With $1 trillion up for grabs in the bailout, can Dems force the Money People to act in the national interest?

Will Democrats encourage Treasury Sec'y Paulson (left) to, er,
see reason as the GOP tries to stampede them into a bailout?

by Ken

Last night, trying to help Rachel Maddow in the segment of her show where she invites a guest to talk her in off the ledge regarding an issue of the moment, Paul Krugman allowed that, while it's indeed remarkable that Republicans and Democrats have agreed on the need to take historic (and monumentally expensive) action to prevent a meltdown of the financial system, he noted that it's far from agreed what action to take.

As Krugman wrote in his NYT column yesterday:

[I]t’s no use whining (sorry, Senator Gramm) about the prospect of a financial rescue plan. Today’s U.S. political system isn’t going to follow Andrew Mellon’s infamous advice to Herbert Hoover: “Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate.” The big buyout is coming; the only question is whether it will be done right.

It's natural to assume that the Republicans, left to their own devices, will act solely in the interest of their kind of people -- namely the investment bankers, their investors and other holders of those crappy mortgage-based securities that got them, and us, into this mess. It's all too easy to guess that a few out-of-the-mainstream Dems like Barney Frank will sputter and cuss and then give the Money People pretty much everything they want, leaving the vicitimized mortgage holders holding the bag

It's even easier to guess that with $1 trillion to throw around, and the clock ticking, the Money People will work with their GOP White House and congressional allies to ram through a stored-up agenda of Christmas goodies they never imagined they'd have a chance to get done -- in much the same way that right-wingers who hate America because we're still too damned free, despite their best efforts) had a field day clamping down on civil liberties with the Patriot Act.

Yesterday our colleague Ian Welsh offered an interesting proposal ("How to Bail Out Ordinary Mortgage Holders and Not Just Banks") over at FireDogLake. He warned against yielding to the GOP stampede for what will be basically a bailout of the Money People, and also argued against direct assistance to mortgage holders to pay mortgages that, he pointed out, always were dreadfully exploitative agreements and make even less sense now that the properties are worth less than their written values.

What the government should do instead is set up a Trust to buy mortgages at a discount, then reset them to 20, 30 or 50 year fixed mortgages with a reduced face amount. If the house is later sold, half of the increase goes to the government, so that taxpayers make a profit. The mortgage cannot be paid off before the end of its term so that financial scavengers cannot come around and, as they did over the last ten years, say "get rid of that mortgage, and take ours. It's better. Honest!", because we know that when they say better, they don't mean better for the mortgage holder. The mortgage is attached to the property and is transfered to any new buyer. And the mortgage cannot be removed from the property, and any new mortgages attached to the property are junior to the government mortgage.

End results:

a) a floor is set for mortgage prices. (Whatever discount the government is buying at. Probably 60% to 70%, but it should be based on what the long run price was in the area before the housing bubble.) This ends the confidence crisis in these securities, because there is now a market price—what the Trust will pay.

b) It helps homeowners stay in their homes.

c) It gets rid of overly complex mortgages and puts in their place a dead simple mortgage that anyone can understand.

d) It punishes lenders, which they deserve, for making loans they should never have made.

e) While it does keep homeowners in their homes, it doesn't let them off scot-free either. In exchange for a good mortgage they can service, they give up some of the future profits on sales in their houses.

f) The government will almost certainly make a long term profit on this. This is important, because it's not fair for people who aren't underwater on mortgages to spend hundreds of billions or trillions bailing out those who are without some expectation that in the end it won't be more than just a transfer of wealth to them and to investors and banks.

Whatever plan the government comes up with is going to be so technical as to be beyond the understanding of most of us, because the underlying issues are. But we know what kinds of mischief the Republicans are going to perpetrate if they're allowed to have their way.

"This bailout can be done right," Ian insisted.

It's up to Democrats, who appear to be in danger of stampeding into a hasty decision, to stand firm and make sure it's done right. The last two times they didn't stand firm and do things right, we got the Patriot Act and the Iraq War. This is too important for Democratic fecklessness. Too important for them to just give the Bush administration whatever it wants.

If they do give the administration what it wants, then Wall Street and the Banks just got bailed out, no help goes to ordinary people and you get stuck with a trillion dollar bill. Taxpayers get all the toxic assets, but Wall Street, who paid themselves more in bonuses in 2007 then 80 million Americans got in raises, keeps the profits.

Democrats need to stand up for ordinary Americans and do the right thing.

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