and with a too large a monthly payment. Or, I have an interest only adjustable and I’m looking at a HUGE payment in a few months or years on a house thats overpriced which I have no equity in.
Even if you give me 20,000 dollars, why would I pay down a mortage on a house that is still overpriced with a monthly payment I can’t afford? Wouldn’t that be throwing good money after bad?
edh - September 24, 2008 at 9:07 am
What makes you think someone behind in their mortgage or under water in their home equity would use the money you give them to add to their monthly mortgge payment rather than reduce their contribution to it?
Ben White - September 24, 2008 at 9:08 am
No.
This answer would not solve the problem. The problem is that the value of the houses went down. When the mortgage is for more than the value of the house, it’s bad to own the mortgage and the mortgage will have a very low value.
This is true whether or not the home owner can eventually pay off the mortgage in 20 years. If the home owner keeps paying the payments (or house prices go up), then the mortgage can regain some value in a few years. But the _current_ value of the mortgage is very low.
No one needs ignorant (but earnest) “ideas” on what to do. Study the problem and understand it and _then_ offer some ideas. Or just leave it to people who already understand it.
Wildmonk - September 24, 2008 at 9:10 am
Weffie is right – you are missing the point that the ‘bailout’ money is not a giveaway. It is a purchase of assets to take them off the books of the banks groaning under their weight. The government would (I hope) pursue their repayment over the long term.
While your idea has the surface appeal of putting money in my pocket, I strongly suspect that it would be quite inflationary. And this, my friend, is a price that we don’t want to pay.
TPS - September 24, 2008 at 9:13 am
How about stop looking for “solutions” and let the market fail as it needs to?
If we’re going to have to endure pain, let’s endure the pain of a natural market failure — not the pain of stealing money from people like us to shore up those who can’t pay their debts.
Make that some of those who can’t pay their debts. Thanks to a series of medical issues, I have credit troubles. Bad credit troubles, in fact. I haven’t asked my own freaking family to rescue me, let alone asked the rest of the American populace to do it. Demanding that I now rescue somebody ELSE from THEIR credit troubles is beyond infuriating.
David Bernstein - September 24, 2008 at 9:18 am
A lot of defaulters CAN pay their mortgage, but don’t want to because they put no money down and are paying, say, a $300K mortgage on a house now worth only $200K. Giving them more money to pay their mortgage won’t help.
Ron Hardin - September 24, 2008 at 9:22 am
It’s pushing on string.
You have to line up the incentives with human motivations or it will fail.
The failure was caused by a bad assumption more than anything, namely that all the mortgages won’t fail at once. As a result, all the risk assessments on the packaged mortages were hugely wrong, and everybody has too much risk to capital.
The market did that in 1987 too. Portfolio insurance, via simultaneous trading in two markets, guaranteed that nobody could lose money on their portfolios. The math proved it.
Reality, however, when nobody can lose money, simply works to restore the rule of common sense by violating an assumption, in that case that it’s possible to simultaneously trade in two markets. One of the markets had to close for a few days until enough people had lost enough money to open again.
The math was good, but not the assumptions.
Likewise here, except the assumption that mortgage failures are independent is wrong, so all that laying off of risk didn’t work after all.
Scott Somerville - September 24, 2008 at 9:25 am
There’s a lot to like about this. One thing worth noting is that institutionally powerless deadbeats won’t be able to afford enough lobbyists to lock in their tax-funded benefits forever. Anything we give Wall Street will be locked in forever. Anything we give Joe Six-Pack will be gone next time sommebody sneezes… because Joe Six-Pack doesn’t have a fleet of lawyers crawling all over Capitol Hill.
I don’t know if it will cost more than $700B to pay all the mortgages that are in arrears, but I don’t have ANY reason to think that $700B is what this bailout is really going to cost. As soon as you add in student loans, car payments, medical bills, and everything else Congress feels like socializing, we’re up to a trillion and counting.
So, I’d love to see a plan that allows the feds to buy stock in existing personal mortgages by picking up payments. When and if the house sells, “we the people” get our share of the investment back.
mike anderson - September 24, 2008 at 9:28 am
OK, you go first. Send me a check for $20,000. Never mind that my mortgage is paid off, Baby needs a new BMW.
I have a better idea: all those AIGers and Freddie’s Fanny guys can have a bigass yard sale and start chipping in. Then, maybe, I’d be willing to kick in a few bucks.
missedpoint - September 24, 2008 at 9:32 am
Dude,
You’re missing the point. The point isn’t that there are bad debts out there. I can understand why you would be confused on that point, since you have probably been reading newspapers.
However, newspapers, and especially their reporters, are fkin idiots. They’re reporters because they couldn’t cut it in college, and so majored in journalism.
The point is that the people with the money have decided that the current regulatory scheme isn’t favorable to them lending us their money in the first place.
