The Troubled Asset Relief Program is relief for whom???
The Secretary of the U.S. Treasury is authorized to establish the Troubled Asset Relief Program (or ‘‘TARP’’) to purchase and fund commitments to purchase, troubled assets from any financial institution, on such terms and conditions determined by the Secretary.
“WOW” what an interesting time to be an Economist, or a US citizen for that matter. My take on it is this:
First of all we must realize that we can point fingers and refuse to help bail some water out of this sinking boat, but that wouldn’t be smart given the fact that we all are in the same boat.
I break the population into three groups, which are overlapping because any of us can be in two of the three groups, and over time, some may find themselves within all three groups. This makes finger pointing really a waist of precious time.
Group One: The Money owners who are the lenders. They range from banks, insurance companies to individual investors that have money in the market to loose if people don’t pay their mortgages.
Group Two: The pissed off people who are stuck in the middle. These people are not suffering big losses due to sub-prime investing. They also are not struggling to pay their mortgage. They are upset because they get no direct and immediate benefit from the “bailout”, yet as tax payers will have to foot the bill. They are the most upset of all over this fact.
Group Three: Those who will need assistance to maintain their mortgage. That’s all I’m going to say about them. With the exception that people from group two may find themselves in group three if they loose their job, or they have an adjustable note and have not realized that they may be in danger in the future.
Now that we’ve established the players, lets talk about the rules to this new game.
First, we must save liquidity in the markets so all business’ have short term capital to pay payrolls instead of layoff or file Bankruptcy. (Bankruptcy happens due to the fact that most business debt has cash requirements that state, if your cash falls lower than X amount, we can call your loan due immediately. Lenders do that so they can try to get their money from borrowers before the bankruptcy locks cash and assets away in court)
Secondly, we must place a stop loss backboard on corporate balance sheets in an effort to save corporate stocks from crashing. With this done, companies are less likely to lay people off, and job loss will be minimized.
Thirdly, we must stop the rate of home foreclosures. The more empty houses on the market, the lower real estate prices fall (Normal supply and demand curves, you remember from your Econ 101 class). By stopping the foreclosure rate, we can provide more price stability in the market and stop the bleeding of household net worth. As long as people feel less rich, they will be hesitant to pull out that wallet and continue to demand goods and services.
“TARP” has no caps or values that determine what the Secretary of the Treasury must work with. It gives him extraordinary power and control. Many are concerned that he may bail out these financial institution at high values, which is expensive. This helps Corporations get top dollar for their mistakes at the expense of tax payers. Some feel the Secretary may turn around and sell these debts or the Real estate to the private sector. This would be the worst thing he could possibly do. He would just prolong this crisis and transfer all the wealth away from the average citizen to the wealthy.
We can not have the Government own homes and begin to foreclose on citizens, that would be bad business. Imagine how you’d feel if the U.S. Government took your home.
So the question is:
How can the government own your mortgage, protect the tax payer (who is now the shareholder) from a deep loss on the investment, And at the same time protect the homeowners from losing their homes when it is obvious these particular homeowners are struggling?
Well according to Senator John McCain’s plan as he states in Tuesday night’s debate, much of the burden of paying to keep troubled borrowers in their homes will shift to taxpayers. McCain’s original plan called for lenders to write down the value of these mortgages and take those losses. But the Republican presidential candidate unveiled a new $300 billion plan in response to the first question of the debate. He said,
“I would order the Secretary of Treasury to immediately buy up the bad home loan mortgages in America and renegotiate at the new value of those homes, at the diminished values of those homes, and let people make those – be able to make those payments and stay in their homes.”
Basically the banks and corporations would sell assets to the Government at a high premium. The Government would then devalue those properties and restructure loans at low current market value so that Americans can stay in their homes. I don’t know about you, but if I do participate with my taxes, I want to rest assure (even if it is a false sense of security) that I will get most if not all of my money back in tax breaks on the back end. McCain’s plan guarantees that tax payers will be giving hundreds of thousands of dollars to the Banks and forgiving homeowners for something they are both at fault for. I don’t think McCain “gets it”.
