Alibris Secondhand Books Standard

Friday, October 10, 2008

solution for the financial crisis?

Sam Norton of the Elizaphanian blog offers a solution to the American financial crisis.

Take the $700bn and use it to pay off the mortgages of the poorest. Instant solvency and liquidity flowing through the system, a Jubilee for social justice, and the bankers aren't favoured over the people they misled.

(hat tip: Steve Hayes)

At first glance, it looks like a simple and just solution. But is it? While the philosophy sounds nice, I have doubts about the implementation.

First, who are "the poorest"? While many Americans own houses, many others don't. This solution wouldn't benefit the poorest of the poor, who couldn't afford to buy a home even under the relaxed standards that got the banking industry into this crisis.

So we're talking about just the poorest homeowners, then. But how do you measure "poorest"? Do you look at tax returns? If so, do you look just at last year's? Consider the case of someone who was making good money, got laid off for six months, but has now found another well-paying job. This person is not poor, and can probably make the mortgage payments without aid, but the one-year dip in salary could qualify them for the government payoff.

So do you look at several years of past returns, and average them? Again, there's a similar problem. Someone who had a low income but got a big promotion is in better shape than the average of the past seven tax returns would suggest. Past performance, as they say in the investment business, is not a guarantee of future results.

So let's forget tax returns. Maybe we should look at net worth. But that would benefit people who have maxed out their credit cards and are making only minimum payments, as well as those who have acquired large debts getting postgraduate education. Members of the latter group have intellectual capital that should reward them financially in the long run; they can probably make their own mortgage payments. Meanwhile, those in the former group need help understanding responsible money management, or a mortgage bailout will do them no good.

It's a nice sentiment, this idea of paying off the mortgages of "the poorest", but I don't see a way to put it into practice.

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