Alternatives to the bailout?

Here is one proposed alternative to the government buying up nation’s bad mortgage investments. From James Pinkerton, Let’s Bail Out Main Street NOT Wall Street. Here’s How:

Mallory Factor, a South Carolina businessman, has a better idea: “Bail out homeowners, not lenders,” he says. “Any qualified buyer who wants to buy a house,” he says, “could buy one at a guaranteed low interest rate, of, say, 3.5 percent. And any qualified homeowner who wants to refinance could get the same rate.” If that happens, Factor predicts, “There would be a flood of liquidity into the system, as people bought houses again, which would also help reduce the housing-stock overhang. In addition, as people refinanced, all these instruments, such as collateralized mortgage obligations, which Fannie Mae and Freddie Mac have choked on, would once again start performing. And that would save the banks and many investors. It would save the banks and investors by saving homeowners and homeownership.” In other words, trickle up, not trickle down.

The current interest rate for a standard 30-year mortgage is around 6 percent. At that rate, the payments on a $300,000 mortgage work out to $1,799.65 a month. By contrast, at Factor’s proposed rate 3.5 percent, the payment would be just $1,347.13 a month. That’s a whopping difference, especially for homeowners who might have paid more for a house than it is currently worth. And at 8 percent, which many adjustable rate mortgages (ARMs) have shot up to, the monthly bill is a prohibitive $2,201.29 a month.

This interest-rate buy-down is the elegant heart of Factor’s plan. And who would do the buying down? “The federal government,” Factor answers bluntly. “This is a government buy-down of interest rates, but it would benefit homeowners first, and only then, second, the banks.” But, he notes, the buy-down is only for qualified borrowers. So the banks would still lose a lot of money. Which is good, since they need to be reminded not to make this mistake again. And since there’s no Fannie or Freddie any more to buy these dubious loans in the future, the banks will have to be careful, once again, about who is a qualified borrower, and who is not. The government, Factor reminds us, would only be on the hook for the costs above 3.5 percent—the banks would be responsible for the first 3.5 percent, and for the principal.

That’s bad news for bankers, Factor adds, but good news for taxpayers: He estimates that his interest-rate buy-down plan would cost Uncle Sam perhaps $200 billion (more if interest rates rose, less if interest rates fell). But it would surely be cheaper, he suggests than the trillion or more that the Washington plan seems destined to cost. And once again, Factor’s plan would focus on Main Street, not Wall Street—surely a substantial virtue in and of itself.

What might be some other alternatives?

About Gene Veith

Professor of Literature at Patrick Henry College, the Director of the Cranach Institute at Concordia Theological Seminary, a columnist for World Magazine and TableTalk, and the author of 18 books on different facets of Christianity & Culture.

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  • http://gpiper.org/katiesbeer TK

    “Bail out homeowners, not lenders,” … “Any qualified buyer who wants to buy a house,” … …And any qualified homeowner who wants to refinance ….”

    Not a bad idea IF the standards for mortgage approval returned to responsible ones. One thing I don’t hear mention much these days is the liberal changes to mortgage approvals that occurred during the Clinton years. People, who by reasonable bank standards would not qualify for mortgages, were able to get them.

  • Carl Vehse

    One of the signers of a letter opposing the bailout is Jeffrey A. Miron, senior lecturer in economics at Harvard University. Miron notes in a commentary (in CNN of all places!):

    “The fact that government bears such a huge responsibility for the current mess means any response should eliminate the conditions that created this situation in the first place, not attempt to fix bad government with more government.

    “The obvious alternative to a bailout is letting troubled financial institutions declare bankruptcy. Bankruptcy means that shareholders typically get wiped out and the creditors own the company.

    “Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

    “In contrast, a bailout transfers enormous wealth from taxpayers to those who knowingly engaged in risky subprime lending. Thus, the bailout encourages companies to take large, imprudent risks and count on getting bailed out by government. This “moral hazard” generates enormous distortions in an economy’s allocation of its financial resources.

    “Thoughtful advocates of the bailout might concede this perspective, but they argue that a bailout is necessary to prevent economic collapse. According to this view, lenders are not making loans, even for worthy projects, because they cannot get capital. This view has a grain of truth; if the bailout does not occur, more bankruptcies are possible and credit conditions may worsen for a time.

    “Talk of Armageddon, however, is ridiculous scare-mongering. If financial institutions cannot make productive loans, a profit opportunity exists for someone else. This might not happen instantly, but it will happen.”

  • http://gpiper.org/katiesbeer TK

    That is the first argument against the bailout that makes sense to me.

  • http://www.bikebubba.blogspot.com Bike Bubba

    Bail out Main Street? Yes, we COULD tax the common worker and then give him his money back, but that’s kinda silly, don’t you think?

