In an essay in the Guardian Columbia University economist and Nobel Prize winner Joseph Stiglitz talks sense:
The holes in financial institutions’ balance sheets should be filled in a transparent way. The Scandinavian countries showed the way two decades ago. Warren Buffet showed another way, in providing equity to Goldman Sachs. By issuing preferred shares with warrants (options), one reduces the public’s downside risk and ensures that they participate in some of the upside potential.
This approach is not only proven, but it also provides both the incentives and wherewithal needed for lending to resume. It avoids the hopeless task of trying to value millions of complex mortgages and the even more complex financial products in which they are embedded, and it deals with the “lemons” problem – the government gets stuck with the worst or most overpriced assets. Finally, it can be done far more quickly.
At the same time, several steps can be taken to reduce foreclosures. First, housing can be made more affordable for poor and middle-income Americans by converting the mortgage deduction into a cashable tax credit. The government effectively pays 50% of the mortgage interest and real estate taxes for upper-income Americans, yet does nothing for the poor. Second, bankruptcy reform is needed to allow homeowners to write down the value of their homes and stay in their houses. Third, government could assume part of a mortgage, taking advantage of its lower borrowing costs.
Sorry for beating this drum so endlessly. The second part of the above are specific implementations of the general priorities Governor Patrick laid out on this page last week. At least Massachusetts has a chief executive who understands our financial system. The short article is worth a read in its entirety.
mike-from-norwell says
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p>Let’s see, in MA we don’t even get to deduct mortgage interest or property taxes, so the only deduction is on the Federal level. Still trying to find that 50% marginal rate in my 2007 1040 instructions (in fact, these deductions wash out in AMT calculations so the truly rich don’t even get to see these deductions).
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p>If you’re going to make an argument, fine, but don’t blow it in the details. Tends to make those who know wonder what else you’ve gotten wrong.
bob-neer says
That converting the mortgage deduction into a cashable tax credit is meaningless, or a bad idea? As to Massachusetts, of course it’s a federal program that he is talking about. Here is a relatively simple summary that might be helpful for interested readers (not you, Mike: I know you know đŸ˜‰ but if you have any useful reference links, feel free to chip ’em in.
mike-from-norwell says
get your numbers right. If you’re coming out with a statement that the government is paying 50% of the mortgage interest and property taxes “for the rich”, and the actual number is nowhere near that…
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p>Well, if I figure reading an article that they’ve blown one stat, it calls everything else into question into their argument. I don’t necessarily have a problem with the tax credit suggestion, but just offering constructive criticism. If you screw up one major inflammatory basis of your argument, a logical reader will discount the rest, regardless of its validity.
mike-from-norwell says
about the advisability of getting people of low incomes into buying houses instead of renting: House upkeep costs.
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p>You rent, you’re not laying out funds when the furnace goes out, when you have shell out $300 to get the heating system checked for the winter, when the hot water heater bursts. You don’t call the landlord; it’s all on your dime.
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p>From a reality standpoint, we went through in ’99-00 a loss of stock market capitalization that dwarfs what we’re looking at now with the real estate devaluation. At least in this go around, we have physical property we’re dealing with; back then, you could only contemplate papering the den with your Pets.com stock certificates. For good or bad, we had a tremendous push to have everyone own their own home as a laudable society goal. Great, but with every boom, people figure out how to game the system (and just look back at Dime Bank in the late 80s if you don’t think these shenanigans with liar loans and the ultimate in stupidity 80/20 combo loans to avoid PMI are something new).
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p>If you have sufficient equity and can understand the true cost of home ownership, sure buy a house. Otherwise you’re probably better off renting and avoiding the realities of the true costs. And they forget that selling isn’t like liking on Etrade for $19 and you’re done. Try 5% of the sale price and months of anxiety and “spruce up” costs.
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p>The true fact in many of these foreclosures is that you have people stuck in properties that they are completely underwater as far as what they owe v. what it can be sold for in the current market. In most cases, they have zero equity in the property (either because they didn’t put anything down or they kept cashing out of the property with equity loans), and the law has been changed that they owe no tax liability on the debt forgiveness. They are in essence glorified renters of a property that they have no more claim to own than you or I, as they have zippo equity. Maybe moving through the foreclosure process is the best result and they can get into something that they can actually afford. The real secret of real estate is appreciation, in that you don’t have to share with your mortgage holder the gains on your house. For the foreseeable future, that gain doesn’t look too possible (unless you’re watching 3 year old reruns of “Flip This House” over and over again).
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p>Recharacterizing the interest rate probably still doesn’t make the math work, and you have amazing unintended consequences if you decide we should start writing down the principal on mortgages so they can stay. Heck, forget the credit rating, I’ll just skip a few mortgage payments and get the note redone to my benefit tax free.
mcrd says
I ca/nr believe this—I really can’t believe this. I have sen the state legislature and our Congress do some pretty despicable things, but the REPUBLICANS and the DEMOCRATS have really screwed us this time.
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p>Just read Gorbachev is starting a third party in Russia. It’s high time in USA. We can’t go on like this any longer.
I honestly hope that the House of Representatives takes a long look and does some soul searching and #1 gets a new speaker and #2 starts stripping some of these incompetents of their chairmanships. I have had some really bad vibes of late and I’ve been through a load of crap in my lifetime.
bob-neer says
A bill that fundamentally just buys bad debt at an undetermined price is (a) unlikely to solve the fundamental problems here, and (b) too big a subsidy to too small a part of the country. I still think the bad consequences of a No vote outweigh the good consequences but the House leadership really owes it to the people to step forward with a good bill rather than force a choice between a bad bill and no bill. They have the power, they can lead us in a good direction. The White House certainly won’t.
z says
it’s “Stiglitz”
bob-neer says
Maybe no one noticed.
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p>;-)