Spring Break
Bail out home borrowers, not Wall Street
Issue date: 10/2/08
The market, however, always plays out - and soon enough, "the bubble burst." When prices and construction began to fall as the housing market flattened out, foreclosure rates began increasing and mortgage debt was suddenly a real issue. Home borrowers, many of whom had poor credit, defaulted on their mortgages, causing a steep decline in demand for mortgage-backed securities on Wall Street.
The bailout plan was designed to enable financial institutions to begin lending again by having the federal government buy up mortgages, securities and other financial holdings that are undermining market confidence and resulting in the stock market decline.
But who really deserves to receive a bailout from the Treasury? The original proposal was to give it to the financial institutions that hold all this bad debt. But underlying all the bad debt are bad mortgages that people can't pay off. This raises an obvious question - why not put a moratorium on home mortgage foreclosures and re-write the mortgages? If mortgages are written down and people can make the payments, it would cost tax payers and the economy far less than a foreclosure. This approach was taken during the Great Depression and it actually made money for taxpayers.
The problem with bailing out financial institutions is that the unqualified home borrowers will still default on their loans and lose their homes. In some cases the bank or lending institution might decide it's worthwhile to reassess a mortgage but in many cases that might not happen. If the financial institutions sell their bad debt to the federal government, they no longer have any incentive to renegotiate a deal with the home borrowers.
Since blame is equally shared by all the parties involved in this financial crisis, the bailout should also be equally shared. Of course, if I'm someone who's been making his payments on time, it might bother me when someone down the street who bit off more than he could chew got bailed out. But it will bother me less than a Wall Street executive who got bailed out after making the same mistake and was paid millions to do it.
As free market capitalists, we have a tendency to worship profit-seeking institutions as perfectly efficient and sensible. We find complacency in the perfection of the system. But the present crisis proves this mentality is misplaced. It shows that all institutions have built-in incentives that lead to risky, irrational behavior and all institutions are capable of self-destruction.
The bailout plan was designed to enable financial institutions to begin lending again by having the federal government buy up mortgages, securities and other financial holdings that are undermining market confidence and resulting in the stock market decline.
But who really deserves to receive a bailout from the Treasury? The original proposal was to give it to the financial institutions that hold all this bad debt. But underlying all the bad debt are bad mortgages that people can't pay off. This raises an obvious question - why not put a moratorium on home mortgage foreclosures and re-write the mortgages? If mortgages are written down and people can make the payments, it would cost tax payers and the economy far less than a foreclosure. This approach was taken during the Great Depression and it actually made money for taxpayers.
The problem with bailing out financial institutions is that the unqualified home borrowers will still default on their loans and lose their homes. In some cases the bank or lending institution might decide it's worthwhile to reassess a mortgage but in many cases that might not happen. If the financial institutions sell their bad debt to the federal government, they no longer have any incentive to renegotiate a deal with the home borrowers.
Since blame is equally shared by all the parties involved in this financial crisis, the bailout should also be equally shared. Of course, if I'm someone who's been making his payments on time, it might bother me when someone down the street who bit off more than he could chew got bailed out. But it will bother me less than a Wall Street executive who got bailed out after making the same mistake and was paid millions to do it.
As free market capitalists, we have a tendency to worship profit-seeking institutions as perfectly efficient and sensible. We find complacency in the perfection of the system. But the present crisis proves this mentality is misplaced. It shows that all institutions have built-in incentives that lead to risky, irrational behavior and all institutions are capable of self-destruction.
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