Rescuing the Bailout

RESCUING THE BAIL-OUT
An opposition to the Emergency Economic Stabilization Act
By Fred Ashley

The Emergency Economic Stabilization Act of 2008, or Bailout Plan is a law authorizing the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially mortgage-backed securities, from the nation's banks. I am against this Bailout Plan because there exist better alternatives to its overall structure as it relates to timing, magnitude and the methodology of attacking the current economic problem.

The “emergency” plan was introduced with an overwhelming sense of urgency as the solution to the global credit freeze that would inevitably lead to wide spread job losses, increased home foreclosures and an annihilation of investor confidence. Forced onto the American taxpayer, politicians claimed the Bailout was mandatory to, at minimum, delay the largest financial crisis since the Great Depression. Because each of the proposed programs included in the bailout would take many months to be implemented, it is reasonable to assume that the implied urgency of the proposed solution was actually intended to simply postpone the fall of investor confidence as opposed to carrying out any immediate financial transactions. Investors wanted to see that a plan was in place, the details were significantly less important from a timing perspective. Therefore, the rationale used to avoid reasonable alternative methods was mostly manifested.

Briefly ignoring the hypothetical doomsday timeline created by the current Treasury Secretary, the actual need for $700 billion is an artificial amount that conveys more shock value or an extreme willingness to solve the problem rather than a strategic plan. As when wolves are allowed to guard the hen house, it seems irresponsible to commit over $4,000 per taxpayer to an exiting administration possessing the same deregulatory principles that played a major role in the creation and neglect of the current economic crisis.

The Treasury Secretary’s deregulatory ideology was overwhelming, and therefore diluted when the details of the $700 billion were expanded from a 3-page proposal to over 450 pages of implementation regulation. Many voter concerns, including decreasing excessive executive compensation for failing institutions, obtaining an equity position for taxpayers within these same companies and various oversight additions were added for political cover, but are negligible to the primary purpose of stabilizing the economy. To add insult to injury, the additional provisions allowing the modification of mortgages purchased in an effort to assist distressed homeowners in avoiding foreclosure could have been the most effective path towards stabilizing the housing industry, but were only referenced in less than 5% of the entire proposal.

Stabilizing housing prices is widely accepted by most economists as the best way to solve the lingering recession and potential depression. Using the same $700 billion dollars, most of the current and pending foreclosures in the country could be avoided utilizing more practical rather than political strategies. If the past is prologue, by funding a Homeowners Refinance Act, similar to the one used during the Great Depression, we could multiply the effectiveness of the current Bailout Plan. However, this time mortgages could be made to homeowner’s in a subordinate lien position.

For example, banks could be given a profitable alternative to foreclosure by modifying the amount of their nonperforming mortgages to 80% of the properties current value with a new manageable fixed rate and payment terms. The incentive would be realized by distributing a 10% cash payoff to any existing lien holders in exchange for a 20% lien on the homeowner’s property. As a former mortgage and real estate broker that currently negotiates discounted mortgage payoffs, I can confidently say that most banks would prefer this strategy to foreclosure.

Simultaneously attacking the growing surplus of available homes, similar lending standards could be available to individuals interested in purchasing a home. The underlining political dilemma of making this “bailout” fair and profitable could be presented in the following manner: Participating individuals would lose their ability to receive tax credits for the interest paid towards their primary mortgage. Instead, that amount would be credited towards the 20% lien held by the government. With the average mortgage being less than $250,000, over 20 million homes could be saved or purchased using the same $700 billion. Systematically, this would significantly lower mortgage payments, increasing household cash flow, thus directly stimulating the economy through more consumer buying power.
Increasing real buying power as opposed to the borrowing power that some economic strategist call “tackling the credit freeze”, is a better long-term approach to maintaining a productive economy.

After acknowledging that the major investment banks who masked these mortgage-backed securities for so many years have either failed or converted to more regulated entities, the inappropriately inflated investor confidence is the only other major intangible deficiency plaguing the current financial crisis. The Bailout appears to be more focused on re-inflating that confidence than dealing with the catalyst causing the deflation. By identifying better alternatives, it is fair to say that the timing, magnitude and methodology of the Bailout Plan do not proportionately reflect its intended objective of immediately stabilizing the economy. It is because of these reasons that I am opposed the Emergency
Economic Stabilization Act of 2008.