A Modest Proposal

to prevent the hoboing of America

The real problem, as it was tol’t to me by the village elders, is with securitized mortgages. Mortgages often cut hastily and predatorily, bundled together and sold and resold as if they have some actual, measurable value.

“Passed around like a bottle of Crown.” as one saying goes.

“…passed around like a dirty postcard…” as Tennessee Williams once said.

Collectively they form a true fiscal black hole at the bottom of an economic gravity well, and the problem is, no one know how big the hole is, so no one knows where the event horizon – the area surrounding the hole from which nothing escapes and inside of which external events no longer have any effect – begins or ends.

Time Magazine puts it less geekishly:

The dollar estimate of this bailout is just that — an estimate. Think of it as that bubble that slides up or down inside a level: it keeps moving, and where it ends up depends on who's talking. Some optimists think the mortgages the Treasury will buy are basically sound, and that the ultimate loss to the government after it sells them could be as little as $100 billion. Others point to a drop in housing prices of nearly 20% since mid-2006 and say the government's eventual loss could approach $1 trillion.

Which, to this citizen's ears, sure as hell sounds like the Very First Thing the federal government needs to figure out.

First. Thing.

Like NASA, before space stations, satellites and “One small step…” came a lot of hard work and heavy lifting to figure out how to make the rockets less explody.

Which, admittedly

is sometimes still a problem.

But it’s not throwing a lit Zippo into a retention pond full of napalm and hoping for the best. There is actual science to it. And science begins with data, which is exactly what is lacking up at the Hank Paulson’s International House of Bailout.

So, how do we measure how far down the hole goes while every Master of the Universe on Wall Street is now cowering in fear, moaning out the same piteous mantra that “nobody knows” how deep the ocean or high the sky?

It starts with telling the people who caused the problem to STFU, because correctly diagnosing any problem of this type down to a useful level of detail is hardly impossible.

As far as I can see, getting that data has been dismissed as “impossible” merely because it would involve a lot of really brutal mop-and-bucket number crunching by the people who have been paid tens of millions of dollars every year to fill their company's coffers with sand, sawdust and snake oil. So because they don’t have a sufficiently sophisticated computer model to spit out the answers for them, as far as the pampered elite are concerned, it must therefor be completely beyond the limits of human knowledge.

Well fuck that.

Part I: Laying a foundation.

Building a reasonably reliable database would be grueling, fussy, boring work, but hardly impossible. And what’s more, there are thousands of people available right this minute to do the job.

So suppose tonight Barack Hussein Obama went on the teevee machine and announced that, as President, he would call upon every business school and economics study program in the nation – from Harvard to Prairie State – to come together in this time of grave national crisis and help America by digging into the Big Shitpile (h/t Atrios.)

Senator Obama tells financial capitals of the world that, starting one week from today, America will turn its youngest and brightest loose on solving the real riddle of the catastrophe that is now upon us: What is all this paper really worth?

That as part of a National Class Project ™ for the semester upcoming, the component parts of the toxic “securitized investment vehicles” would be divvied up and sent to colleges and universities from coast to coast (and, where possible, would involve “home town” mortgages in the same locale as the school), along with a relatively simple analytical framework based on pre-bubble housing prices, income guidelines, etc.

The task of the students in the National Class Project would not be to solve the crisis: their job would be to conduct fast, basic research upon which a stable solution would be built. Students would populate a national and publicly-transparent database containing the quick-and-dirty “Analyzed Market Value” (AMV) ™ for each property, and then divide mortgages into three, broad categories (with as many substrata as you’d like):

1. Solid. The AMV roughly corresponds to the mortgage value, and the income of the home owner is such that paying off the mortgage is highly likely.

2. Shaky. The AMV is “off” by, say, 15-20% (let Paul Krugman pick the range.) The mortgage is too high for the real value, and/or the income of the home owner is too low. This is the category on which the vast majority of bailout money would be focused (see the “New American Homestead Act” (NAHA) ™ below.)

3. Shit. There is no way on Earth this mortgage should have been written. The owner will not have access to the FRA (see below) and will probably lose their property, but will receive some form of boilerplate bankruptcy protection. The lender of record will be fined for predatory and deceptive practices.

At the end of the exercise we will have a close-enough-for-government-work answer to “What is all this paper worth?”

Next step: What to do about it?

Part II: A New American Homestead Act

For every single dollar proposed by the federal government to backstop failing Wall Street plutocrats, three dollars must go into a Federal Refinancing Authority (FRA).

Any homeowner in the “Shaky” category with a single residence who has taken out a mortgage in the last ten years and is willing to promise (within reason) to hold onto and live in that property for the next five years can apply to refinance down to the Analyzed Market Value.

The FRA will pick up half the cost of the reduction and the lender will eat the other half. Homeowners will see the value of their property drop, but not to an unreasonable level. Lending institutions will take a small but sustainable hit. And taxpayers will shoulder a fraction of the burden they would otherwise have to.

The FRA will come with a sunset provision and will disappear two years from inception.

Part III. The Ownership Equity Society.

For every dollar that goes towards backstopping a bank or Wall Street firm, that institution will issue one dollar’s worth of non-voting preferred stock to be held in trust for the citizens of the United States and used to help fund national infrastructure projects.

Part IV: Capitalize and Trade.

The federal government is in the driver's seat here and should damn well act like it. The Fed will make a one-time offer buy the “Shit” properties at their Analyzed Market Value plus 5%, take it or leave it. Firms that bought and sold that iron pyrite as if it were gold can hold it and take their chances, or take the loss for some cash on the barrelhead.

The properties the government ends up owning will be parceled up and sold off, where possible, to individuals and institutions that can demonstrate a reasonable plan for putting them to work for the public good (schools, community organizations, research parks, after-school/career academy programs, social enterprise programs, etc.)

All proceeds from the program will go towards public investments in alternative energy research and incubation.

Part V: Regulate, regulate, regulate.