Rich people aren’t required to lend us their money. They do that as a favor, and so that their richness can grow. It helps them, it helps us. Everybody is happy.
However, the current regulatory environment does not allow the rich people to accurately gauge the risk of lending to us. This has caused them to stop doing so.
That regulatory environment forces the rich to lend to bad credit risks. The rich folk have decided that, under those terms, they’d rather not participate.
Giving money to the homeowners to spend at Target (and they would) doesn’t solve the problem, because homeowners are witless idiots who, we discover, can be sold any financial product no matter how bad the terms are.
That doesn’t solve the real problem at any rate. Because the real problem is that the rich don’t have to lend to us; and if we force them to lend to illegal aliens with no money down and no income verification, then the rich will just take their dollars and go home.
They already own their mansions outright.
Lily - September 24, 2008 at 9:38 am
Why does every plan involve taking my money and giving it someone else?
Lily - September 24, 2008 at 9:38 am
Why does every plan involve taking my money and giving it someone else?
Joshua Poulson - September 24, 2008 at 9:44 am
I believe a better solution is to instead pay one payment for every single home or construction equity loan in the United States. People who have been good on their mortgages will get a little traction, people who are behind will get a mild reprieve, and mortgage holders will likely get a capital infusion, since the good mortgage holders will continue paying as they already had and the ones in arrears will at least pump in one payment. This has got to cost less than $700B.
Jim - September 24, 2008 at 9:48 am
There’s a lot of upside to what you are describing, but I believe the problem is this:
Let’s say 10% of the mortgages out there are “bad.” The Paulson plan throws $1 trillion at these bad mortgages. Your plan spreads it out over every mortagage.
So with your plan, “only” $100 billion is to fix the bad-mortgage problem and create assets for the banks, while the rest is going to mortgages that would have been paid anyway. That money is really a stimulus check for the general economy.
I think The Powers That Be do not believe $100 billion applied to bad mortgages is enough.
Granddaddy Long Legs - September 24, 2008 at 9:58 am
Let me see if I understand this correctly. People got easy loans, thanks to pressure from federal legislators that wanted to run for reelection on populist propaganda. So tons of money flooded into the housing market, seemingly out of nowhere, and prices soared. Then grossly irresponsible people bought houses they couldn’t afford, and promptly stopped paying their mortgages when they felt the squeeze.
This actually happened to the family next door to me. They weren’t wealthy, but the guy smoked Cubans and they had a flat screen tv. They didn’t keep up their house, and they owned several cars that rarely all worked at the same time. I know they’re not indicative of all defaulters, but it’s a telling sign of where they ranked their priorities. They even suggested we take their azalea bushes after they abandoned the property since, in their words, “no one owns the house now.” But don’t worry about them; they bought a house about 30 miles away in a more rural area. It appears one bank doesn’t know what the other is doing, and they got a line of credit without much trouble.
Meanwhile, I still have the same crappy television I had in college, I bring leftovers to work every single day so I don’t waste money on lunch, and I’ve never missed a mortgage payment. When I feel the squeeze, I do without so I don’t run up the credit card balance it’s taken me years to get under control. In short, I begrudgingly sacrifice in the present so I can have a more stable and secure future.
Now I’m supposed to advocate giving the irresponsible people a monthly subsidy so they can blow that free money on more cigars and techno-gadgets while they await their next government handout?
Seriously? I’ve sacrificed for nothing? It’s enough to make people like me want to pick up their marbles and go home.
Maybe I should stop being such a worry wart, start having more fun, and join all the other “progressive” rats at the government feeding tube.
gijoe - September 24, 2008 at 10:16 am
How about letting us take care of ourselves? I’m 31 and bought my first home a few years ago. I did not get an adjustable mortgage because I knew they were dangerous. I did not get a $5000 new home buyers grant because we made $1000 too much. Why should I have to pay for idiots who got adjustable mortgages? Why should I pay for companies who use bad buisness practices? I don’t expect anyone to give me a free ride. Why should people that already have money get a free ride?
Why help people who took chances and brought problems on themselves? No one is giving me a free ride or free money.
Chris - September 24, 2008 at 10:27 am
Let the bodies hit the floor! That is the only way that the market will find its true value, and that is the only way to restore market health. I mean, where is the personal responsibility on the part of the Homeowners? Were they forced to overextend. Here is a novel idea, if you are legally able to enter a contract, we should legally expect you to understand math and no ammount of lender obfuscation should be overcome the borrowers duty to understand what he is doing. BTW I have been renting for the last several years because a of a mobile job and the common sense that the market was behaving irrationally.
JFP - September 24, 2008 at 10:39 am
Shouldn’t those of us who lived within our means get rewarded somehow? We should get higher interest rates on our savings accounts or something. This would partially offset the hit we are going to take by bailing everyone else out.
