A Solution to the Financial Crisis

I am increasingly certain the proposed bailout is dangerous.

As long as it is the only solution on the table, however, you cannot throw rocks at it. A lot of people are throwing rocks at it without having the guts to propose an alternative.

Here's an alternative:

• Freeze all ARMs at their current interest rate level or 10%, whichever is lower.
• Pay off mortgages that exceed 80% of the current collateral value down to 80% of the current collateral value (if a home is worth $200K and you owe $210K, the government will pay your bank $50K and bring your balance down to $160K).
• Increase tax rate of 2% on anyone making more than $150K/year who benefitted from the mortgage payoff for 25 years. This extends to people who are not making $150K today but make it in 5 or 10 years; and it is dropped for people who have their income drop below $150K during that time frame.
• Refinance at current prime all mortgages under $250K for people making less than $100K/year and a 2-year history of being no more than 30 days behind on payments.
• Convert all interest-only real-estate loans less than $500K to 30-year, prime loans.
• Ban ARMs and interest-only loans.

The problem with the Bush administration solution is that it is very inflationary, it rewards bad decisions on Wall Street, and does nothing about the cancer causing this crisis—the plummeting home values.

My solution rewards no one. Everyone who took on a mortgage will still have their mortgage. Everyone who made a bad loan is still reliant on the people paying the loans to make their payments. However, everyone gets a free pass on the actual extraordinary event (the financial hurricane): the massive drop in home values.

As a result, many people who were in a bad position because they were underwater on their home values are all OK. The financial institutions at risk because of this situation will have an injection of cash and a reduction in risk profile. This injection of cash will create new capital that can go into the markets (the whole point of the Bush bailout).

Now, just buying out mortgages so they are not underwater does not address other nasty problem: risky loan instruments. If you could not pay your loan payments at 120% you home value, you probably still cannot afford them at 80%. The reason is because banks created goofy mortgage products that were once affordable for these people but have become completely unaffordable. So, the rest of my proposal addresses two key culprits: ARMs and interest-only loans. Turn them loans into loans people can afford. Reduce the risk profile of the institution and let people keep their homes.

The thing that kills home values is foreclosures. This proposal results in:

• A significant reduction in foreclosures (thus preserving home values)
• An injection of cash into financial institutions that can be used as future capital for investment
• Minimal regulation that prevents the greedy lending habits that created this crisis
• Everyone still be responsible for their own decisions—both Wall Street and Main Street
• It should be much less expensive for the government, meaning fewer new taxes and a lower risk of inflation (it is still an inflationary solution)