| By Larry Downing, Reuters | |
 | |
| President Bush walks out of Oval Office before he speaks about the economy at the White House on Friday. With him are (left to right) Chairman of the Federal Reserve Ben Bernanke, SEC Chairman Christopher Cox, Secretary of the Treasury Henry Paulson | |
If these are such good investments that we, the taxpayers, will actually make a return on this huge buyout, why is there such trouble finding private sector funding?
Holding these "assets" for how long, or selling them at what percentage of a loss to purchase others, benefits the average American how?
Do we become even less liquid as a society with all our tax monies tied up in poorly backed securities and at the mercy of a debt that needs servicing in the credit market at precisely the same time as credit is frozen worldwide?
What effect does carrying a debt that is equivalent to our gross domestic product ($14.5 trillion US) over each year, year by year, have on the solvency of our system? How do we raise revenue to service this debt when we are "house poor"?
Can we trust people who have been and are in such deep denial of their own responsibility that they deny even being republicans anymore?
Market Myth: Worst Economy Since The Great Depression?
To hear John Kerry tell it,
We just set a record for yearly production: a GDP of nearly $12 trillion, or $120,000 per family. As for what really counts, personal well-being: A record 69 percent of Americans own their own homes, and the account balance in the average 401(k) plan is $77,000, up 22 percent in three years.
On the eve of his nomination at the Republican Convention in
He was dealt an extremely miserable hand by his predecessor. As Bill and Hillary Clinton were leaving the White House, the tech-stock bubble was deflating, and GDP and employment growth were slowing sharply. A recession began two months later.
The fraud at Enron, WorldCom and other companies, which would bloom into historic scandal in the fall of 2001, also occurred under
It is, frankly, a miracle that the
More interesting, compare Bush's economy to
The unemployment and inflation rates today are precisely the same as at this time in 1996. Total job gains from January to July were somewhat higher in 1996 than in 2004, but in 1996 manufacturing jobs actually fell -- while they rose by 81,000 in 2004. Also this year, GDP growth and productivity were considerably higher than in 1996.
The ABC News/Money Magazine personal-finance index is 59 percent -- which is higher than the 18-year average. "I think economic growth will be faster in the second half of 2004 than in the first," writes David Malpass, the highly regarded Bear Stearns strategist.
So why all the gloom and doom? Three reasons….
1. In many cases, Kerry and his supporters are flat-out lying. Look up the non-partisan website of the
2. The media are wildly pro-Kerry. Last week, the Census Bureau released data showing an insignificant uptick in poverty rates in the past year, plus a minuscule rise in the number of uninsured. From the hysterical TV and newspaper coverage, you would have thought another depression had begun. An actual reading of the report reveals that poverty rates "remained unchanged for Hispanics…and Blacks" and are below levels in the first
3. This is a time of change, and Americans are legitimately worried. To assuage those fears, Bush wants to shift ownership and control -- of retirement funds, health insurance and other key assets -- away from businesses and government and toward individuals. That means building an "ownership society" through reform of Social Security, the tax code and the healthcare system.
I strongly agree, which is one reason I am helping to launch a new group called Investors Action, which will educate
It's hard to see those interests being served by Kerrynomics. For example, Kerry wants to raise taxes, which will reduce returns for investors and increase the cost of capital for businesses, almost certainly whacking stocks. Already, as my colleague, economist Eric Engen of the American Enterprise Institute, has shown, when Kerry's prospects in the polls rise, the market falls -- and vice versa.
Maybe investors -- and investors-to-be -- aren't nearly so dumb as some candidates think they are.
n.
An investment swindle in which high profits are promised from fictitious sources and early investors are paid off with funds raised from later ones.
[After Charles Ponzi (1882?–1949), Italian-born speculator who organized such a scheme (1919–1920).]
A fraudulent investing scam that promises high rates of return at little risk to investors. The scheme generates returns for older investors by acquiring new investors. This scam actually yields the promised returns to earlier investors, as long as there are more new investors.
