Er, maybe this is dumb, but...

2008-09-29 22:08

So, our government is arguing about how to spend hundreds of billions of dollars “rescuing” our financial system. In a great hurry.

Here’s my thought. There’s somewhere around 50 million mortgaged properties in the US. Most of them are probably not in immediate danger of foreclosure. Say five million of them are. (I’d think 10% would be a lot, right?)

So, how about this. The federal government spends $50 billion making $10,000 of payments on those five million mortgages.

For all but a few of the most ridiculous mortgages, that ought to give us at least a couple of months’ breathing room, during which people can argue about whose fault it is, get more detailed data on the state of various sets of mortgages, and so on.

This is less than ten percent of the number the Treasury apparently pulled out of thin air, and it ought to be enough to make the problem enough less immediate to give some breathing room. Getting those billions of dollars into the exact banks having the most trouble may not be very good capitalism, but it’d give us time to let them fail and get bought out by smarter banks, or whatever it is that’s supposed to happen, right?

So why is everyone trying to solve the whole problem all at once at huge cost, when we could just take small, focused, action to mitigate the worst of the problem (debts which are in danger of foreclosure, but where the underlying asset isn’t going to cover the debt), and then give everyone a bit of time to talk it over, figure out what should be done, and so on.

Peter Seebach




  1. According to one friend, the solution is to put the American economy back on the gold standard.

    — rone · 2008-09-30 01:21 · #

  2. Unfortunately the media (and our elected representatives) are doing a really bad job explaining what the $700B would be used for.

    As it currently is contemplated, the $700B would be used to buy distressed bonds at fire-sale prices.

    Those bonds are not actually worthless, just worth less than they once were, and really hard to value right now. But someday they will be worth something, and if the government is sufficiently Warren Buffet-like, they may turn out to be worth more than the government will pay for them. So we will get at least part of the $700B back in a few years, and maybe the whole thing. We might even turn a profit.

    On the other hand, just making a bunch of mortgage payments for people has a lot of problems:

    1) The government will never get a penny of that money back. It's straight down the rat-hole of overvalued housing.

    2) You would be directly rewarding the people who got in over their heads by buying more house than they could afford.

    3) You would also be directly rewarding the lenders who made the most predatory loans.

    4) In the end, it would solve nothing. The properties would be just as underwater in a year, and you've spent $70B to kick the can down the road.

    5) You wouldn't even kick the can down the road, since those mortgage-backed bonds which are polluting the banks' balance sheets would be just as illiquid and hard to value as they are today, because nobody would know what would happen after the mortgage prop-up money is spent.

    — Peter Leppik · 2008-09-30 05:48 · #

  3. What Peter said. Another thing to note is that the way mortgage-backed securities are packaged, there are multiple owners of the mortgage, some of whom stand to gain when a troubled mortgage goes into foreclosure. So the only way a mortgage is likely to be renegotiated is if a single entity buys up a controlling share of that mortgage's securities. If, for example, Uncle Sam buys them up.

    And right now Uncle Sam is the only one with the cash and inclination to do that sort of intervention.

    — David Leppik · 2008-10-01 12:03 · #

  4. As far as I know, the buyers of mortgage-backed securities don't typically have a say in whether or how an individual mortgage is renegotiated, just as owners of mutual funds don't have any role in deciding whether the fund buys or sells an individual stock. So that issue is pretty much a red herring.

    Aside from that, however, economists of otherwise varying views are very skeptical about whether the bailout as proposed will do much of anything useful. At marginalrevolution, Alex Tabarrok writes,

    The Economic Consensus v. Politics

    The consensus among economists is now clear, the best strategy for dealing with the financial crisis is to recapitalize the banks that need recapitalization. Paul Krugman, John Cochrane, Luigi Zingales, Douglas Diamond, Raghuram Rajan and many others all advocate some form of recapitalization as do Tyler Cowen and myself. Krugman would prefer a recapitalization in the form of nationalization. In my view, there is still plenty of private money to buy banks at the right price and my preferred model is the FDIC leading a speed bankruptcy procedure, as was done brilliantly with Washington Mutual (Cochrane also supports this model.) In the middle are most of the others who have a variety of good ideas to require the banks to raise equity in various ways.

    The consensus policy of economists would put most of the burden of adjustment on politically powerful holders of equity and bonds.

    There is also a consensus among economists that the bailout bill is not the right policy. None of the above economists, for example, is enthusiastic about the bailout. My bet is that all of us think that the bailout has a substantial likelihood of failing. The support that exists is born out of hope and fear not judgment and experience. Nevertheless, the political consensus is that a bailout is what we will get whether it is likely to work or not.

    — linda seebach · 2008-10-03 08:26 · #

  5. Hey Dan (Cadan),

    Didn't know you were so Political, have you experienced the Political Transformation that's Global now too? I hope not.

    Is is tough to still Hold Christ up High?

    What needs to be done - men should hear God's Law (Word) and become guilty before God so He can save the hearts of men who try to figure things out when their hearts never will. Gospel-101 stuff you know!?

    Really good seeing you Dan.

    Please E-mail me,
    Connie Lewis

    — Connie - Jesus Is Real · 2008-10-17 13:54 · #