Imagine we bailed out homeowners

There would be huge uproar if the United States bought out the distressed mortgages in the country and just let the people who had trouble with their loans remain in the house, just wiped the slate clean. Yet that is what the bank bail-out will do, if the U.S. buys up all the bad debt banks hold while leaving the healthy banks “unclogged” (to use President Bush’s plaque-in-the-veins metaphor of this evening) and ready to operate profitably, again.

Make no mistake, helping taxpayers recover the value lost on that “toxic paper” would be the lowest priority on Wall Street.

On the other hand, if the U.S. government bought up all the bad mortgages, foreclosed on them and, then, let the people who defaulted live in those homes on rental terms, eventually providing programs to buy homes back from the government, that would be considered a fair treatment by many voters. The assets seized would offset the cost of the mortgage losses and provide the basis for recovering the losses later by selling the property. We’d be tangibly helpful to distressed families, giving them a roof over their heads while opening the door to their repaying the cost of the home in rent and, ultimately, new mortgages.

Why is the U.S. not taking the same approach as it did to AIG when it failed last week? The U.S. government now owns about 80 percent of the company in exchange for the cash it needed to stay afloat. There are already investors interested in buying that equity at a profit to the government.

Wall Street should be sold off to the government, just as mortgage-holders in default would find their homes repossessed, and the companies receiving money from the public held responsible to the taxpayers as shareholders, because without that public money, they will be out of business. Surely, if the crisis is resolved, the assets will be worth more, but so too would there be viable economic reasons to buy those assets back from the government at a profit.

If the bail-out goes ahead based on the U.S. buying “toxic paper” the banks, for all intents and purposes of analogy between these scenarios, will end up owning their homes and mortgage-free. The U.S. government will be left holding the paper that representeds inflated values of assets held by others — no collateral and, therefore, unlikely to be treated as a pressing debt to be paid by responsible people who want to own their property.

I don’t doubt we need to do something about the credit crisis–I just think we should treat the recipients of the largesse of the U.S. taxpayers like any business would treat someone asking it for value: Ask for security that the debt will be repaid. Then, the bankers can keep their banking houses and learn to run their businesses responsibly before buying out their saviours, the American people.  We could even cap the premium the government demands to make sure that, once the industry is able to profit honestly, it could become a truly private concern.

Recovery or double-dip?

The bail-out of Wall Street will merely compound the problems that got us here, because the program leaves the banks free of the cost of their junk assets while depriving the buyers of those assets—that’s us, the taxpayers—with any of the benefits of ownership. As planned, the bail-out will simply transfer paper around. That, my friends, is the recipe for a moral hazard. But not the moral hazard of government intruding in markets, rather it is the temptation on bankers’ parts to do it all again, because they are insured against the loss. Or, more to the point, they will not have paid the price for their misdeeds this time around.

Democratic calls for concessions by the banks, such as restrictions on CEO salaries and assistance to homeowners, while these are needed, will not temper the market’s desire for huge returns. They are band-aids on Godzilla, which makes the monster a little less ugly, but doesn’t change its appetite for destruction. The $700 billion+ the already expended $300 billion (on AIG, liquidity lending by the Treasury to the Fed, etc.) we’re spending is merely going into the accounts of the people who, feeling no limit to their tolerance for risk, ran the economy aground last week. The Bush Administration was part of that wretched crew, not its saviors. In fact, they are merely greeting their beleagured friends at the dock with buckets of money to hand out to the “survivors.”

In reality, the survivors of the economic meltdown haven’t been exposed yet. Fired bankers will go home and relax, because they have a lot of money. The rest of the country is simply waiting for the glacial pace of erosion to accelerate into their lives like a continental flood when the ice sheet disintegrated. Since those folks are now going to spend $1 trillion to “save” some banks from bad paper, which carry virtually no upside and a lot of risk that the paper will become valueless, the severity of that eventual economic cataract will only get worse.

On the other hand, if that $1 trillion represented real value, which the government could then sell at some future date, taxpayers would, at minimum, have some influence over the disposition of all the property that banks acquired during this spending spree. We’ve heard so much about “the ownership society” over the past seven years. Why, now that we’re dishing out another trillion dollars, are we not getting some ownership, as the government did when it bailed out AIG last week?

Everyone is expecting a recovery now. The market was disappointed today, to the tune of 300 points, that people are debating the terms of the bail-out before simply handing over all that cash. How can we be so presumptuous? Granted, the bail-out is necessary, but not necessarily in the form it takes under Henry Paulson and George W. Bush, a banker and a, well, “executive president,” who are bailing out their base.

If the bail-out goes ahead as planned, I’d hold on tight for a double-dip, when Wall Street comes begging for more help.