Investopedia Says:
The Ponzi scam is named after Charles Ponzi, a clerk in Boston who first orchestrated such a scheme in 1919.
A Ponzi scheme is similar to a pyramid scheme in that both are based on using new investors' funds to pay the earlier backers. One difference between the two schemes is that the Ponzi mastermind gathers all relevant funds from new investors and then distributes them. Pyramid schemes, on the other hand, allow each investor to directly benefit depending on how many new investors are recruited. In this case, the person on the top of the pyramid does not at any point have access to all the money in the system.
For both schemes, however, eventually there isn't enough money to go around and the schemes unravel.
Where there is money, there are swindlers. Protect yourself by learning how investors have been betrayed in the past. The Biggest Stock Scams Of All Time...
Corporations have for years argued that they have the same rights as the individual under the law. Shall we hold them to that?
Let's test the theory that it is the victims of this scandal, i.e. the mortgage holders that are unable to pay the costs of their sub prime loans, who are to blame for the supposed house of cards falling. Obviously they are not an interest group that is "too big to fail", but let us for the sake of argument assume that it is their "fault" that this mess has begun to unravel.
Shouldn't we identify these individuals and assess these loans on a case by case basis? Oh, that's right. You've been bundled. And that is the fault of the foreclosed homeowner...how?
If this is a crisis caused by greed, fraud or malfeasance, what role does law enforcement have and what part does the justice department's obligation to prosecute play in the efforts to protect financial markets after the great flood of tax dollars to the rescue?
I do not advocate a commission, but rather a law enforcement approach. There are some really, really smart FBI agents who are quite capable of investigation of financial fraud. Senator Dodd, should there be accountability and a promise from the administration to investigate, identify and prosecute criminals as part of the price for this leap of faith on behalf of the American taxpayer? (Something for nothing is simply magical thinking and the taxpayer is not the tooth fairy. We nay sustain the brutal loss, but we demand justice.)
The Middle Class Must Not Be Forced to Bail Out Wall Street Greed
For years, as a member of the House Banking Committee and now as a member of the Senate Budget Committee, I have heard the Bush Administration tell us how "robust" our economy was and how strong the "fundamentals" were. That was until a few days ago. Now, we are being told that if Congress does not act immediately and approve the $700 billion Wall Street bailout proposal these "free marketers" have just written up, there will be an unprecedented economic meltdown in the United States and an unraveling of the global economy.
This proposal as presented is an unacceptable attempt to force middle income families (and our children) to pick up the cost of fixing the horrendous economic mess that is the product of the Bush Administration's deregulatory fever and Wall Street's insatiable greed. If the potential danger to our economy was not so dire, this blatant effort to essentially transfer $700 billion up the income ladder to those at the top would be laughable.
Let us be clear. If the economy is on the edge of collapse we need to act. But rescuing the economy does not mean we have to just give away $700 billion of taxpayer money to the banks. (In truth, it could be much more than $700 billion. The bill only says the government is limited to having $700 billion outstanding at any time. By selling the mortgage backed assets it acquires -- even at staggering losses -- the government will be able to buy even more resulting is a virtually limitless financial exposure on the part of taxpayers.) Any proposal must protect middle income and working families from bearing the burden of this bailout.
I have proposed a four part plan to accomplish that goal which includes a five-year, 10% surtax on the income of individuals above $500,000 a year, and $1 million a year for couples; a requirement that the price the government pays for any mortgage assets are discounted appropriately so that government can recover the amount it paid for them; and, finally, the government should receive equity in the companies it bails out so that when the stock of these companies rises after the bailout, taxpayers also have the opportunity to share in the resulting windfall. Taken together, these measures would provide the best guarantee that at the end of five years, the government will have gotten back the money it put out.
Second, in addition to protecting the average American from being saddled with the cost, any serious proposal has to include reforms so that we end the type of behavior that led to this crisis in the first place. Much of this activity can be traced to specific legislation that broke down regulatory safety walls in the financial sector and allowed banks and others to engage in new types of risky transactions that are at the heart of this crisis. That deregulation needs to be repealed. Wall Street has shown it cannot be trusted to police itself. We need to reinstate a strong regulatory system that protects our economy.
