This Land is Your Land: A better way to spend $1 trillion
Rich Rodgers
[Editor's note: This was originally submitted as a guest column.]
By Rich Rodgers of Portland, Oregon. For 11 years, Rich was a policy advisor to a Portland city commissioner on housing policy, school funding, environmental restoration, and public safety. Prior to that, he studied the effects of regional growth management on housing prices, and worked in the Oregon Senate as a research assistant. At Yale University, his history thesis focused on the lack of community involvement in decisions to construct major public infrastructure in historic African-American neighborhoods in Atlanta. He now works in the private sector.
The US government is proposing to spend at least $1 trillion of taxpayer money to bail out failing financial institutions. There is no talk of bailing out struggling home owners, just the banks and investors holding bad mortgage debt and associated derivatives. There is no guarantee that this massive intervention in the market will stabilize things, and there is no chance that the typical American family will see any direct benefit from the plans being proposed today. It’s the wrong way to fix these problems.
We need a new approach. We need a 21st Century Homestead Act that writes off these bad debts and gives every American household their own home, free and clear. We can do it, and we should. It will cost us less in the long run, and put us in a much stronger position going forward. It needs to be done with a close eye on fairness and the interests of our key global partners, but it should be done.
The main problem facing the markets, according to Treasury Secretary Henry Paulson and other Bush officials, is that they are clogged with an unimaginable amount of Wall Street’s bad debts. Investment banks have made massive leveraged bets on mortgage-related securities, using instruments like credit default swaps and other derivatives. $21.6 trillion in new debt has been created since 2001. When the housing market got shaky, these bets went bad, and no one can really say with any accuracy just how large the problem is. Estimates are that the credit derivatives market totals over $62 trillion, several times larger than the value of all residential real estate in the United States.
Even under the best of circumstances, the current proposal from the Bush Administration will raise the national debt to at least $11.3 trillion, which equates to about $110,000 per household. This is money we don’t have to spend. Government debt is already too high, as is the average family’s household debt. Wall Street is wildly out of control, and the American people can’t afford to bail them out. And of course, there is no guarantee that the trillion dollar bailout will work. Can you imagine sinking over $1 trillion into a failed solution? What would we do then?
If we stick with the Bush plan, we will still have a negative savings rate, limiting funds available for investment in new technologies and business growth. Falling housing prices and record levels of household debt will still dog any chances of economic recovery. The airlines, automakers and many others will still be in trouble. We will just be another day older, and deeper in debt, with no real solution to the structural problems in the system. Ken Lewis, the CEO of Bank of America, recently predicted that half of the nation’s 8,500 banks will fail to survive the current crisis.
Our financial system should work for us, not the other way around. Let’s face it: Wall Street gambled as heavily as it could, and it lost. We should not have to mortgage our future to bail out Wall Street. We need to change our approach from helping Wall Street to helping the American people directly, with bold solutions. It’s the only way to fix what’s gone bad with the American economy.
There is a simple solution to the problems of the American mortgage market: eliminate all of that bad mortgage debt, and give every American household a free and clear title to their current home. Current outstanding mortgage debt would be eliminated, not by raising taxes and going deeper into debt, but by simply writing off these debts as bad debts.
Our government officials are rushing from one problem to the next, and spending hundreds of billions with each step. But these are just paper losses. The important thing, at the end of the day, is the land, and the houses that sit on it. Focus on what happens to the land and our homes, and we will find the answer to our problems. With no monthly mortgage payment, the American people will be free to make major investments in education, the stock market, and other securities. Freeing up this capacity to invest and spend will fight the deflationary effects of unwinding bad debts. The economy will recover quickly, and it will be stronger than ever.
In ordinary times, this proposal would be radical, and unnecessary. But in times like these, wiping the books clean while preserving the underlying free market investment structure is actually the sanest approach. The government need not take up new ownership positions in the insurance and financial services industries. We don’t need to take on massive new levels of debt. We don’t need to commit to bailing out industry after industry. We don’t need to change our way of life or our market economy.
Most mortgages are held by Fannie Mae and Fannie Mac (over 80 percent in Q1 of 2008), which are supported in large part by selling their own agency debt. This debt is not guaranteed by the US Treasury as Treasury bills are, which is why there has already been a sell off of agency debt over the past few months. Many of the other players in the mortgage market are already out of business. Washington Mutual and Countrywide, two of the nation’s largest mortgage lenders, are already casualties. At the time of this writing, three of the five major investment banks were gone, with a fourth seeking any safe harbor to save it from the raging storm. Writing off all of these mortgage debts will allow for Wall Street and the rest of the American economy to recover and focus on running an economy based upon sound fundamentals. With total direct agency debt at approximately $1.7 trillion, the cost of keeping important partners whole would be the same order of magnitude as the cost of the current plans, with a much better result for the average American and the American economy.
