THINKing Outside the Box

A recent opinion poll broadcast on CNN Headline News indicated that 58% of Americans are opposed to the $700 billion bailout of struggling financial institutions, while the same percentage supports assistance to homeowners who are struggling with their mortgages. This is nothing less than a classic example of “the people” being smarter than the ones they chose to lead them. They instinctively know that the bailout the government is proposing is wrong and they couldn’t be more right.

There are a host of questions that the leadership pushing this plan cannot answer. Will this tremendous amount of money actually accomplish its stated purpose of jumpstarting the credit markets? Once the system is running, how much is it going to take to then fix it? Will the fixes be accepted even if they are affordable? How will this massive addition to the national debt be repaid and by whom, how and when? What guarantees are there that the money will be used to fund stabilization measures and not acquisitions on the part of the recipients?

These corporations that used abstract mathematical concepts that they didn’t even understand, but profited greatly from, should not be rewarded. They produced nothing. They ruined the lives of thousands. Their managers were only loyal to the bottom lines and their bonuses and, if bailed out today, they will figure out new ways to rip off the consumer tomorrow, because the system will remain fundamentally the same.

If we really want to put our $700 billion dollar to good use, and simultaneously begin the process of replacing an economic system that has repeatedly proven it doesn’t work with one that does, the government should refuse to fund this “top down”, business friendly, taxpayer yoke and try a solution that directly benefits homeowners and begins to change this mess for an economic system that redistributes wealth without a major social upheaval.

If the monies were used by the government to purchase the differential between a homeowner’s mortgage and the decreased value of their home, effectively becoming an equity partner in the home and taking repayment when the homes again appreciated, foreclosures would stop, the housing market would stabilize, banks would have the liquidity they so desperately are seeking, bad debts would be removed from their books freeing up the credit markets, and best of all, the debt would be repaid by market mechanisms rather than by taxpayer assessments.

For example, if you owned a home with a $500 thousand mortgage, but which is only valued in the current market at $400 thousand, the government would pay the bank the $100 thousand difference and the homeowner would get a new mortgage at $400 thousand for thirty years at a fixed rate. If the house appreciates back to its original value, the homeowner would be required to refinance and repay the $100 thousand back to the government.

By becoming equity partners with thousands of homeowners, the risk would be diluted across a broad pool of investors (the homeowners) that have long-term interest, rather than cut and run profit-takers (the financial speculators and loan re-packagers and the like), and the government would dilute the power of these entities without excessive new regulations that would inevitably lead to those companies coming up with even more arcane ways to avoid the rules. By using this type of lending as the basis to reform both Freddie Mac and Fannie May, the obvious organizations through which these loans should be handled, they could reform both organizations by restricting their activities to their proper scope and function, which was to safely help Americans buy their own homes in the first place.

Following this course of action avoids the useless recriminations over who deserves help and who doesn’t, holds everyone accountable, keeps the oversight of the money with the government and is a surer way of rejuvenating the economy than the proposals currently being touted. Politicians are continually telling individual Americans that we are the backbone of the economy. In this crisis they need to support us with direct financial assistance instead of asking us to break our financial backs yet again to save companies that didn’t, haven’t and never will give a damn about anything other than profit.

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