My Two Cents

The housing bailout

Chris Farrell Feb 18, 2009

The President will propose how to help out homeowners facing foreclosure. David Leonhardt of the New York Times has a good article today on the choices facing the Administration. In essence, the Administration has to choose between focusing on those homeowners in dire financial straits or to include homeowners with mortgage payments they can meet but on homes worth far less than the value of the mortgage. It looks like the Administration will direct resources toward the most desperate homeowners.

But Dean Baker,co-director of the Center for Economic and Policy Research in Washington D.C., offers a far better solution on his blog.

We know that the people who run Citigroup, J.P. Morgan, Wells, and other major financial institutions may not be the sharpest knives in the drawer, but how much do taxpayers have to cough up to make up for their ineptitude? David Leonhardt’s discussion of housing bailout plans never seems to consider the possibility that we would just let large numbers of foreclosures occur and let the banks eat their losses.

Yes, many, if not most, of the banks will go under. So what? Why should taxpayers support convoluted schemes to protect these bank executives and their shareholders from their own ineptitude. We can protect homeowners by simply giving them the right to stay in their home as renters following foreclosure. It’s a simple, costless and bureaucracy-free solution, but it screws the banks. So, the folks in Washington and the media apparently are not interested.

Well, I’m interested, and I don’t see why not? So far, my sense is that Treasury remains for too solicitious of bank shareholders and bondholders.

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