The 21st Century Homestead Act has a lot in common with the Homestead Act of 1862, signed into law by President Abraham Lincoln. Homesteads for pioneers gave America an incredibly strong foundation for building a strong country. After World War II, the GI Bill gave millions of Americans the ability to earn a home for the first time. Our greatest presidents have always understood that the best way to make America strong is to ensure that the American people have a home to call their own.
It is important to acknowledge directly and honestly that this proposal does raise questions of fairness. For the 35% or so of American families who do not own a home, for example, eliminating mortgage debt would be of no direct help. Renters would have to be given assistance to purchase a new home of their own. The minority of Americans who own their home outright could be offered tax incentives and longer term credits, to ensure the proposal is fair to everyone. There will be some expense in workouts with key creditors and commercial banks holding healthy mortgages.
If you have doubts about the fundamental premise behind this proposal, ask yourself this: With each American family owning a home without mortgage debt, won’t the American economy roar back quickly, and be stronger and more stable than ever? In the long run, the investors will thank us, for restoring America and its economy to a position of long-term stability and strength.
The time to act is now. In the coming hours and days, the Bush administration will continue to push for the wrong kinds of solutions, committing over $1 trillion of taxpayer funds in the process. Let’s solve this problem a different way. Let’s get back to being pioneers. Let’s write off all the bad debts, and give every American household their own home.
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Sep 22, '08
Great idea. I can't imagine our legislators being that open-minded. They are so beholding to the special interests. However, it is certainly an idea worth considering. It would clear up our present mess.
11:59 a.m.
Sep 22, '08
Thanks for focusing on the real issue here Mr. Rodgers.
In about twenty hours of network and cable "news" this weekend, I heard a lot of talk about Freddie and Fanny, as aleged "conservatives" like Gigot, Fund, and other Serious People can legitimately hang at least half of the blame on Libruls.
The derivatives Ponzi scheme, not so much.
<hr/>As for your idea, it is:
Too sane.
Too radical.
Does not provide cover or immediate benefit to the afrementioned Serious People to ever have a prayrer of passing.
Maybe we should lower expectation and demand that the provision that provides unfettered and unchallengable power to the Sec Tres for the next two years, be removed from the bill immediately.
Even that may not be doable given the recent track record of our delegation in standing up to executive power grabs.....
Sep 22, '08
Then you create the problem of rental properties. Are you prepared to bail out trillions of dollars in investment properties? What about people who already own their homes? Do they get a lifetime of no property taxes?
Sep 22, '08
sorry - insane idea. And WAY more expensive than 1 trillion. And, the "fairness" aspect would be ridiculously complicated to make it work out.
And, then, what happens when people need to sell their house and move? What about new mortgages? What happens to housing prices when suddenly everyone has 100% equity, sells their place for $400K, then offers $600K on their next place because they can afford a 200K mortgage?
Handing out free money (in the form of 0% down, interest only, adjustable rate BS) was the worst idea ever - and retiring everyone's mortgage debt is that same idea on steroids.
1:09 p.m.
Sep 22, '08
Handing out free money (in the form of 0% down, interest only, adjustable rate BS) was the worst idea ever
No it wasn't. Imagining that people with seven figures of discretionary investment capital needed no rules to follow within the system, was the worst idea ever.
This ain't Fight Club you know. This is the world economy.
Sep 22, '08
I would think it would be good if everyone all of the sudden had 100% equity because home prices would actually decline, without the owner losing any money. If I owned my $300k house outright today, after only having contributed only $60k, I'd be much more willing to sell it for $100k because I'd still be making tons of money. This would mean the buyer that normally couldn't get a loan for $300k could now possibly buy my house. This would counteract the impact of potential for over-bidding as described by JahnsPDX. I'd suggest, though, getting rid of the capital gains exemption on any home that was subject to this proposal as a further means of counteracting any negative affects and to raise more revenue to help pay for it.
But, I also would like to know the cost of such a proposal. How does it compare to the current wall street buy-out proposals?
1:39 p.m.
Sep 22, '08
The cost of retiring every mortgage in the country would be a fraction of the roughly $10-$11 trillion in outstanding mortgage debt. Or at least could be, depending on the conditions placed upon any bailout.
