A Market Based Alternative To The Wall Street Bailout

File this one under a moment of personal privilege, as it has nothing to do with “GA” politics, except for the fact that our GA delegation in Congress is currently deciding on how it will vote regarding the largest bailout in the history of the world.

While not gleeful about the prospects of the Paulson bailout plan announced last week, I’ve resigned myself to the position that, absent strong federal government intervention, the current crisis on Wall Street will result in a total collapse of our banking system, economic system, and in many ways, our republic.

While I think the plan is workable, it needs some tweeks, at a minimum.  The dilemma, at least to me, is how do we fix the underlying liquidity and structural problems with our banking system without rewarding the bankers who created this mess in the first place?  Yet, if the fix is too punitive, those same bankers are forced out of business, with a similar result as if no “fix” ever took place.

There’s an excellent analysis here , and I would encourage anyone who is having difficulty understanding the basics of what is going on to read that gentleman’s diary’s.  (Yes, it’s from RedState, but his analysis is detailed, yet in layman’s terms, and is not partisan).   

I came to the conclusion yesterday, after absorbing Paulson’s testimony to Congress, that there has to be a better way.  Paulson intends to pay higher than current market prices for the toxic loan portfolios in order to flood the market with capital.  I think this is too much of a wealth transfer to the taxpayers, with dubious expectations of results.   Yet, I would still admit, I would prefer it to doing nothing.

While it may be too late for counter proposals, this one kept me up last night.   But if we’re already at the point of acknowledging that the mortgages currently on the books are indirect liabilities of the taxpayer, and we have created a bailout of Wall Street in order to save main street, why don’t we just bite the bullet and bail out main street?

Instead of buying “toxic” portfolios with dubious value, why not allow the Fed to create an RTC type entity to refinance and hold mortgages?    Anyone with a mortgage currently on the books would be allowed an automatic refinance into the new fed pool of mortgages, at a rate of 5%.   The loans would be subject to a limit of 100% of current appraised value.   If the mortgage amount is higher than 100% of the new appraisal, the fed and the mortgage holder would split the amount.  (There’s your bailout, Wall Street).   Given the low doc nature of these refis, it would seem that closing costs could be minimized to appraisal, title search, origination fee capped at .25% of the loan amount, and attorney’s fees. 

As a bonus, the loans would be assumable.  This would encourage people who are at or near 100% loan to value to stick with their mortgage, knowing that when interest rates go up, (and they will), their home will have additional value because it has a 30 year fixed rate loan at 5%.   This will help create equity in exisiting homes, while not encouraging additional new construction (oversupply) because new construction will not qualify for this program.

This would have much of the same effect as the proposed bailout.  Capital would be freed up overnight on Wall Street.   Homeowners would see relief across the board, not just the ones who borrowed over their ability to pay.   Wall Street would be able to sort out its own winners and losers based on who has the most loan exposure to loans over 100% LTV, but wouldn’t have Congress dictating how to run their business.  (After all, Congress has yet to prove they can run Congress).

So, it’s an idea.  I’m throwing it out there.  Clearly would need additional details to be legislation, but it may get some conversation started.

But if you like the idea, and you know a GA Congressman or Senator who hasn’t decided on how to handle the bailout, you may want to send this idea their way.