FROM THE EDITOR

A modest proposal, to prevent another “bailout”

By Eric Norberg

The Bee, Nov 5, 2008, Updated Oct 30, 2009

ADVERTISEMENTS

The subject of that federal financial “bailout”, which preoccupied people across the country in September and into October, would not normally be a fit topic for an editorial in this intensely local Southeast Portland newspaper. Not even although the financial future of every BEE reader is directly or indirectly affected.

But that will be the subject of this editorial, for two reasons.

The first reason is that the initial attention focused on mortgages. Mortgages make home ownership possible for most, including most who live in BEE country. That makes the subject pretty local.

Certainly the current economic downturn involves more than just mortgages, but it was mortgages which served as the focus and initiator of the crisis.

The other reason that we are writing about it in THE BEE is that we actually have a suggestion for a very simple change in the banking rules that should prevent this situation — at least as far as home mortgages are concerned — from EVER happening again.

Surely we aren’t the first to think of this, but as of this writing, we haven’t seen it suggested anywhere else, so it appears to us that it is up to THE BEE to step in where larger media seem to have overlooked the obvious, and strike a blow for national financial stability.

The background

Before we get to our own modest proposal, though, a little more about that “bailout”. Here is what it really was.

As summer ended, lending in this country was grinding to a halt. Not only mortgage lending, but all lending. Businesses had discovered they could not routinely call on established lines of credit to buy the merchandise they needed for the upcoming Holiday season — often the only time of the year they actually make real money, threatening untold local and national businesses with having to close down permanently.

Even banks saw the interest they pay to borrow money from each other suddenly tripled or quadrupled, as banks began to disbelieve (some, with good reason) that the borrowing banks were solvent.

The problem was that many odd and creative mortgages had been sold to people who could not afford to keep servicing them — and these same loans had then been sold to other institutions, which now held them.

This not a new tactic by any means: Mortgages have been sold to other banks or institutions by the originating lenders for forty years or more. The originators get a fast, if discounted, return that way; the purchasers get cash flow that should have lasted for the length of the loan. For decades, many homeowners have noticed with surprise that they were now making payments on their loan to a different bank than the one they got the loan from.

But in the 1980’s, financial experts, tinkering with risk and reward, came up with financial derivatives and offbeat financial assets to sell, on Wall Street and elsewhere. One of those new ideas was packaging a large number of mortgages, and selling the package like a stock. Not only did investors buy these, but pension plans bought them, banks bought them, and huge Wall Street firms bought them. They were supposed to be safe, being secured by the payments by the citizens with the mortgages. But mischief had occurred.

1 | 2 Next Page >>