As best as I've been able to determine, roughly half of the mortgage assets in the country have belonged to one of the entities involved in bailouts so far. The value of those firms has approached zero at various times, Washington Mutual being a good example.
With the kinds of powers it's claiming these days, the federal government could claim the healthy mortgage assets of these failing firms, rather than just the toxic waste, for pennies on the dollar.
On top of the hard assets Freddie and Fannie hold, they also guarantee mortgage-backed securities (MBS). Stepping in to salvage Freddie & Fannie didn't just provide the indirect benefit of more stable credit markets, it also provided the direct benefit of preserving the value of those MBS for those investors. A harder negotiation with those entities could look to acquire those assets at a discount.
At the end of the road for these types of securities--MBS and direct agency debt--you'll find central banks of foreign countries and other large institutions. Many of these institutions are failing or have failed. And there are a lot of ways to negotiate with a country like China, which depends upon a healthy US economy to fuel its exports.
I don't understand the argument that increased equity is a bad thing. If everyone had more equity, I guess it would look a lot like Portland's housing market over the past fifteen years. Except that everyone would have equity, not just some. My read on things is that we've been strongest over the country's history when ownership has been most widespread.
Sep 22, '08
Handing out free money (in the form of 0% down, interest only, adjustable rate BS) was the worst idea ever...
I agree, which is why we (the United States taxpayers) should laugh Paulson and his ilk right into the Atlantic Ocean.
Think about it. FREE MONEY. I can come up with a couple of different ways you could do it:
You give me nothing. I give you money, that's worth something. Or,
You give me something, THAT'S WORTH NOTHING, and I give you money, that's worth something. Or,
You give me something, that's worth ALMOST nothing, and I give you money, that's worth something. Whatever the difference between what you gave me and I gave you? THAT'S free money.
If you answered "Door #3, you're a WINNER!" (Not really. Wait. I thought we were a nation of WHINERS, not WINNERS...)
That's EXACTLY what's being proposed. US taxpayers give money in exchange for mortgage-backed securities (or anything else Wall Street doesn't want). Why? Supposedly because no one can figure out what these securities are worth, but whatever they are worth, it sure ain't much. So, class, what's the difference between the money we, the taxpayers, would be giving to these banks, and what they are giving us in return? Say it with me now...
FREE MONEY!
Oh, and in case anyone was wondering why free money is a bad idea, well, if you're giving it away for free, how much can it really be worth, after all? (Someone should write a book. "Monetary Policy for Dummies." Oh, wait. I think I just did.)
Actually, though, now that I think about it, it is really something else. Someone has a bomb and a match and says, "I'm going to blow you, me, and everything else up unless you give me all your money!" Now, what's that called? Oh, yeah.
EXTORTION.
But then, a hero rides in on a big white donkey, pulls out a laser cannon, aims it at the head of the bomber, and says, "Go ahead. Make. My. Day." The bomber blows out the match, gently puts down the bomb, and starts running. The hero takes him out, anyway.
Are you with me class? That's right.
IN.
MY.
DREAMS.
Sep 22, '08
All this arcane financial jiggery pokery is pretty much Greek to me. But as I understand it, the big problem is that in the end all of this debt is owed to other countries, and if we were to simply wipe the slate clean it would trigger a worldwide economic collapse. I wouldn't want to suffer through that, even if my mortgage did disappear. Still, the present course of privatizing the profits and nationalizing the losses is unacceptable.
Sep 22, '08
"If you have doubts about the fundamental premise behind this proposal, ask yourself this: With each American family owning a home without mortgage debt, won’t the American economy roar back quickly, and be stronger and more stable than ever?"
this is a nice idea, but i'm guessing what would happen is that the massive cash stimulus of releasing people from their mortgages would turn into serious inflation pretty quick.
Sep 22, '08
this is a nice idea, but i'm guessing what would happen is that the massive cash stimulus of releasing people from their mortgages would turn into serious inflation pretty quick.
As opposed to the not-so-nice idea of trading the banks US Dollars for next-to-worthless pieces of paper? What do we think releasing the banks from their debts is gonna do?
Well, devalue the US currency, for starters. Encourage more reckless lending and paper-wealth shell games seems likely. (Fool you once, ha ha. Fool you over and over again, I get rich!) And, in the end, will the pyramid scheme known as the "global economy" be any better off for the rest of us?
Naaaa...
Sep 22, '08
I rent, despite making a decent middle-class wage. I decided several years ago to continue renting until the housing bubble deflated a bit, because I thought it was painfully obvious that a major correction was going to be necessary before the decade was over.
