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A New Year's Resolution: Fixing the Mortgage Mess, and More

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Proposition: There is a way to stabilize the housing market, end foreclosures, provide several trillions in stimulus funding, and NOT add to the federal debt. Read on...

There is an eternal puzzle in the world of politics. How is it that individuals of high intelligence and principle, when joined in groups, make such dumb decisions? Examples are all around us, including the Kennedy/Johnson/Nixon administrations on Vietnam, Reagan on tax cuts, and the Bush/Obama administrations on Iraq and Afghanistan. The latest is Bush/Obama and the financial crisis triggered by mortgage derivatives.

Mr. Obama inherited the financial crisis, and in most respects has continued the policies laid out by the Bush administration. These were bold and radical interventions on Wall Street, providing billions in direct aid, protecting institutions deemed "too big to fail," moving "toxic assets" off balance sheets, taking direct ownership or control over firms, and finally taking over two of the big three auto companies.

The emphasis has been on stabilizing the banks, investment, and auto sectors, through direct aid and indirect loans and guarantees, with a total commitment adding up to many trillions. These actions appear to have avoided a massive collapse of the financial sector, but they have not brought us easily out of the Great Recession.

As radical and bold as the Wall Street and Detroit interventions have been, both Bush and Obama have been equally timid in direct aid to Main Street. Many millions have lost their jobs, and virtually every home owner has lost a great deal of equity. Millions of homes have gone into foreclosure, and millions more are threatened. Job growth coming out of the recession has been tiny, and a full employment recovery may take five or more years.

Mr. Obama and his advisors continue to believe that he just did not explain his decisions and accomplishments well enough. In fact he did explain them well, but it is the substance of his decisions that has been lacking. His focus from the start has been on Wall Street, with little but rhetoric for Main Street.

Wall Street received a lot of support, without many conditions, such as commitments from the banks to make loans to small businesses, tracking where the money went, reduction or elimination of big bonuses, and so on. Wall Street has not been grateful to the nation for the assistance it received. Main Street has waited for something to be grateful for.

What Mr. Obama has done, in effect, is endorse "trickle down" economics, and just as this did not work the first time around, it is not working now. The public rage which led to the Republican gains in November's elections is a rational response to Mr. Obama's policies. He and Congress have ignored the fundamental question in national politics: "What's in it for me?" Main Street needs direct aid, not trickle down.

A solution to this problem really is not hard to find.

Accountability is the key to the solution. Those who created and abetted the financial crisis have to do more than accept our trillions, and continue business as usual. Those who cost the taxpayers so much need to be held accountable. Wall Street needs to pay back its debt to the country.

Here is what we can do for Main Street:

First action: an immediate freeze on all foreclosures based on adjustable mortgages, going back to 2005 mortgages.

Adjustable rate mortgages are a large part of the problem. In essence, they are a bet that the mortgagee will move before rates reset, and that at that time the value of their home will have increased. We have seen that this really is a bet, and the gamble finally did not pay off.

Second action: new adjustable rate mortgages have to be prohibited.

Third action: Those now holding adjustable mortgages on their principal homes will be offered the option of a no-cost conversion to a 30 year mortgage at current rates, say 4.5%. If they can't make the payments on the new mortgage, then foreclosure could proceed. Many others, though, will be able to keep their homes after the conversion.

Fourth action: Those who have lost their homes to foreclosure will be refunded their equity, including down payments, principal payments, and associated fees.

While millions would be helped by these four actions, the majority, the rest of the country, also needs compensation for the losses created by the recession. This includes those who have continued to make mortgage payments on time, but who still have suffered loss of equity. Everyone needs compensation.

Fifth action: Every adult should be given a one-time payment of $5,000.

The result of these actions would be a major stimulus directly to our people, with direct benefit to the economy. Wall Street would pay, not the government.

But how to pay for all of this? While the cost would be several trillions, there is a way to pay for it: federal loans to Wall Street, the banks and investment companies. These would be 50 year loans at 3%, structured as mortgages, with accelerated interest payments up front. The industry can afford a 50-year loan. In the event of a bankruptcy, the federal loan would be the most senior debt, first in line for compensation. If bankruptcy assets were not enough, the government could either take over the company, or amend the law to allow it to seek repayment directly from its officers and directors.

The principles at work are fairness, equity, accountability, and responsibility. These are not partisan issues. Main Street needs bold actions. Wall Street has benefited from public assistance. Now, Main Street needs Wall Street's assistance. It's payback time.