Third, we need to address the needs of working families in this country who are today facing very difficult times. If we can bail out Wall Street, we need to respond with equal vigor to their plight. That means, for example, creating millions of jobs through major investments in rebuilding our crumbling infrastructure and creating a new renewable energy system. We must also make certain that the most vulnerable Americans don't freeze in the winter or die because they lack access to primary health care.
Finally, we need to protect ourselves from being at the mercy of giant companies that are "too big to fail," that is, companies who are so large that their failure would cause systemic harm to the economy. We need to assess which companies fall into this category and insist they are broken up. Otherwise, the American taxpayer will continue to be on the financial hook for the risky behavior, the mismanagement, and even the illegal conduct of these companies' executives.
These are the last days of the Bush Administration, the most dishonest and incompetent in modern American history. It is imperative that, at this important moment, Congress stand up for the middle class and for fiscal integrity. The future of our country is at stake.
Cultural and Structural Shifts Rise Out of Risk-Taking Titans' Hard Fall
By Jill Drew, Cecilia Kang and Nancy Trejos
Washington Post Staff Writers
Sunday, September 21, 2008; A01
The credit crisis shaking the global economy is forcing a dramatic reconfiguration of Wall Street, where the financial industry in recent years has been driven to take ever-greater risks on increasingly esoteric investments.
The fragility of Wall Street's architecture was exposed this week when two icons of investment banking and the world's largest insurance company were fed into the maw as their competitors pushed for a historic government bailout to help salvage their own shaky businesses.
It is too early to tell whether Wall Street has truly been transformed by the series of upheavals or is simply witnessing a shuffling of its players. But as deal makers and policymakers now sift through the debris, some shifts are already evident, both in the structure of high finance and the culture of those who practice it.
"The competitive landscape of finance is changing before our eyes and the losers are the investment banks," said Roger Leeds, director of the Center for International Business and Public Policy at Johns Hopkins University. "What we're having now is a fundamental correction, not only of the market but of the institutions themselves."
Three of the five free-standing investment banks have fallen. Bear Stearns was sold at a fire sale, 158-year-old Lehman Brothers went bankrupt and Merrill Lynch is being acquired by Bank of America. The surviving titans, Morgan Stanley and Goldman Sachs, remain under pressure and have been weighing their options.
As financial analysts survey the horizon, they see the emergence of a handful of giant, global firms that manage a wide range of business activities alongside several boutique advisory firms that court blue-chip clients. Newer players will remain on the scene, including hedge funds and private-equity firms -- both lightly regulated entities that manage pools of money for wealthy investors and often buy large holdings in securities or sometimes directly invest in companies.
These changes could be accompanied by a cultural shift as the sheen comes off a longtime career destination for those with the brains, ambition and fortitude to place high-stakes wagers in return for outsize paydays.
Already, the shakeout is costing jobs and ruining fortunes. New York Mayor Michael Bloomberg estimates 40,000 workers in New York state, including many well beyond Wall Street, could lose their jobs as a result of the financial crisis.
Whether these changes portend a permanent remaking of Wall Street remains uncertain. The answer could turn in part on whether the government's rescue plan announced Friday succeeds. If the massive bailout fails, the destruction wrought on global financial markets could be staggering, ultimately clearing the way for the birth of a new system.
If the federal plan works, most of Wall Street could be spared and the business model that has powered it in recent years -- centered on complex securities, tremendous borrowing and opaque dealings -- could resume much as before. That is, unless the inevitable excesses are tamed by new regulation.
The fall of the investment bank was of its own making, analysts said. Starting in the 1980s, investment banks began straying from their traditional roles as intermediaries to mergers and acquisitions, investment advisers to corporations and individuals, traders of securities and portfolio managers for wealthy clients.