My suggestion to the Government regarding asset acquisition
For purchasing assets from Banks we should start by paying 100% of the principal amount owed on each transferred loan. As well, pay 0% of any interest or fees that have accrued. This 100% will decrease as institutions shift more debt. For example:
· The first $100,000,000 in transferred debt would be purchased at 100% outstanding principle loan amount
· The second $100,000,000 in transferred debt would be purchased at 85% outstanding principle loan amount
· The third $100,000,000 in transferred debt would be purchased at 70% outstanding principle loan amount and so on…
The Government could adjust the sliding scales percentage breaking points as they see fit, but this scale encourages participation at the same time discourages abuse by the institutions. There is a portion of these loans held by banks that they’ll need to make a judgment call to hold on to and renegotiate more favorable terms for the homeowner. With this plan, they have an opportunity to rethink their burden and not just dump on the American tax payer.
My suggestion to the Government regarding asset management:
#1. How are we going to keep people in homes that they can not afford?
#2. How are we going to foreclose on those who simply can not keep up even with renegotiated terms?
#3. What is the Government going to do with the hefty inventory of empty homes that have already been foreclosed on? If they sell them to the public, we’ll have corporations buying blocks of them at deep discounts at the tax payer’s expense. Potentially the same institutions that sold a home for $400,000 may buy it back for $150,000.
The Government should do the following:
Notify all homeowners that are in homes that have been transferred to the Government. This notice will give them a web-site they can go on (A real estate Inventory web-site) or they can call a hotline to speak with an advisor that will walk them through the web-site information gathering process.
Real estate Inventory web-site- The purpose of this site is to plug in personal financial information in order to generate a Tier number for each borrower. The Tier numbers will represent the amount of mortgage a borrower can handle per month. For example, Tier #1 is for persons who can afford less than $2,000 per month (including taxes and insurance), Tier #2 would be for payments of $2,000 to $2,400 and so on. They can attempt to renegotiate the terms of their loan. I’d suggest all loans be at a fixed rate of 5% to 6%, re-amortized up to 35 to 40 years.
Once a borrower has a Tier number he/she clicks on the inventory icon on the web-site. They will have to put in their password, Tier number and zip code. The web site will pull all homes that are owned by the Government within the borrower’s monthly price range. The list will be from closest zip code to the farthest zip code.
This will elevate the complications of dealing with current home values (which no one knows), as well as past sale price. Borrowers will have to move into a home that they can afford within any area they’d like to move.
The inventory of houses transferred by banks would be listed as Red, Yellow or Green.
Red indicates that homeowners are still in the home and trying to remain.
Yellow indicates that homeowners do not qualify for that Tier payment and are in the process of moving.
Green indicates that the house is available to be viewed by relocation borrowers who did not qualify for their home. (After a certain period of time at this status, the Government can allow real estate agents to list these properties on the Multiple Listing Service for open offers by the public)
This Government Act has split the real estate market in two. The first one is the normal market with buyers and sellers (private real estate market). Their elasticity curves are both relatively unitary elastic. The second market is the Public properties (Government real estate market), where the supply curve is perfectly inelastic. The Government will have a set amount of inventory to control. If they allow private parties and the general public to bid on and buy these properties, that will further reduce the Demand curve in the regular market. This will continue the destabilization of the private real estate market.
By keeping the inventories and the demander separate in two markets it will in essence maintain affordable homeownership for the owners of transferred Government real estate. Most importantly, it will continue the stabilization process within the private real estate market.
The Government may consider having current real estate brokers handle transactions of the Government market by allowing them to work as agents of Government market demanders (who are displaced due to their Tier ranking) to find them properties that are currently listed on the Multiple Listing Service that have a special Government designation.
Just a thought! Thank you for indulging me,
I’m Jermaine Harris
I dont think the gov’t is on the same page as you Prof. Harris. It seems like part of the “American Dream” is having things we can’t afford and the world of loans and credit make it all possible. The banks and the buyers are resposible for the situations they are now in and that if someone is in a home they can’t afford they shouldn’t be allowed to stay there but I know it is not that easy. Great ideas. Let’s hope Washington is somewhere in the same universe.
sorry, I’ll try again tomorrow
Jeff, I’m just one perspective. It’s easy for me to voice an opinion, I assume it as a right. Yet when it comes to a large group of dumb overachievers or smart underachievers agreeing on one thing, there is no predicting. Especially when special interest has the whole system in a choke-hold.
