Adam Rice

My life and the world around me

Pretty soon you’re talking real money

There are about 7.5 million subprime mortgages floating around in the USA right now. These are at the root of the current financial crisis, for which Paulson has proposed a $700 billion bank handout bailout.

Note that he wants to give the money to the banks. After the banks get that money, the borrowers are still going to be in default.

I realize the situation isn’t as simple as this, but just for grins, let’s attack the problem from the other end. The bailout amount works out to a little over $90,000 per subprime mortgage (not all of which are in default, but let’s include all of them anyhow). Imagine if the government forced the banks holding all those toxic loans to rewrite them as fixed-rate mortgages at reasonable rates, and set up what Republicans like to call a “personal account” for each homeowner with a subprime mortgage. Stick that $90,000 in the account, let it accrue interest, and use the principal and interest to supplement the amount that the homeowner can pay. Suddenly the mortgages look a lot more viable to the banks, which would restore liquidity to the market. And people don’t get thrown out of their homes.

I’m sure there’s a perfectly logical reason why this kind of welfare is bad, but the kind of welfare Paulson wants is good.

7 Comments

  1. I have substantial objections to plans presented by Dodd and Paulson, but the problem is that banks have a liquidity problem – the banks can’t trade these mortgage-backed assets for more capital to lend to other businesses as operating capital. The reason why it’s a serious governmental issue is that because credit has dried up small and medium businesses can’t borrow to expand, and instead have to lay people off to balance their books. And because credit is so tight, these businesses are under extra pressure to balance their books as lenders call loans in.

    I think your plan is more just, but it doesn’t address the same problem Treasury and Congress want to address, the shortage of available funds to lend to other businesses as working capital.

  2. To be clear, I’m offering my “plan” mostly just to illustrate the hypocrisy of corporate welfare, but I do think it would be effective in restoring liquidity.

    The banks can’t trade these MBSs because everyone considers them to be toxic waste. If they were all suddenly co-signed by Uncle Sam (or for that matter, if Uncle Sam just paid down everyone’s note by $90K in one lump sum and re-amortized the loans), suddenly most of that toxic waste would be much more viable, and would get traded around more freely. Am I still missing something?

  3. It makes sense to me. I’ve been having similar thoughts, but more in the vague “there has to be a way to give the money to the people to pay the suck mortgages.”

    Of course, this welfare is bad because it goes to people in the middle class. Instead of the banks just getting the money directly, they have to wait for the money over time like a regular mortgage. That’s not nearly as profitable on paper as just infusing the market with capital so the gamblers can keep gambling.

    You should put this up as a petition to send to Congress. Basically outlining the principle that Congress should assist the homeowners with a guarantee account like you suggest. Managed by FDIC perhaps, and perhaps only on your homestead property. Additionally, the Congress must enact regulation to prevent these predatory lending practices.

    Use the interest to pay for universal health care.

  4. McChris isn’t entirely accurate. We’ve just been approved for large equity AND lines of credit with two of the banks on the bail out list for a small family business in Texas.

  5. I fully agree with your proposal, except the part where you call it a joke.

  6. Thanks NobodobodoN, I’d never heard of her, but I like what she has to say. The “Mama” related video is a pretty good rant too.

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