Driven by competition and the hunger for bigger profits, they began to aggressively push exotic products like asset-backed securities and other derivatives.
The investment banks not only sold these instruments to investors but also began purchasing them for the firms' own accounts, using larger and larger amounts of borrowed money. The more risks investment bankers took, the more money they made. Internal controls were lax.
"I don't think they had a good appreciation of the risks they were taking," said Ray Hill, a finance professor at Emory University.
Nor were government regulators fully aware of the gathering storm. They were hobbled by Balkanized oversight and gaps in disclosure rules.
"The problem is transparency because regulators weren't able to assess risks at investment banks in the way they are able to with commercial banks," said Mark Gertler, an economics professor at New York University.
Two of the big five investment houses have landed in the arms of commercial banks with Bank of America's purchase of Merrill and J.P. Morgan Chase's takeover of Bear Stearns. Meanwhile, the British bank Barclays is acquiring choice bits of Lehman (a bankruptcy judge in New York yesterday approved the sale of nearly all Lehman's assets), and Morgan Stanley is considering a merger with Wachovia, one of the country's largest commercial banks.
With the merger of investment banks into commercial banks and leaders of both political parties pressing for new regulations to enhance transparency and control over banks' investments, analysts say the new Wall Street could be a throwback to previous decades.
Investment and commercial banking was separated by law in 1933, when Congress passed the Glass-Steagall Act in response to a banking crisis that ushered in the Great Depression. By banning banks from selling stocks and bonds, the government aimed to end abuses that caused the collapse of thousands of banks across the country, wiping out the deposits of millions of customers who, at the time, did not have the benefit of federally guaranteed deposit insurance.
In recent decades U.S. banks, facing competition from foreign counterparts that had no restrictions barring them from owning brokerages, found loopholes in the law to open or acquire new business lines. In 1999, Congress conceded to the new reality, repealing the 1933 law with the passage of the Gramm-Leach-Bliley Act.
Commercial banks moved increasingly into the traditional domain of investment houses, in some cases acquiring them outright, such as the marquee purchase of Chase Manhattan Bank by J.P. Morgan in 2000. As investment banks faced heightened competition in their traditional business lines, these enterprises leveraged up with borrowed money and went looking for profits, betting on ever-riskier securities and derivatives. That is the trend the crisis of 2008 may reverse, at least for a time.
"It will tend to tone down some of the behaviors," said Thomas Atteberry, a partner in First Pacific Advisors, who moved 5 percent of his company's portfolio out of mortgage-related securities in 2006 in anticipation of a credit market meltdown.
But even as the formal line between different stripes of banks became blurry, investment and commercial banking remained divided by culture.
"Investment bankers get paid for performance, so they take risks to get paid," said Sam Weiser, a former Citigroup employee who now is chief operating officer of the Chicago-based hedge fund Sellers Capital. "The prevailing goals of commercial bankers are to protect assets."
Investment banks also tend to be more decentralized. "What makes Merrill's investment banking model work is that they attract high-powered, entrepreneurial people who build businesses within a business, and commercial banks do not work that way," said Hill, the Emory finance professor. "The question is: Does the culture of Merrill that made it so successful, is that going to survive in a huge organization?"
Traditionally, many investment bankers shunned their colleagues on the commercial side as stodgy and risk-averse. But now, as institutions meld so must the psychology, analysts say.
"There will be a merger of two ways of doing business," said Seamus McMahon, a financial services partner at Booz & Co., a global management consulting firm. "The stand-alone investment bank may have been an accident of history. It had its run and it's over or at least vastly diminished."
The new management, analysts say, will emerge from the ranks of commercial bankers.
"That is the superior force, and that changes the nature of how things are approached," said Len Rushfield, adjunct professor of finance at Pepperdine University. "The commercial banking world is built on relationships and continuity and not on high levels of incentive compensation."
The first test for the future of Wall Street banking could come over compensation levels: whether the investment banking stars who placed big bets and were awarded big salaries and bonuses in return continue to get paid.