While I think your plan is by far one of the better ones I have heard, (and very well thought out) I just can’t get on the bandwagon of having the government buy back and guarantee all of this bad mortgage debt. Let alone to try and run some sort of program to manage it in a efficient manner.
I believe that the 700 billion would be better spent in revamping our banking system, after letting it fall due to it’s own greed and indiscretions. It is unfair to expect any taxpayer to be responsible for the bad decisions of the financial “system” simply because they failed to self-regulate in the interest of making more money. Having the US taxpayers bail out the mortgage mess is like you losing money in the stock market and then asking your neighbor to pay you back because you made a bad decision – that’s NOT how the world is supposed to work, let alone American Capitalism!
Sometimes you have to let things die so that new life and growth can take it’s place.
I would say taxpayers in general falls into Group One as we are paying money to the government who in turn make bad decisions along with the corporate greed that created this economy mess that American is in today. Throughout the years we have heard of many scandals, not as many as today. We probably now have statistics of corporate greed, scandal and fraud. With all the taxes being paid to government America should not have a problem with the distribution system in the United States, we should not have the need for infrastructure, quality water, unemployment, homeless, excessive poverty, overall, necessities in life, prior to giving, saving and investing. The money is going to the chiefs while the Indians struggle because of the tax brackets created by government thus leading Group Two to paying higher taxes.
Not only would taxpayers fall in Group One, but the majority would fall into Group Two such as me. It heartens me to know that me as a taxpayer is taking the grunt from the top and bottom and feel penalized because of the righteous path or decisions I have made, but is punished instead of rewarded. I’m not looking for a pat on the back per say, but when I view the many holes in the system with perpetrators with Magnums, $100 dollars shoes but with lavish things that was not earn, but provided with taxpayer’s money why I should subsidize the rent, food and healthcare and not the rich. The rich scheme for making more money and creating additional tax loopholes thereby the gap is getting wider between the low and middle class.
I not sure of a stop loss backboard, but as long as there is greed, corporate layoffs and job loss will always exist. Kudos to Mr. Harris for his suggestions toward repairing the broken system. I guess I won’t ask for an INC for this semester allowing me the opportunity to take your class next semester as this idea may lead you to greater places in your career. Thought I would get that in there.
Back to my opinion, government taking homes is no different than the feeling of being stolen from another country. Whatever the government has up its sleeves sound more like communism. Every idea, law, or mandate by government costs the taxpayers. For that matter, let alone McCain not getting it, I don’t think government gets it.
Thank you for the opportunity.
The three groups of the citizenry is very illustrative and I can generally agree with this. Currently I can identify with each one to differing degrees but most focus is on the 2nd group.
TARP is a relief program seemingly directed to helping group one so they can work with group three thereby indirectly aiding group 2 and group 1 again. That sounds like a warm fuzzy but it doesn’t give me any feelings of warmth or comfort. While the program is likely necessecary and the proper thing to do it certainly is not “right” and facilitates cronyism. The very people complicit in the failure seem to be positioning themselves as the savior or direct beneficiary of the system.
I like your tiering of principal assurance to lenders and the tiering of home affordability to borrowers. This seems to address a concern of mine. The concern that both will enact a sort of adverse selection and dump the largest, worst positioned debt, it also reduces the “right” of ownership and entitlement disease we seem to have in the United States.
In relation to more current events. Many of your proposals lend to saving jobs by providing/creating liquidity, creating a stop loss and helping people keep their homes. Currently one debate among the presidential candidates is whether or not we should pay more in taxes. If taxes move markets away from efficiency creating dead weight loss, why would we want a candidate who thinks it is a good idea to take money away from those who made sacrifices for it and give it to people who did/do not make the same sacrifices.
It has been over a week since the bill was signed by President Bush. Is today the day to point fingers. I hope so. While I am uncomfortable spending tax dollars to help people who behaved irresponsibility and with a great degree of negligence I am willing to spend tax dollars on a special prosecutor to investigate and prosecute the individuals and organizations who neglected their responsibilities. Those who hide under the guise of the public trust and hide their transgressions with partisanship and spin.
Regarding the above comment….