Paul - September 24, 2008 at 10:43 am
As most of the above posts highlight, intervening at step 1 really creates as much moral hazard as intervening at step 4 (even with attempts to offer something to those that avoided a mortgage they couldn’t afford, which then dilutes the effectiveness of the plan anyway).
Krugman’s suggestion (provide capital in return for shares) seems to be the best way to reduce that unfairness, has the best chance of minimizing the loss of our tax dollars and has been tested and worked reasonably well elsewhere (e.g. see the Nordic bank failures in the 90s). The socialism charge is limited as well if the rules are clear that it’s a temporary situation i.e. the government has to sell the shares once the crisis has passed.
whitehall - September 24, 2008 at 10:44 am
More silliness.
The housing market has to find an equilibrium and that means pain as equity values are destroyed and prices come in line with real incomes. Someone has to take a haircut and in respect to moral hazard principles it should be the lenders and the over-extended home owners.
The problem we’re trying to fix is two fold. First, due to financial leverage being behind the creation of the money supply, wiping out too much lenders’ money collapses the money supply. This causes depression as we saw in the 1930s. Banks need some reserve of equity capital to stand behind the created money supply but losses wipe that out taking the money supply with it.
On the other end, no lending means no buyers so anyone having to sell will default making the lenders’ problems worst.
Seemingly, the shortest path is for the government to buy defaulted homes at some discount on the outstanding mortgage. Since everyone has to live someplace, overall vacancies will remain the same since owners will be converted into renters. The rents will partially cover the costs of the bought-out mortgage.
The government-owned houses would slowly be reintroduced back into the market, no doubt at a loss.
Ultimately, most mortgage defaults are covered by Freddie Mac and Fannie Mae so it is largely a wash.
The problem is the bureaucracy to execute such a plan. It turns the Federal government into a huge landlord. Someone will have to fix the roofs, collect the rents, decide when and at what price to sell.
The latter part is why the Administration is injecting itself in the top end where it deals with a few professional organizations rather than the bottom where it would have day-to-day responsibilities for millions of properties.
Besides, I’m a renter and I’ve been waiting for prices to come back down to earth. However, I will hold out until the future is clear. I bet I’m not alone – this makes the market even worst (or better.)
Lori Ringhand - September 24, 2008 at 11:18 am
The comments here are interesting. If the reality is that the “bad assets” are not really that bad and that the government will at some point be able to sell them at some profit, then there is an important difference between the Wenger plan and the Paulson plan: one creates real long term national debt; the other does not. If not, however – if the bad debts remain bad because people can not pay the underlying mortgages – then we are about to give roughly a trillion dollars to somebody. Why is it so much more infuriating to people to give that money to individual families that made irresponsible decisions than it is to give the money to financial institutions that made irresponsible decisions?
nlcatter - September 24, 2008 at 11:20 am
DUH
because it would TAKE TOO LONG
moron!!
Art W Hyland - September 24, 2008 at 11:21 am
The fact that you are serious about this concept, plus that you think Krugman to be a serious economist rather than a Gailbraith socialist, makes me ever so sad for the state of this country. The idea of giving money to people who have not earned it is repugnant to me. I want the fix to ensure that no one who helped cause this problem goes without punishment in some form, preferably monetary. The Paulson fix appears to be a temporary purchase by the government, who I hope would be able to sell these assets at some value at a later date. This is not a giveaway, unless I’m not aware of such. But your plan is one, and should be scrapped for the absurdity it represents.
Art W Hyland - September 24, 2008 at 11:21 am
The fact that you are serious about this concept, plus that you think Krugman to be a serious economist rather than a Gailbraith socialist, makes me ever so sad for the state of this country. The idea of giving money to people who have not earned it is repugnant to me. I want the fix to ensure that no one who helped cause this problem goes without punishment in some form, preferably monetary. The Paulson fix appears to be a temporary purchase by the government, who I hope would be able to sell these assets at some value at a later date. This is not a giveaway, unless I’m not aware of such. But your plan is one, and should be scrapped for the absurdity it represents.
Anonymous Coward - September 24, 2008 at 11:25 am
” but I have to pay for some guy’s house he should have known he couldn’t afford”
You people are acting like you’re not going to pay for it *anyway*.
You are going to pay for this debacle whether you like it or not.
It’s the same way we all pay for bad schools, racism, cursing, Britney Spears, obesity, crime, and every other social ill.
- pay the bankers
- pay the home owners
- pay neither right now, and later pay in the resultant 25% unemployment and social disorder.
LOL @ thinking that you can some how opt out.
Like you actually live on self sufficient island, replete with ammunition to keep the hordes out.