When John Thain was still Merrill's chief executive earlier this year, for example, he hired a legendary trading manager from Goldman Sachs named Thomas K. Montag. The tab, disclosed in a filing with the Securities and Exchange Commission: annual salary of $600,000, signing bonus of $39.4 million plus a promise to reimburse him for Goldman shares he forfeited for an estimated total of $50 million.
Analysts wonder if Bank of America Chairman Kenneth D. Lewis would agree to pay that amount.
If Wall Street loses its lure of big riches, it could have trouble attracting top talent.
"Most business students don't go into investment banking because they love finance so much, but because it pays well," said Francisco Cabeza, a student at the University of Pennsylvania's Wharton School of Business who has a job offer at a private-equity firm in London.
Richard X. Bove, an analyst at Ladenburg Thalmann & Co., predicted that the crisis could spark a start-up boom on Wall Street, with hot demand for small boutique investment firms focused on one or two specialties. He said these firms could fill a niche as behemoths like Bank of America and Citigroup grow so large that they cannot serve all their corporate clients because of conflicts of interest.
Some analysts also see some of Wall Street's influence being redistributed overseas as business migrates to other places with money. "New York will be the first among equals but absolutely not the place. Normally it was London and New York," said McMahon, the management consultant. "I think we'll see Abu Dhabi grow. Singapore. I think we'll see India if they can get their regulations straightened out."
Nor was the earthquake that rocked U.S. financial markets a tragedy for all involved. For those with strong enough balance sheets and money to spend, the recent weeks have presented a unique chance to buy. Bank of America's Lewis was one notable winner.
Even Lewis posits that a chastened financial industry is entering a new phase.
"It seems unlikely that most companies would simply volunteer to pull back the reins on profit and growth in a hot market. But, in fact, that's precisely what needs to happen," said Lewis, according to a prepared text of a speech he gave Friday in Washington. "We must embrace the reality of what will be, at least in the short term, a smaller industry with a simpler approach to finance."
Special Correspondent Heather Landy in New York and staff writer Robin Shulman contributed.
McCain Claimed "Privatization" Was Necessary For Social Security
In particular, the Obama campaign has begun highlighting John McCain's support for privatizing Social Security, the venerable government institution known as a third rail of politics.
Appearing in Florida on Saturday, the Democratic nominee warned voters that his opponent's plan would leave the retirement security of senior citizens at the whims of an erratic market.
"I know Senator McCain is talking about a 'casino culture' on Wall Street," said Obama, "but the fact is, he's the one who wants to gamble with your life savings and that is not going to happen when I'm President of the United States."
The McCain campaign has responded to these and other attacks by accusing Obama of fear mongering, repeatedly denying that the Arizona Republican ever supported privatization in the first place.
"He's not ever talked about outsourcing Social Security into the private sector," senior adviser Steve Schmidt told reporters Thursday. "What people talk about with regard to personal accounts is giving the American people an ability to have a greater return on an investment -- it could be bond funds, for example."
But a rarely-seen video in a new documentary released by the group Progressive Accountability, a portion of which was handed over to the Huffington Post, shows this simply isn't true. McCain has in fact argued that privatization is necessary to maintain Social Security into the future.
"Without privatization, I don't see how you can possibly, over time, make sure that young Americans are able to receive Social Security benefits," McCain declares at a December 2004 event in New Hampshire.
"Americans have got to understand that we are paying present day retirees with the taxes paid by young workers in American today. And that's a disgrace. It's an absolute disgrace and it's got to be fixed," he declared on the campaign trail this year.
The footage, part of a documentary called Third Term and narrated by Democratic strategist Paul Begala, is pretty cut and dry, and as such, damaging in the current electoral environment. And there are many other similar quotes out there. This March, for instance, McCain declared: "I'm totally in favor of personal savings accounts...along the lines that President Bush proposed." (Personal savings accounts, it should be noted, became the messaging that Republicans turned to after privatization performed poorly).
