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Same Fix as with Failed Savings & Loans


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Our best course of action likely would be to handle this debacle as was done with the failed Savings & Loans:  Sell the loans for market value and then, due to the implicit guaranty attendant to “Fannie” and “Freddie” securitized loans, have the federal government (in reality, taxpayers) make the mortgage holders whole by covering the shortfall between the amounts owed and the amounts the loans sell for. In this manner, taxpayers end up “stuck” only for the spread between fair market value of the loans and the balance owed on them.  This, as opposed to picking up the tab for the entire amounts owed.

Applying this methodology would result in the mortgagees getting “bailed out,” not the Wall Street gurus with latent liability after monumentally profiting from securitizing and selling substandard loan packages.

I understand the Fed and Treasury’s concern regarding getting liquidity into the system as quickly as possible. However, it’s well known that vast sums are sitting on the sidelines; money that will come back into the financial markets once a plan is in place and which would be available to purchase packages of mortgage-backed securities at their current fair market value.

The other inevitable result of the current plan on the table, as noted by another author in this American Experiment series, will be inflation due to “monetizing the debt.”  This is an economist’s term for printing money. In addition to the methodology I just described for liquidating troubled assets, I would suggest the Fed now look to increase interest rates and decrease the money supply in order to keep inflation in check and to ward off further declines in the value of the dollar.

Tom C. Schock is a developer with Capital Growth Real Estate in St. Paul.

This commentary originally appeared in Volume 3 of "What's a Free Marketeer to Think?"
Click here to read the entire volume.