MikeMangum - September 24, 2008 at 12:06 pm
You’ve simply shifted the moral hazard to people who bought more house than they could afford.
silvermine - September 24, 2008 at 12:13 pm
What about those of us who work quite hard, but not enough to afford a house in a bubble, and we did not buy a house.
You’re going to price us out of the market AGAIN, only this time with our own money.
Thanks.
Ming the Merciless Siamese Cat - September 24, 2008 at 12:34 pm
The intended purpose of the bailout is simply to spend $700 billion in taxpayer money, your proposeal is a good a way to accomplish it as any. However, if the intended purpose is to address the cause of the financial crises, this is entirely useless.
The underlying weakness in the financial system comes from illiquid mortgage assets that have lost value. These illiquid assets are choking off the flow of credit. Giving $20K each to selected households, to do with pretty much as they like, does nothing to restore the value of mortgage assets or liquidity in the credit system.
Diggs - September 24, 2008 at 12:44 pm
So your idea is to give money to people too stupid to correctly allocate their money in first place? And your plan is to take that money from those of us who have worked hard, saved, and paid off our house?
You have to be a Democrat.
midwatchcowboy - September 24, 2008 at 1:09 pm
How about take 15% off the original value of every first home mortgage and reducing the current principle remaining by that amout. Then requiring mortage companies to reammortize them at a fixed rate (TBD) for 30 years if any owner applies.
No more ARMs/balloons and it forces a writeoff of the bubble. Also rewards people, like me who are current.
bobby b - September 24, 2008 at 1:20 pm
“Shouldn’t those of us who lived within our means get rewarded somehow?”
- – -
“Progressive” thought cascades from one central paradigm: those that live within their means are suckers.
John - September 24, 2008 at 1:27 pm
>>> (largely the same ordinary American taxpayers who will finance any solution)
Surely you jest. Subprime deadbeats do not earn enough to *pay* federal taxes. Your idea is nothing more than a huge transferral of wealth from responsible citizens to irresponsible citizens who used their houses like ATM machines and bought BMWs, boats and vacations.
As a mortgage broker, I saw it all. People with 520 credit scores making $35k a year driving around in new Beemers while I’m driving a ‘97 Tercel. And now you want to take food out of my kids’ mouths so I can bail-out the deadbeats by paying their bills? Good grief.
Boo-frigging-hoo. They should all lose their homes.
Here’s a novel idea: how about everyone, from Wall Street bankers to subprime deadbeats, be held accountable for their own decisions and live with the consequences of their actions. Too much to ask?
John Dexcente - September 24, 2008 at 1:35 pm
That you would suggest a massive wealth transfer to homeowners who are struggling to make payments because they overspent on their housing makes me pretty certain that you haben’t the vaguest idea what moral hazard actually means.
John Dexcente - September 24, 2008 at 1:35 pm
That you would suggest a massive wealth transfer to homeowners who are struggling to make payments because they overspent on their housing makes me pretty certain that you haven’t the vaguest idea what moral hazard actually means.
John Dexcente - September 24, 2008 at 1:35 pm
That you would suggest a massive wealth transfer to homeowners who are struggling to make payments because they overspent on their housing makes me pretty certain that you haven’t the vaguest idea what moral hazard actually means.
Bob - September 24, 2008 at 2:40 pm
Then stick a lien on the property – due upon sale – to recover the monies.
Kaimi - September 24, 2008 at 3:47 pm
A number of commenters have suggested that there are moral problems with a transfer from one group to another. And there are certainly cogent arguments that can be made along those lines.
Professor Wildenthal’s argument notes that the government is _already_ suggesting a wealth transfer of up to almost a trillion dollars, from taxpayers to large banks. He’s suggesting that if we’re already discussing transfer (to banks), it may make sense to transfer to individual home owners instead.
As for the “why should the responsible homeowners bail out irresponsible homeowners?” question — well, for the same reason that Bush-Paulson are suggesting that responsible homeowners should bail out irresponsible bankers. If the crisis is sufficiently large, it could affect everyone. (Just as responsible, fire-code-abiding taxpayers subsidize the fire trucks that put out fires at non-code-abiding buildings, because it’s better to do that than to let the whole city burn down.)
That’s rationale may not be convincing for some critics, but it’s the rationale behind the original Bush-Paulson plan; and it’s a rationale that equally supports Prof. Wildenthal’s proposal.
gijoe - September 24, 2008 at 4:11 pm
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.
jaed - September 24, 2008 at 4:57 pm
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?
Joe Leahy - September 24, 2008 at 6:21 pm
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.
John Armstrong - September 24, 2008 at 8:41 pm
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.
steve@missouri.edu - September 25, 2008 at 7:01 pm
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 ??
greg - September 29, 2008 at 11:52 pm
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.
Robert - September 30, 2008 at 12:51 pm
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.
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