I'm very fond of the saying, "It's not rocket science" when describing the difficulty of a task. So you can imagine my delight when I saw bumper stickers appear that say, "My Congressman is a Rocket Scientist" when describing my congressman, Rush Holt (you know, it's one step a way from my dad can beat up your dad, but hey, it's cool). And it's pretty much true (you can read about Rush Holt's background here).
Now for many months, the thing about this "Mortgage Crisis" that I could never understand is why didn't all these people, with the mortgages that suddenly got so high they couldn't afford them (thus leading to foreclosure), didn't refinance? Am I missing something here? Why didn't the banks work with these people to get better terms, that they could afford to make? It didn't (and still doesn't) make sense to me. Yeah, sure, the banks may lose money but better to lose $100K than $400K (I'm pulling numbers from my arse here), but no? Better to have payments coming in on a house than having it sit empty, going into disrepair and being sold for less than worth, no? I didn't get it. I still don't - what am I missing?
But imagine my surprise when I received an e-mail from Rush Holt, that pretty much describes the same thing - I'm going to post it here (I hope he doesn't mind) because it's his ideas on the bail out - and you know what? It's been done before, during the Great Depression and it worked.
As I continue to be involved in discussions in Washington on how best to address the economic crisis, I want to share my thoughts with you on an issue that I have heard from many Central New Jersey residents. Secretary Paulson’s initial approach to the urgent financial crisis was wrong. It appears, though, that the negotiations are moving toward a better approach. The problem is that financial institutions have been trading securities whose value they don’t know and can’t know because bad mortgages are mixed in with good mortgages in indeterminate amounts.
For any problem, you should go to the root in order to solve it. The root here is that the bad mortgages mixed with the good mortgages have poisoned the financial papers. In buying those papers, taxpayers won’t know whether they are getting any value for their dollar, and neither Secretary Paulson nor the market will be able to determine the value. So go to the root of the problem: repair the bad mortgages. The Administration approach is to help Wall Street and hope eventually that helps Main Street. That is backwards. Helping Main Street will help Wall Street, and it will restore confidence, liquidity, and solvency.
There is antecedent for this: the Home Owners Loan Corporation (HOLC), which the Federal Government created in 1933 in that mortgage crisis. This program, which lasted 20 years, shored up a collapsing market by purchasing delinquent mortgages at a discount and working with homeowners to restructure the mortgages into more manageable terms. Congress and President Roosevelt authorized HOLC for $4.75 billion – or $76 billion in today’s dollars. With this investment, in its first two years, HOLC helped more than 1 million homeowners. In fact, when the HOLC finally ended, it showed a net $14 million surplus for taxpayers. Congress would be wise to consider the HOLC as it works to pass a financial bailout package.
The negotiations for such a plan have been at times constructive and bipartisan and at times divisive and rancorous. I am hopefully we can have a good bill soon – before the financial situation deteriorates further.