Bailout Reform

Many of us are upset about the economic crisis, especially as we watch the fiasco known as the bailout. Just the other day we were told that instead of buying up all the bad mortgages that are directly responsible for much of the mess we find ourselves in, the Government is now buying banks and other companies.

We saw that AIG, the insurance giant, came to the well once again, all the while providing massive luxury meetings and huge bonuses to company executives, all with the taxpayer funded bailout monies. None of this sits well with the taxpayers.

I was against the idea of the bailout from the start, as many others were and are. However, our Government is bound and determined to keep on spending in hopes something positive will happen. In this light, and simply for the sake of argument, (not that I am actually pushing the idea,) I offer a different pathway for bailout monies.

A brief bit of searching turned up numbers showing there are approximately some 50 million mortgages. Most of these are solvent, being paid on time, but those that are either behind or in default are undermining the entire financial industry. The reasons for the defaults are many, including massive fraud, irresponsible borrowing, etc…, but this is a point for another day.
What if we gave the money directly to the mortgage holders? What might be the consequences? What would be the cost? Will it work? (Note: I am not breaking down the various types of loans or taking into consideration fraudulent loans. This is merely an exercise for the sake of argument.)

From the few figures I have found, the average outstanding balance of mortgages is somewhere in the neighborhood of around $145,000.00. If, for instance, the government gives out half of that money with the requirement the monies be spend paying down the principle and restructuring notes that were written at unfavorable terms. The cost would be about $362.5 billion. Now we put on the rose colored glasses to analyze the potential results!

The financial institutions that hold the loans would be flush with cash. These monies would be required to be the source of new loans, responsible loans to people who can pay them back. They would also be required to pay a small percent of the profits to the Government, (on not only the original monies but future profits resulting from the monies the institutions collected as a result of the new loans,) to pay the debts the taxpayers are now holding as a result of the bailouts.
Most mortgages should now be caught up and affordable. The homes would now have positive equity. Home values should actually rise adding even more equity. People would also have a larger percentage of their incomes available for other spending which has largely been curtailed as a result of this whole mess. With more spending comes economic growth as retailers need to by more product, manufacturers need to produce more goods, including the auto manufacturers which should help to negate the need for the Government to bail them out, more people are employed to produce all these goods which gives rise to more income and more spending. With all of this we should also see more home purchases. As home inventories decline, home building should once again increase, but hopefully at a more moderate pace.
Sales taxes would be up as would real estate tax revenues which will help the states, counties and cities.

If all this were coupled with reforms in Government, (especially in earmarks and institutions such as Fannie Mae and Freddie Mac,) and a positive national energy plan, we could go a long way in restoring the economic quagmire we are now entangled in.
If the problem starts with the consumer overspending, especially on mortgages, would it not make some sense to start fixing the problem on this end? Does this make any less sense than what we are doing now?