Sunday, September 21, 2008

Off Topic: Fallout from the Bailout

Bits and pieces of the proposed U.S. financial bailout are trickling out. It appears that the U.S. Treasury will spend $700 billion ($2,000 for every man, woman and child in the U.S.) to buy Collateralized Debt Obligations, or CDOs. CDOs were created when banks and other lenders mixed together lots of subprime mortgages and other debt, and magically created AAA-rated investment vehicles. Well, now you're going to own $2,000 worth of them.

I'm not complaining that the government is moving to shore up the economic system, but I am very concerned about the process. Can we forget the Patriot Act, an abomination with bipartisan support that was proposed after 9/11 by the same Bush Administration that's proposing this emergency action? Or, how about the secret Bush Administration briefings to Congress that warned of dire consequences if we didn't go to war with Iraq, the briefings that were later found to be almost entirely false? When these particular boys "cry wolf," I'm inclined to apply a pretty thorough smell test. In rushing to try to get a law passed this week, I hope that we don't end up with something that we're very sorry about in the future.

Whatever the eventual bailout plan looks like, will it help the man on the street, the man on the 80th floor, or (I hope) both of them to some degree? In my opinion, the plan has to do everything it can to keep people in their homes. Whether through cutting interest rates, extending payments or even forgiving a portion of some homeowners' debts, it's far better for people to stay in their homes rather than either abandon them or be forced out by foreclosure. Lived-in homes are maintained, and they help to preserve the property values of surrounding homes. It only takes a trip to a city such as Stockton, California's foreclosure capital, to see the carnage wrought on neighborhoods by foreclosures. There, you'll see block after block of abandoned homes that have been raided for their copper plumbing and wiring, with overgrown yards being used as dumping grounds. Many of these homes, still fairly new, are so badly damaged that it would be cheaper to tear them down and build something new than to repair them.

The investors who purchased the CDOs had no interest in preventing foreclosures; in many cases, they didn't (and still don't) even know which mortgages they held. If the government consolidates these mortgages in one place, with the goal of getting the mortgages to reliably pay something, and with getting already abandoned homes rehabilitated and generating income again, everyone will benefit, and this bailout will be worthwhile. If, however, the government shows the same lack of concern that the investors currently holding the CDOs have shown, the citizens of the U.S. are going to end up paying, and paying very dearly, for the hubris of Wall Street.

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