McCain's Bailout Plan for Idiots (not Obama's, not Bush's)

Tonight John McCain announced to the world an asinine plan in which the US Treasury would buy up all the bad mortgages in the country and forgive the home owners the portion of their debt that they have lost as their home value went down. This may sound OK at first, but let's see if it even passes the common sense test.

First, how he described the alleged plan: "I would order the secretary of the Treasury to immediately buy up the bad home-loan mortgages in America and renegotiate at the new value of those homes — at the diminished values of those homes — and let people be able to make those payments and stay in their homes."

Second his claim of exclusivity: "It's my proposal, It's not Senator Obama's proposal. It's not President Bush's proposal."

I call Bull Shit on that one.

At a news conference on Sept. 24, Obama said, "we should consider giving the government the authority to purchase mortgages directly instead of simply purchasing mortgage-backed securities." Several days later, in a news release, he said he would "encourage Treasury to study the option of buying individual mortgages like we did successfully in the 1930s." Hmmm, sounds vaguely familiar, doesn't it?

It's a stupid and dangerous plan, and here's why.

First, it's stupid because it absolves parties of their bad and potentially unethical actions. I'm not just talking about those darned 'predatory lenders', but also the whopping 25% of sub-prime applicants that LIED and inflated their income by at least 50% to get the loan. That's 25% of about 1.3 trillion dollars in outstanding sub prime paper that is or will definitely be in default. Which brings me to my next point.

Stupid, part II. 300 Billion dollars will not go nearly far enough at the final destination (homeowners), but could help a lot at the institutional level. Government dollars would provide enough liquidity for investors to feel they can invest, thus leveraging the money. The payback from corporate borrowers would come with interest, thus giving the taxpayers a return on investment.

On the other hand, this $300 billion would be gone in about a year if they did nothing but buy up sub prime mortgages that are going into default. At the end of that time, the government would be holding mortgages worth a lot less than $300 billion due to forgiven debt, further defaults, and further depressed prices. So, if the government handles this directly, they will need to capitalize this money themselves by selling bonds. The size of this effort will require a new government entity, and I don't believe for a second that it would go away when the job is done.

The dangerous part -it will further depress home prices, possibly severely. What will a great many of these people do as soon as they can break even on their mortgage? Sell! What happens when people sell their homes at a reduced rate? Your home price goes down as well.

The talk of the success of this type of bailout during the Great Depression is naive of history and economics. First, this current crisis has enormously devastating potential, but as yet is not even 1/10th as bad as the Great Depression was when this legislation was enacted. The current economy still has enough liquidity for these homeowners to sell once they are bailed out, that economy didn't. Second, the nation's economy was agriculture and industrial based in the 1930's, a completely different animal. Many of the homeowners who were aided were farmers whose income was tied to their land and virtually all homeowners who still had an income were tied to their location for their employment, and therefore were unlikely to sell. These conditions just don't exist today.

This is a good review of the Home Owners' Loan Act of 1933:
http://www.washingtonpost.com/wp-dyn/content/article/2008/03/13/AR2008031303174.html