Plugging holes in the dam

So the U.S. government is bailing out the big boys. The geniuses at the wheel are taking over the world’s biggest insurer, AIG. The hundreds of billions of dollars necessary for this will be provided by you and me and every other schmuck in America who pays taxes. Another step down the debt hole, following the path set by the bailouts of Fanny Mae and Freddy Mac (the quasi-non-governmental corporations that buy up mortgages so ordinary folks can own homes) and the reckless brokerage firm Bear Stearns.

I used to work in the hydroelectric industry, and while there I learned something about dams and leaks. One of the basic principles of fixing leaks is that you put material on the side where the water is going into the dam, not the side where it is coming out. Otherwise the water flow just blows your patching material back out of the hole.

Unfortunately, our government is doing exactly this. Your tax dollars and mine (actually, the money is being borrowed all over the world) are being used to buy up worthless pieces of paper representing bundles of mortgages. These mortgages were mostly sold in a devious manner to people who couldn’t afford them for homes priced at twice what the market can sustainably bear. Now many of these mortgages are in default, but the good mortgages cannot be separated from the bad, so the whole deal is poisoned. No matter how much money our government pours into the accounts of the big banks and investment firms that bought this crap, the paper will still be suitable only for wrapping fish and stuffing effigies of Lehman Brothers executives.

As I pointed out earlier, the government would serve us all better by approaching the other end of the equation. The long-term solution is improving the financial situation of ordinary people so that they can afford to pay their mortgages. That, in turn, would slow or stop the slide in housing prices, which would reduce the number of people with mortgages that exceed the market price of their house.

The other solution on the upside of the dam is realizing that there is about 45% froth on the top of home prices right now. The past ten years has seen a classic price bubble, triggered by the aforementioned sleazy mortgages. Adjusted for inflation, home prices were flat from 1947 to 1997, and then nearly doubled in just a few years.

The government needs to enforce a great renegotiation. It wouldn’t be all that complex to do some studies of historical housing prices by metropolitan area and calculate roughly what the price of homes should be minus the wing-ding inflation of 1997-2007. Make the banks knock down the mortgages from the 2000-2007 era to something near reality. It would be bitter, but a 40% markdown would be better than the 99% markdown they are suffering now. Convert all these loans to plain vanilla fixed rate mortgages and outlaw everything else. More ordinary people could then stay in their homes and get on with their lives, buoying our shaky economy.

I don’t want to hear anything about coddling “people who made bad decisions.” By all means, perp walk the mortgage brokers who passed the buck, the financial analysts who gave the thumbs up, the bond raters who held their noses and lied, and the C-level managers of the firms that cheerfully bought all the soiled paper. They all should have known better. I forgive most of the over-optimistic home buyers. Sure, some were speculators, ready to flip their overpriced plasti-board McMansions to the next bigger fools. However, a lot were just people sick of pouring money down the rent rathole and trying to achieve their dream of homeownership. This majority of Americans, who can’t balance their own checkbooks, much less calculate compound interest, are dependent upon the judgement of professionals as to what kind of loan makes sense for them. There is no way to sort them out, but it’s better to save a few speculators than to let the whole lot of them collapse into bankruptcy.

Take care of the ordinary citizen and the Dow Jones will take care of itself.

Comments

[Jim]

If you don't agree with the bailout, please go to:
http://sanders.senate.gov/comments/ and http://leahy.senate.gov/contact.cfm to tell our senators to vote no to it, in any way, shape, or form. The only way America is going to wake up, is with a shake up.
If you do agree with it, tell them that you do. Democracy is great, isn't it.