The Trickle-Up Bailout
By Jonathan G.S. Koppell and William N. Goetzmann
Wednesday, October 1, 2008; A17
The theory underlying the bailout plan stalled in Congress is that rescuing the finance industry will restore market stability and that the benefits will eventually trickle down to average Americans. Thus, solving the subprime mortgage crisis has morphed into a much larger challenge: reassembling the architecture of the financial markets, which seemingly requires giving the Treasury secretary nearly a trillion dollars and extraordinary latitude to pick winners and losers.
There is an easier and more politically palatable fix: Pay off all the delinquent mortgages.
The financial crisis is a liquidity crisis, yes, but it is ultimately a product of homeowner failures to pay. Unless this fundamental problem is fixed, we will continue to see — and need to treat — the symptoms. The proposed bailout ignores this. Yet the sum being demanded from taxpayers is almost certainly more than sufficient to pay off all currently delinquent mortgages.
If the government did this, all the complex derivatives based on these mortgages would be as good as U.S. Treasuries. Their fair value would jump to 100 cents on the dollar, rescuing teetering financial institutions. The credit markets would be resuscitated overnight. Foreclosures would stop.
. . . This solution would start by helping ordinary Americans and would quickly spill over to revive the financial markets. Directly addressing the underlying cause of the crisis would help ensure that we would not be facing the same crisis again down the road. While Wall Street has only recently felt the bite of foreclosures and delinquencies, communities across the nation will face greater financial and social fallout if the foreclosure crisis continues.
No more trickle-down, our trickle down has trickled out
Put the money where the pain is, keep people in their homes, balance the credit-crisis that’s attached to the sub-prime disaster and keep derelict neighborhoods from imploding.
Sounds better to me than giving Henry Paulson more dough.