Fear of Clowns

"Faith may be defined briefly as an illogical belief in the occurrence of the improbable."
- H. L. Mencken

Tuesday, September 30, 2008

The Trickle-Up Bailout - the solution starts here 

The economic crisis didn't start two weeks ago but is serious. The plans being bandied about Washington all center upon gambling an unfathomable amount of money buying "toxic assets" from banks that are maybe worth something, maybe worth nothing. Nobody knows. If someone knew what they're worth, that someone would be buying them up. That nobody wants to buy them at any price is testament to their potential worthlessness. Besides, who in their sane mind would pay good money for a toxic asset?

This essay appears in today's Washington Post. Shorter: instead of bailing out the banks that got us to where we are, buy mortgages directly from troubled mortgage holders on 6% 30 year terms; if the mortgage holders still can't keep up, take a like claim in the future value of the house.

The financial crisis is a liquidity crisis, yes, but it is ultimately a product of homeowner failures to pay. Unless this fundamental problem is fixed, we will continue to see -- and need to treat -- the symptoms. The proposed bailout ignores this. Yet the sum being demanded from taxpayers is almost certainly more than sufficient to pay off all currently delinquent mortgages.

... Some will argue that it is grossly unfair to pay off the mortgages of borrowers who took risks and lost. In other words, why should my profligate neighbor be rewarded for overleveraging himself?

Because such unfairness is a small price to pay to avoid a rapid transition to a socialist economy, the collapse of our financial system (and its related global implications) and a frightening shift of economic power toward the executive branch. Why shell out $700 billion to Wall Street dealmakers and the companies they managed into this mess? Wouldn't it be preferable for individual homeowners to benefit directly?

... When Congress returns, lawmakers are likely to modify and then pass the administration's bailout proposal. They should consider ways to implement this bottom-up solution. Combining this approach with the government's proposal could greatly benefit taxpayers. Yes, the government's swift purchase of illiquid securities would stabilize compromised financial institutions and the credit markets. But the notion that taxpayers would benefit in the long run is pure speculation, particularly if the government overpaid for the securities. On the other hand, once a government-sponsored refinancing wave kicked in, the full value of the securities in the government's portfolio would be restored, and they could be sold off in an orderly manner, with Uncle Sam taking profits that would cover the cost of the bailout.

-- William N. Goetzmann, Director, International Center for Finance at the Yale School of Management and Jonathan G.S. Koppell, Associate Professor of Politics and Management, Yale School of Management & Director of the Millstein Center for Corporate Governance and Performance

If you feel so moved, print and fax (find fax number here) the essay to your Senators and Representative or call and say "trickle up"! As always start the communication with your name and address so it's known you're a voting constituent.

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