“The rich scheme for making more money and creating additional tax loopholes thereby the gap is getting wider between the low and middle class”. The “rich” do not have schemes to make money and create additional tax loopholes. I believe successful people do what unsuccessful people will not do.
The “scheme” to make money has an opportunity cost that the non wealthy will not pay. In order to provide a better future for their family they are willing to sacrifice spending time today with friends and family. They are planning for the future instead of just taking it day by day, come what may. Part of this planning is reacting to tax law changes. This is analogous to sports. Every year the NFL changes the rules a little. A player who doesn’t make changes to his behavior will be at a disadvantage to those who have made adjustments. A player who still wants to play by the rules in effect during the 1970s would be a fool on todays ballfield. I submit to you that every year congress changes the rules and every year it is your responsibility to evaluate how this effects you and what you can do to reduce any negative exposure or reposition yourself to even benefit. Just play by the rules of the day.
Very interesting proposal Prof. Harris.
Interesting article. I agree that McCain is trying to provide aid to the wealthy and not to the middle and low class. Seems like he is trying to put the tax burden on everyone else but the wealthy so that they can recover what they lost. A lot of people are sinking because they did take out what they can’t afford, however we have to deal with it no matter what. Hopefully whatever is decided to do will not make us dig a bigger hole for our society. We need to find solutions and need to take actions asap! There a a lot of interesting ideas and the idea to make some sort of real estate website about what category tier you are and when to buy etc. Never heard of that idea. Could be possibly done, but seem to be hard!
An interesting idea, why do you think no one in the government has come up with this yet? With more homeowners forced out of their homes into lower-income housing, won’t there soon be shortages of this type of housing? What will happen to the higher-priced homes, will they sit there until they can be bought when the economy is back on its feet?
Interesting thoughts, I read about Jermaine Harris and noticed that political service was not listed!
All I can say here is wow… I dont still think someone here is going to eat some of this money being lost and it is going to be us tax payers. I think this is a great idea yet it is so unrealistic and hard to do.
Thank you all for your responses. We must all remember that this is a huge and unpopular undertaking. None of us have faith in our Government. Yet and still $700 billion is real. The one remaining irrelevant question is, what would the economy be if we did nothing and let our banking system suffer without intervention. The one relevant question is how can our Government regain our trust? Any suggestions?
I think the plan you set forth is a great plan. I think McCain doesn’t get or the people in Washington. I feel its going to take someone that is economy aware of today world. Alot of things I feel we should have some kind of say so if they’re going to be using our tax dollars.
I think the government is actually trying to help us in the first place. I don’t think it’s one persons fault. I think many people and corparations did it to our economy, people should understand that no one will think atilt you your self will not start thinking . I feel like all this talk about our government is pointless. I mean $700 billion dollars is a lot of money even for a country with one of the best economies in the world and if government thinks it would help our economy i think we should trust them.
Well, if the government doesn’t partake in this dwindling economy who will? There’s no other source that has the power to tweak the economy if it’s flawed. The flow of money will just continue to flail without any intervention. The only way the government will ever gain trust from its citizens is if the taxes that fund the government’s operations are used more productively and create progress towards a debtless/profitable society.
Well I guess the government should get involved to fix this growing real estate and financial crisis! But Professor Jermaine, who will be initially in charge of this, and don’t you think then we will need new real estate laws? Ugh more laws! I do believe the government DOES need to step in… the government needs to be the good guys and help out.
Also, it sounds like a perfect breakdown, but i don’t really understand, are you giving the banks an option of buying the loans at that $100,000,000? Wouldn’t they just be giving the govt their trash? Maybe I don’t fully understand.
Awesome sight!
I think the government needs to step in and hault all housing foreclosures. Then they need to promise to cover these people for the price of the loan before the dumb “balloon” payments. The banks created this mess through their greed, so therefore they should not be making profits from their bad behavior. Now the loans get renogotiated at the amounts of the payments you talked about… what the homeowners can afford. Therefore banks are able to keep their cash coming in for those houses at no doubt will be a reasonable amount that they originally probably agreed to when they first got their loan. But they will be denied the excessive profits they would’ve gotten with the crazy “balloon” payments.
interesting article. and the government just needs to step up and take charge on all the foreclosures.
I think the government should get and reinstall the regulations. good article