[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.