Since the problem with the economy is directly related to sub-prime mortgages, here is my suggestion for fixing it. (I took two economics bird courses in university, so my opinion should be considered authoritative).
Forget TARP. Forget the stimulus. Forget nationalizing the banks. Forget Obama's mortgage rescue plan. They should all be replaced by this:
The government should directly inject cash into the mortgages of ALL homeowners who purchased their houses after a certain date (the date the housing boom started). The amount of the injection would be equal for all who qualified (basically, people who would have been OK if the value of their house had at least stayed at the price it was when they bought it, instead of falling below their equity in it). These are the honest, hardworking people who have been inadvertently impacted by the economic meltdown. Some of these people are already doing OK, some are struggling. To avoid the "moral hazard" of rewarding bad behaviour, they should all receive the credit. Also, the banks should be encouraged to forgive an additional amount up to the government credit amount, if, in so doing, they would lift the homeowner above water. If the bank refused, it wouldn't get the government credit. Also, anyone who is renting who wishes to purchase a new home should also be eligible (if they can qualify for a mortgage on conservative terms).
The cash injection would go immediately to the mortgage holder (eg. the bank). For the homeowner, the only change he would see would be in the "amount owing" column on his mortgage statement. The additional cash would flow to the banks, as with TARP, but along the way, it would lift many mortgagees out of the hole.
How much would it cost? Well, at $50K for each of 10 million mortgages, it would only be $500 billion. The actual payment and number of mortgages affected should be chosen so it is big enough to bring the number of foreclosures down to normal levels as well as pumping cash into the banks to make them solvent.
The program should be financed (eventually) by increased gas taxes.
Limits that should be placed on recipients:
- if they get the money, they must then be "above water" by at least the traditional 20%
- they must be able to make the monthly payment
- they should have a history of making payments
- must live in home...no investment properties
Such requirements would basically exclude the ridiculous example that Steve Sailer described. These people have no chance of repaying the mortgage and they never did. The bank should foreclose as normal. I only want to help those people who invested in a house assuming their country's financial system was sound and who got caught when they found out that it wasn't.
Example: A person buys a house in 2002 for $240,000 and puts down 10% or $24,000. Currently he owes $190,000 but the house has dropped in value by 25% so it is only worth $180,000. He has -$10,000 equity. The householder has a good history of making his payments and can afford the house. The government credit of $50,000 reduces his amount owing to $140,000, giving him equity of $40,000 in the house (22%). (Note: If the value of the house had just stayed constant, he would now have $50,000 equity, so he has still lost ground, but at least he is now above water and is free to move to find another job if necessary.)
Is this fair? Under the circumstances, I think so. If you didn't buy a house after the boom started, you didn't lose any money when the market crashed, so you wouldn't qualify for this plan. However, you would end up paying taxes to help someone else out. If the plan succeeds in saving the financial system, you should consider it money well spent!