Did I predict the full scope of the current crisis? No. Would I be peeved to see my landlord (who over-extended himself on multiple mortgages based on the assumption that double-digit year-over-year appreciation would continue indefinitely) handed the better part of a million dollars by the Treasury to bail him out? Definitely.
Handing the title over to homeowners sounds very nice and egalitarian, except for the fact that it rewards the most highly those who gambled with their families' future, and those who played it safe not at all.
Sep 22, '08
What this comes down to is the responsible fiscally conservative folks taking it where the sun don't shine to bail out poor lottery hacks and billionaire boobs. Different story, same ending. The good people always bail out the idiots.
Sep 23, '08
Hi Rich, you seem like a pretty intelligent guy, have you tried the math on your proposal. $1 trillion bailout / 300 million people = $3,333 per US citizen. Assuming a family of 4, this is just over $13k per family. That doesn't buy much of a home. Using the same estimates of a family of 4, that gives us 75 million homes in the US, multiply that by $150k for the average home, thats $11.25 trillion. How do we digest that bill? How can you propose a doubling of the national debt as sound policy? you scare me "stash"
Sep 23, '08
Sorry Rich, your idea is too stupid to even comment on. The idea that you could use taxpayer money to pay off taxpayer debt is circular logic.
About 50% of all homeowners already own their homes free and clear. About 90% of all home owners have no signficant issue making their monthly payment. Most people are smart enough to only buy a house that they can afford.
Handing out free houses to people would set off a huge inflation free for all. Not to mention, most everyone would instantly demand McMansion size houses which would set off a huge explosion in demand for utilities, gas consumption, power consumption, etc.
Sorry bud, that is one really stupid idea you cranked out.
10:34 a.m.
Sep 23, '08
A lot of people are getting stuck on the idea that these mortgages would have to be bought at face value. That's not what I'm proposing. Essentially, I'm saying that the mortgages that are part of the assets of failing institutions should be gathered into government ownership, to join the large chunk of mortgages held by Fannie & Freddie. These companies are failing because they can't meet their debt service obligations, not because they no longer have any healthy assets like mortgages.
The cost of this proposal depends upon the magnitude of the collapse. The bigger the failure of the financial system, the cheaper it would be to acquire the mortgages that are out there today--if the government chose to do it this way. Instead, there is likely going to be a lot of effort and money expended to make sure certain corporate entities survive, and that means letting them keep valuable assets like mortgage bonds.
A failed financial system is nothing to root for. If you think the $700 billion on the table now is enough to fix the problem, then you should support it. Healthy credit markets are worth a lot. On the other hand, if the $62 trillion or so in credit derivatives prove too massive and complex to be slayed by a $700 billion intervention, then it makes sense to think about a radically different approach.
If you bought up every mortgage at face value, it would be $10-$11 trillion. That would be absurd. I would never recommend that.
If, instead, you gathered every mortgage asset of every failing entity, and joined it with the significant government holdings already in the portfolios of Fannie and Freddie, then the cost would be much lower. If you let the gamblers on Wall Street lose, or at least face the prospect of losing, even the healthy mortgages can be secured for a bargain from institutions entangled in the leviathan credit derivatives market. This is called a workout. Investment banks know the drill--from the other side of the table.
It's hardball to be sure, but they're asking us to bail them out of a ridiculous position, and spend a lot of money to do it. They may have to take a 35-50% haircut on their entire portfolio to give up the mortgages. Those are massive losses, but that should be expected under the circumstances. Seems like a fair deal to me, in exchange for solvency. No one made Wall St. stake out this outlandish positions in the credit derivatives market.
Where we'd need to be careful is with important global partners--foreign central banks, for example. It's important that global credit markets stay healthy.
Oct 2, '08
Is this for real or are you just trying to make a point that Wall St shouldn't get money for nothing? There are plenty of smart people who didn't buy into the housing bubble hype. They either stayed out of the housing market altogether because it was obvious that real estate was overpriced and would and should fall. Or they bought something reasonable within their means not an overblown McMansion. Why should they pay everyone else's mortgage and be left with nothing for themselves? It makes my blood boil! I would resent that about 100 times as much as giving it to Wall St, which is really about keeping liquidity in the financial system rather than protecting bankers' bonuses.
Oct 2, '08
Just think, the bigger your greed and more irresponsible your borrowing, the more such a measure would reward you.
Oct 2, '08
"No one made Wall St. stake out this outlandish positions in the credit derivatives market."
<h2>This is just passing the buck. Borrowers as well as lenders made stupid and greedy decisions. Neither should be rewarded.</h2>