Mattison (![[info]](http://l-stat.livejournal.com/img/userinfo.gif){kind=small} agnosticoracle) wrote,@ 2008-09-29 19:00:00 |
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Mattison's Economic Rescue Plan
The economic problems that motivated the bailout bill have not disappeared in the wave of recriminations that followed the failure of the bill. A wave of panic however has swept through Wall Street this afternoon with stocks down somewhere between 7 and 9% depending upon which index you prefer. Stocks are down about 25% since October of last year. To make matters worse, since none of you were wise enough to ask me not too, I'm going to share my economic rescue plan.
The fundamental problem is that there are a lot of people who have mortgages they can't afford. This is bad for them, it is bad for anyone else trying to sell a house, it is bad for anyone owning those mortgages or various derivatives based off of them, and its bad for anyone who has a 401k that owns companies which have those...
Since mortgages people can't afford is the root of the problem it is a good place to start. The federal government should offer free mortgage insurance for 5 years to refinancing mortgages which meets the following criteria.*
This won't get everyone who is on shaky ground with their mortgage out of trouble, but it will help a lot of people who are on the edge. It will especially help those with variable rates that got crazy. For those that can take advantage of this it will transform these mortgages from part of the problem to part of the solution.
Since the insurance is limited to those who can prove the ability to pay the refinanced morgages, the cost of this should be small. Buying equity in the home will of course cost some money but the government will get 5% from the eventual sale of the home so it isn't exactly a giveaway and could even make money in the long run (though I don't recommend investing the Social Security Trust Fund in this scheme).
While this will help people keep their homes and help stabilize the free fall that is home prices it isn't going to work for everybody. Some people are still not going to be able to afford the homes they bought and those mortgages are still going to get foreclosed. While we may not have as much sympathy for someone who bought too much house and less for a speculator who bought too many houses, we do want to limit the fallout on the rest of the economy.
The second side of this problem is the large number of financial institutions which own mortgages or mortgage derivatives which aren't worth what they bought them for. There is both a liquidity and valuation problem here. The liquidity problem is no one wants to buy these things because many of the mortgages they are based upon are going into default. The valuation problem is if the companies did value these things based upon what they are worth the companies would suddenly be insolvent and have to go out of business.
To solve this problem you need to fix these companies' balance sheets. I propose the following. The federal government will buy preferred stock from any company at the market rate up to 75% the outstanding value under the following conditions.
This reselling of the stock should help finance this in the long term. In the short term something along the lines of what Rep. Peter DeFazio suggested in a 0.25% transaction fee on the sale of stock or other derivatives. Such a tax could raise somewhere in the neighborhood of $150 billion a year. Most appropriately the money to save Wall Street would be coming FROM Wall Street.
* All numbers in this plan are pulled out of my ass. If someone were serious about a plan like the numbers would certainly move around a bit, but should be within an order of magnitude of workable ones.
The economic problems that motivated the bailout bill have not disappeared in the wave of recriminations that followed the failure of the bill. A wave of panic however has swept through Wall Street this afternoon with stocks down somewhere between 7 and 9% depending upon which index you prefer. Stocks are down about 25% since October of last year. To make matters worse, since none of you were wise enough to ask me not too, I'm going to share my economic rescue plan.
The fundamental problem is that there are a lot of people who have mortgages they can't afford. This is bad for them, it is bad for anyone else trying to sell a house, it is bad for anyone owning those mortgages or various derivatives based off of them, and its bad for anyone who has a 401k that owns companies which have those...
Since mortgages people can't afford is the root of the problem it is a good place to start. The federal government should offer free mortgage insurance for 5 years to refinancing mortgages which meets the following criteria.*
- Must be owner occupied home
- Must be a conforming mortgage ($417k single family, $533k two family, etc)
- Mortgage rate must be a fixed rate 5.5% or lower for 15-30 years
- Owner can provide proof of income (tax returns and/or pay stubs) to demonstrate ability to pay
This won't get everyone who is on shaky ground with their mortgage out of trouble, but it will help a lot of people who are on the edge. It will especially help those with variable rates that got crazy. For those that can take advantage of this it will transform these mortgages from part of the problem to part of the solution.
Since the insurance is limited to those who can prove the ability to pay the refinanced morgages, the cost of this should be small. Buying equity in the home will of course cost some money but the government will get 5% from the eventual sale of the home so it isn't exactly a giveaway and could even make money in the long run (though I don't recommend investing the Social Security Trust Fund in this scheme).
While this will help people keep their homes and help stabilize the free fall that is home prices it isn't going to work for everybody. Some people are still not going to be able to afford the homes they bought and those mortgages are still going to get foreclosed. While we may not have as much sympathy for someone who bought too much house and less for a speculator who bought too many houses, we do want to limit the fallout on the rest of the economy.
The second side of this problem is the large number of financial institutions which own mortgages or mortgage derivatives which aren't worth what they bought them for. There is both a liquidity and valuation problem here. The liquidity problem is no one wants to buy these things because many of the mortgages they are based upon are going into default. The valuation problem is if the companies did value these things based upon what they are worth the companies would suddenly be insolvent and have to go out of business.
To solve this problem you need to fix these companies' balance sheets. I propose the following. The federal government will buy preferred stock from any company at the market rate up to 75% the outstanding value under the following conditions.
- The revenue from stock sales must equal the mark down in mortgage or mortgage derivative assets
- Executive compensation is limited to $250,000 and all compensation plans for officers are subject to review by a bipartisan panel
This reselling of the stock should help finance this in the long term. In the short term something along the lines of what Rep. Peter DeFazio suggested in a 0.25% transaction fee on the sale of stock or other derivatives. Such a tax could raise somewhere in the neighborhood of $150 billion a year. Most appropriately the money to save Wall Street would be coming FROM Wall Street.
* All numbers in this plan are pulled out of my ass. If someone were serious about a plan like the numbers would certainly move around a bit, but should be within an order of magnitude of workable ones.