And so, McCain and his aides have been handed an uphill challenge this week. Faced with voters concerned about turning over their benefits to an unstable market and an opponent eager to engage in a Social Security debate, the Senator has been left trying to gloss over his past support for privatization and avoid a political minefield.
"We have to have some straight talk for America," said McCain on Wednesday. "The Social Security system is going to go broke. It will not be there for present day men and women who are working. And we have to fix it and we have to do it in a bipartisan fashion."
US to 'press' countries to forge financial bailouts: Paulson
Agence France-Presse
Published: Sunday September 21, 2008
Paulson said the Treasury's proposal to Congress for authority to spend 700 billion dollars to buy toxic mortgage-related assets from financial institutions could serve as a blueprint for foreign authorities.
"I'm also going to be pressing our colleagues around the world to design similar programs for their banks and institutions when they are appropriate," Paulson said in an interview on Fox television.
Paulson did not provide further details, but US financial authorities have been working closely with their counterparts in Europe and Japan over the past 10 days to prevent a collapse of the interwoven global financial system.
British Prime Minister Gordon Brown said on Friday that his government would "do everything in our power to ensure the stability of the (financial) system."
Britain's Financial Services Authority acted rapidly Thursday to halt short-selling in financial shares -- when investors borrow company stock to sell it in anticipation of profiting from a fall in value -- and Brown said other actions were being considered.
"We are now working with our international partners about broader intervention we are in a position to take," he said.
Paulson also clarified that the US bailout plan sent to Congress on Friday and centered on a government purchase of toxic mortgage-based assets would also cover non-US institutions with operations in the United States.
"Obviously, we'd want to buy from financial institutions that are employing people, and are an important part of our economy," he said.
"Because to the American people, if an institution is doing business here is clogged, and can't perform the role they need to do, it's a distinction without a difference -- whether it's a foreign or a US-owned," he said.
"Remember, our system is a global one."
Paulson also said that the intent of the plan submitted to Congress "right now wouldn't be to buy from hedge funds" -- private investment funds that specialize in aggressive risk-taking.
Regarding the unprecedented rescue plan unveiled to Congressional leaders late Friday, Paulson, a former Goldman Sachs president, said: "I hate the fact that we have to do it."
"This is a humbling, humbling time for the United States of America as we go around the world and talk to people about our financial system. We'll work through this. We need to stablize it first and take steps to clean things up."
Paulson: Don't add households to financial bailout bill
Paulson, making the rounds of Sunday talk shows, said because financial markets remain under severe stress, there is an urgent need for Congress to act quickly without adding other measures that could slow passage of the bill.
"We need this to be clean and to be quick," Paulson said in an interview on ABC television's This Week.
Some lawmakers digesting the eye-popping cost voiced concerns that the proposal offers no help for struggling homeowners or safeguards for taxpayers' money. Democrats say it must include mortgage help so borrowers facing foreclosure can stay in their homes
Paulson said the nation's outdated regulatory system for financial markets must be overhauled, but the first job is to get the most sweeping rescue package since the Great Depression passed by Congress in coming days.
"We need to deal with this and deal with it quickly," Paulson said in an interview on NBC's Meet the Press.
The administration was negotiating the details of the proposal with members of Congress with the expectation that it can be passed in the next week.
Paulson said "it pains me tremendously to have the American taxpayer put in this position but it is better than the alternative."
Both Paulson and President Bush have argued that the alternative would be credit markets that remain frozen, meaning that businesses will fail because they can't get the loans they need to operate and the economy will grind to a halt because consumers won't be able to get loans to make the purchases that keep the economy moving forward.
In answer to a question, Paulson said Sunday that foreign banks will be able to unload bad financial assets under the rescue plan.
"Yes, and they should. Because ... if a financial institution has business operations in the United States, hires people in the United States, if they are clogged with illiquid assets, they have the same impact on the American people as any other institution," Paulson said on "This Week with George Stephanopolous."
On Saturday, Bush said the White House is ready to work with Congress to quickly enact legislation to allow the government to purchase hundreds of billions of dollars worth of bad debt linked to the collapse of the housing market.
