International Law

How to Regain Confidence

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Dean Baker, who wrote Plunder and Blunder, has a couple of good ideas which ought to reduce fear and increase overall confidence.

"Many of the solutions are obvious, but the deciders are no more willing now to step outside the conventional wisdom and think for themselves than when they were busy ignoring an $8 trillion housing bubble two years ago.

In terms of immediacy, the first item should be helping distressed homeowners. The obvious way to do this is "right to rent," which means giving homeowners facing foreclosure the right to remain in their home as renters paying the market rent for a substantial period of time (10 years, for example).

This would immediately give homeowners security in their home, and it would also give banks real incentive to negotiate terms on mortgages that allow homeowners to remain in their home as owners, since the banks do not want to become landlords.

This plan requires no tax dollars and no bureaucracy and could start protecting all homeowners facing foreclosure the day it is signed into law. In other words, it makes far too much sense to be seriously considered in Washington.

The second issue is restoring the banking system to solvency. It is clear that many, if not most, banks are or will be insolvent.

The obvious answer for this situation is to take over the insolvent banks. The government will then separate out the bad assets into a Resolution Trust-type entity (following the model of how we dealt with the failed savings and loan associations in the 1980s).

These will be auctioned back to the private sector over time. The banks will then be restructured and sold back to the private sector. Current shareholders will be out of luck (that's what happens when you own stock in a bankrupt company), and the current crew of highly paid executives that wrecked the banks will be sent packing."

My expectation is that the first idea might make the second less necessary.  The rents could modelled and have a calculated value, making it uneccessary to auction off the toxic mortgages, which are only toxic because with house prices fluctuating the value of the mortgage is just too hard to calculate.

Full post as published by Misleading Advertising Law on January 29, 2009 (boomark / email).