The Corner

Holman Jenkins: Another Way

Jenkins has a good column on a different approach to the bailout. A big snippet:

This column has advocated injecting the money at the level of the collateral — buying and demolishing the least-wanted, market-souring homes in the subprime hot zone of Florida and the Southwest. This solution really would be clean, quick, would minimize the subsidy to bad actors, could be turned off as soon as it had served its purpose, and would involve no sticky issue of whether to bail out foreign banks along with U.S. ones.

Instead, Treasury’s plan is to enter the market at a higher level, buying the depressed mortgage securities supported by these houses. In brief and eye-opening remarks in the Senate yesterday, Ben Bernanke spun a scenario in which derivative mortgage debt would be boosted in market value closer to the value of the underlying cash flow, restoring the banking system to solvency. Then why not just let banks value them that way on their books now, so they aren’t teetering on insolvency? Wait for it. We’ll get there, but not now apparently.

Nor does the Paulson plan have the Occamite virtue of cutting to the heart of the problem, the housing market. So many mortgage cash flows have been sliced and diced and spread over different kinds of securities owned by holders all over the world — a big stumbling block to the private sector trying to manage its way out of a hole. It’s not clear the new agency offers a solution to this problem. It would probably have to buy the entire outstanding stock of questionable mortgage debt before it would have any hope at getting at the underlying collateral, i.e., houses. But then it would become the world’s biggest, most troubled landlord and biggest forecloser on homes. Politics would intervene — and any potential taxpayer gains would likely be frittered away to keep nonpayers in houses they can’t afford.

“No bailouts” makes a nice slogan, but taxpayers are already on the hook for half the nation’s mortgages through Fannie, Freddie and the FHA. And nobody wants to find out what total meltdown of confidence in the financial system feels like. But with Chris Dodd ready to nationalize the banks and Barney Frank to dictate executive pay — and with Clement Attlee Obama waiting in the wings to pile on his own big-government plans in the name of compensating “the middle class” for its sacrifices on behalf of Wall Street — a more minimalist approach than Treasury’s suddenly has a lot to recommend it.

Here it is: Let the government be a buyer of last resort for mortgage derivatives for a set price (say, 25 cents on the dollar), hoping others will gain confidence to step in. Hope, too, that this whets the appetite again for investors to recapitalize hurting banks. If banks continue to falter even with the option to dump their mortgages on government for a deep discount, deal with those challenges as they occur, with forbearance where possible. Meanwhile, use taxpayer dollars to clean up the housing mess in the Southwest and Florida — the surprisingly confined source of all our troubles.

Jonah Goldberg — Jonah Goldberg holds the Asness Chair in Applied Liberty at the American Enterprise Institute and is a senior editor of National Review. His new book, The Suicide of The West, is on sale now. @jonahnro

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