    Far better to remove the Carter/Frank/Clinton regulations that require banks to give credit to poor credit risks, and the markets will recover quickly. The fix to government mismanagement is not more of the same; it is to end that mismanagement.

  • http://gpiper.org/katiesbeer TK

    Now if we only had a trusted leader to repeat those words in a national speech to the nation. Instead, we get a frightened and faithless George Bush, a bitterly blind Nancy Pelosi, a clueless Barack Obama and a too cautious John McCain. The most recent capable national leader, Ronald Reagan is gone, but I think that even poll-watcher and bleeding-heart Bill Clinton could have provided more leadership on this crisis.

    Have I used enough inflammatory buzz words? Sheesh, I broke my own rule, but I hope I get my point across (I dutifully slammed in a bi-partisan way). We need someone capable of leading the nation (not dividing it further).

  • utahrainbow

    I agree, TK.

    I think that if we had some good leadership to explain the problem we’re up against and unceasingly call for calm and steadfastness, probably sacrifice, in a time of difficulty for the sake of future generations, we could make it through without this obnoxious bailout. Probably this will be required even if this thing is crammed down our throats.

    But instead we have fearmongering, condecension, and a spoiled brat Wall Street saying give me my money already. On the news last night, a stockbroker said basically that to the camera. Quit wasting our time and give it over. The arrogance! Yes, it will hurt all of us, this problem, and perhaps change us forever, but the right leader could guide us through it while retaining some semblence of our republic.

    Certainly there is no such leader among the administration or current candidates.

  • Anon

    As I’ve said before, the management of smoke and mirrors is not my area of expertise. Therefore the ideas I have might have some nasty unintended consequences I don’t know enough to predict. But from a (hopefully) Biblical perspective of morality, I would throw out some ideas including

    Under the present circumstances, not necessarily the best way if we were starting a new colony from scratch:

    Federal mortgage insurance. Based upon the Law of God that one must not move the ancient boundary stones, that one must not alienate another from their means of production or from their homes, even in surety for a debt. That ones home and land and means of production may not be sold, only rented for a set period of years. That debts have a termination date, even if not fully repaid. That interest is usuary, which is sin.

    No capital gains tax on any enterprise where family provides a given percentage of the labor. Perhaps 40%, but I don’t know what would be best, here.

    No property tax on such family owned *and operated* businesses.

    No property tax on homes (unless we return to the original setup of only property owners voting).

    The several States and the People insisting that the federal civil government be restrained to those powers expressly granted by the Constitution.

    Deflating the bubble slowly rather than all at once (is this a helpful thing, or a bad idea?)

    Ending speculation on the stock market. No more shorting allowed. Ownership of stocks must be for not less than 7 years. Thus no more day-trading which causes such emotional volatility based upon even inaccurate newscasting. In general stocks should be purchased upon expectation of profit from dividends, not by gambling on the future price of the stocks.

    Stabilizing the currency to be based upon some external source of real value, such as precious metals, gems and even federal lands.

    No more taxation on savings or social security, or medicare.

    The elimination of the death tax, which tax serves to destroy family-owned and run enterprises in favor of large corporate entities.

  • Don S

    So, with this idea the government would be buying down the interest rates of every American who qualified from 6% to 3 1/2%. How much would that cost per mortgage? If I remember buy down procedures correctly, you can get about 1/4% of the ongoing interest rate knocked off for every point (1% of the mortgage value) that you pay up front. So, the government would be paying 10% of the value of each mortgage up front ($30,000 on a $300,000 mortgage). Unlike the present deal, where at least the government would become the owner of some dubious mortgage derivatives, in this case Uncle Sam would have absolutely no chance to gain back any of his money. Well, I take that back. The mortgage holders would have considerably less mortgage interest to pay, so they would have less to deduct on their 1040 forms, and thus pay more taxes. :)

    Moreover, the most precarious loans wouldn’t qualify for this re-financing, because the loan holders don’t have a sufficiently good credit rating. Additionally, over time the artificially low rates, and thus artificially low payments, would simply drive up the cost of housing, so folks wouldn’t really be better off.

    Other than the above, seems like a really good idea. :)

  • The Jones

    I just am really wondering why EASY credit is so necessary for our economy. Credit FREEZE? As in, nobody can lend ANYTHING? Yeah right, give me a break. Credit SLOWDOWN? That’s sounding more like what will actually happen, and considering the past couple of months, whose complaining?

  • Carl Vehse

    It looks like the Senate ‘s version of the $700B crap sandwich has been slavered with plenty of pork grease designed to make it to slide down the gullets of GOP senators, according to information in Michelle Malkin’s column, McCain will support earmark-stuffed Senate Crap Sandwich; Obama: Me, too!.

    McCain, who had made his opposition to earmarks the battlecry of his campaign and senate career, has completely caved on this. Even having Sarah on the ticket may not save him from the loss of conservative votes on this.

    I better order some more t-shirts and bumper stickers.


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