Congressional aides and administration officials were working through the weekend to fill in the details of the proposal.
The Bush proposal that would dole out huge sums of money to Wall Street firms and bankers is a mere three pages in length and is vague in terms of determining which institutions would qualify or say what — if anything — taxpayers would get in return.
"It's a rather brief bill with a lot of money," said Sen. Chris Dodd, D-Conn., the Banking Committee chairman. "We understand the importance of the anticipation in the markets, but we also know that what we're doing is going to have consequences for decades to come. There's not a second act to this — we've got to get this right."
The proposal would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion to make room for the massive rescue.
Published on Monday, August 20, 2007 by CommonDreams.org
Save Subprime Borrowers, Not Bloated Bankers
There is a simple and direct way in which the federal government can help out millions of moderate income families struggling to keep their homes. They can simply change the rules on foreclosure to allow moderate income homeowners the option to remain in their homes indefinitely as renters, paying the fair market rent.
This proposal would immediately give moderate income homeowners a guarantee that they would not be thrown out of the street because they cannot meet the terms of a predatory mortgage. It accomplishes this goal without requiring any elaborate new bureaucracy and without requiring a single dollar from the taxpayers. And this plan does not bail out the bankers, hedge funds, and other financial industry types who were speculating in mortgage debt.
Here's how the plan works. Currently, if a homeowner is not able to make their mortgage payments, the holder of the mortgage can go to court to place the house in foreclosure. This means that if the homeowner is not able to come up with back payments on the mortgage, or work out an acceptable arrangement with the mortgage holder, the bank or financial institution that holds the mortgage retakes ownership of the house and can have the homeowner evicted.
Under this security of housing proposal, the foreclosure process would be changed so that the current homeowner would have the option to remain in their house as a renter paying the fair market rent. If a homeowner chose to go this route, the judge in the foreclosure proceeding would appoint an independent appraiser to determine the fair market rent for the house, in the same way that a bank hires an appraiser to determine the value of the house before issuing a mortgage.
The former homeowner could then remain in their home as a renter for as long as they liked. The rent would be adjusted at regular intervals in step with the change of other rents in the area. There could even be an appeal process in which either party could request that the judge get a second appraisal, at the expense of the person complaining about the original appraisal. This should ensure that the rent set for the house is fair. After the foreclosure, the mortgage holder would now own the house and be free to sell it to another person, but the former homeowner would still have the right to remain as a renter, regardless of who owned the house.
This program could be restricted to homes that cost less than the median house price for an area to ensure that high income homeowners do not take advantage of it. The program would also only apply to people who lived in their homes, not investors. In short, it is a very simple and low cost way to help moderate income homebuyers. It does not give them any windfalls, but it can ensure that they don't end up being thrown out on the street.
In contrast, the politicians are lining up with plans that ostensibly protect homeowners, but would most immediately benefit the mortgage holders who speculated in predatory mortgage debt. For example, one popular proposal being circulated in Congress would vastly expand the role Fannie Mae and Freddie Mac, the government created mortgage intermediaries, in the mortgage market. This proposal would allow them to buy up hundreds of billions of dollars of subprime and other mortgages that the private sector does not want.
Of course, the private sector doesn't want these non-prime mortgages because the default rate is soaring. If Fannie Mae and Freddie Mac suddenly got in the market for this debt, those who are currently speculating in these mortgages stand to make a fortune. It's not clear that the government's largesse will necessarily benefit moderate income homeowners facing foreclosure, but there is certainly a possibility that some of the windfall will trickle down.
The point here is simple. We can design a mechanism that will directly benefit millions of moderate income homeowners who are struggling to hang on to their homes. Or, we can come up with schemes that will benefit the banks and hedge funds who speculated in mortgage debt. Place your bets.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.
Sam Stein
September 20, 2008 06:46 PM
With the financial world in an unpredictable crisis, the political debate has shifted sharply to the efficacy of turning government programs over to the private market.