The Public Works For a Mortgage Bailout

In today’s Washington Post, there is this letter to the editor, from a Mr. Denis K. of Fairfax VA.

A Poor Remedy for the Mortgage Crisis

I was appalled by the plan from the Federal Deposit Insurance Corp. to modify mortgages only for borrowers who have not been able to make their payments [“FDIC Details Plan to Alter Mortgages,” front page, Nov. 14].

Under the FDICs proposal, only borrowers with delinquent loans would receive interest reductions, but many of those borrowers took out loans they knew they could not afford. Also, the mortgage industry is rightly concerned that the plan could persuade others to stop making payments in order to receive this assistance. Because of this, the plan could result in higher mortgage interest rates for responsible buyers.

Instead of rewarding irresponsibility, the government should target efforts to responsible homeowners (those with a five-year record of on-time payments) and offer them new, 30-year mortgages at a fixed interest rate of 5 percent.

This would stimulate the economy by either lowering their monthly payments (thus providing additional spending power) or providing larger mortgages at the same payment levels to purchase properties that have been foreclosed on. This, in turn, would stabilize the housing market. The government could fund this effort from long-term bonds that paid interest of 4.5 percent or less, with the difference going toward administrative costs or government profit.

Finally, a plan for the responsible, a plan I can really get behind (on).

As I write this, the stock market has tanked big-time for a second day in a row and is now at around 1997 levels. Ouch. The CEOs of the Big Three were in Washington earlier this week – each arriving on their own private jet – but there does not seem to be consensus for an automotive bailout. There is talk of a second stimulus package. Unemployment seems poised to continue its rise. Profits are down. And so on. All-in-all, not a good situation.

I’m beginning to think that a better use of bailout funds might be the public works option. It would have the effect of stimulating the economy, shoring up unemployment and, oh by the way, helping address the crumbling infrastructure. As this article in the LA Times points out, public works have not been seen as the quickest way to stimulate the economy. Nothing works better than a check in the mail, goes the conventional wisdom. But the conventional wisdom might be challenged today as people seem to be reigning in spending left and right. As the Times points out, in so many words, the state of the economy currently is not amenable to the quick fix; maybe the slow and steady pace of public works is the way to go. I tend to agree.

In the mean time, if anyone wants me to refi at 5%, drop me a line. I’d find such an offer, um, stimulating.

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