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Trickle-Up: What a Progressive Bailout Would Look Like

It would keep families in their homes and loosen credit markets without rewarding Wall Street's wheeler-dealers for their recklessness.
 
 
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Welcome to America. It's campaign season, and the financial sector is melting down in front of our eyes. Congress' hair is on fire, and it's poised to pass one of the worst taxpayer rip-offs in history.

In the midst of the craziness, Barack Obama is offering up rhetorical cotton candy. "This plan cannot be a welfare program for Wall Street executives," he said. An independent board should be established to "provide oversight and accountability at every step of the way." We shouldn't use the money "to pad CEOs' salaries or allow them to walk away with golden parachutes," he said.

All very risky positions to take.

But at least Obama is saying the right things, even if he's doing so with maddening vagueness.

His opponent is nothing short of incoherent. Last week, John McCain said the "fundamentals of the economy are sound," but by Tuesday, he thought we were facing a "historic national crisis" and looking at "the potential collapse of our financial system." The San Francisco Chronicle called McCain out on his "nearly daily vacillations in reacting to the financial crisis, one day calling for Securities and Exchange Commission chief Chris Cox to resign, the next calling him a 'good man;' opposing a bailout of insurance giant AIG one day and supporting it the next."

Yes, it's campaign season in America, the nation is in crisis, and the Democrats and Republicans are as likely to do the right thing for "Main Street" -- the catchphrase of the day -- as Sarah Palin is to be invited to join Mensa.

But imagine for a moment that we lived in a country with good, progressive governance. We wouldn't find ourselves in our current pickle, but if we did, what might a real bailout plan based on just a little bit of economic justice look like?

In short, it would be based on trickle-up economics. We'd bail out homeowners whose mortgages are on the bubble, and by doing so, the cash we were injecting into the economy would trickle up to ailing financial institutions.

Think about it. The problems our economy is facing are these:

  • Millions of Americans have real estate that's worth less than their mortgage, or close to it, and a great number of those are the mortgage equivalent of crack: They started out cheap -- the banks were the dealers -- but now have ballooning monthly payments that have people between a rock and a hard place. Some people who find themselves in that position were completely irresponsible speculators, some were purely the victims of predatory lending, and most fall somewhere in between.
  • After decades of deregulation -- a bipartisan affair -- the banks weaved together an absolutely incomprehensible mix of securities to back these loans -- derivatives, sold and resold time and again, and insurance-like swaps to supposedly back those securities against default. Now they hold an enormous shit pile of bad paper that's pretty much impossible to understand, much less value. Fearing extinction from all these mortgages going belly-up, they're starting to hoard their cash, and that's tightening credit everywhere and threatening the economy as a whole.

The plan developing in Washington is to take that bad paper off the banks' balance sheets so they stop holding onto their cash like your penny-pinching aunt.

That's pretty much it in a nutshell -- there's talk of re-regulating the financial sector, but few people who pay attention to Congress' doings will hold their breaths waiting for anything substantial on that front.

A progressive bailout would look very different. It would relieve the banks of their burden by buying up mortgages from working people in trouble, rather than giving hundreds of billions to those who are most responsible for getting us into this crisis in the first place.

It would establish a fund to buy homes at high risk of foreclosure and retire the debt owed on them to the banks. The government would then offer the homeowner a new long-term fixed mortgage at a low rate. It could even offer a discounted rate for homeowners at the lower end of the income scale. Imagine that: a little bit of socialism for the poor rather than for the richest.

The government would only purchase mortgages that are at risk of foreclosure, and homeowners would have to prove that they were really struggling to make their payments to be eligible for the program.

The program could begin bailing out only owner-occupied homes, and if that didn't loosen up the credit markets adequately, then it could be expanded to save some properties owned by speculators.

We'd pay for the program with a short-term surtax on, say, the top 5 percent of the income ladder, along with new fees on the transfer of securities.

Of course, over the long term, a lot more would need to be done. We'd re-establish the regulatory framework of the Glass-Steagall Act, the New Deal-era legislation that forced financial institutions to choose between investment banking and commercial lending.

We'd also tinker with the tax code and our trade policy in order to make the "speculative sector" of the economy less attractive to investors and beef up the productive "nuts and bolts" economy that created the American middle class (for more on this issue, see " Meltdown and Bailout: Why Our Economic System Is on the Verge of Collapse").

Another cause of the recession, one that few are discussing, is that wages for all but the top earners haven't kept up with the real cost of inflation, including health care, energy, food and education, and that's impacted not only people's ability to make their mortgage payments, but also their consumer spending. By buying distressed homes instead of paper and refinancing people's mortgages, working people would end up with more cash in hand after covering their monthly note to spend on dinners and movie tickets and wide-screen TVs.

In the longer term, we'd pass other measures to "flatten" the economy -- raising the minimum wage to a living wage, enforcing it, and limiting the amount of executive pay firms could write off to, say, 50 times what the lowest wage-slave was making. (This isn't some radical notion; it would simply be a return to normalcy. In the early 1980s, before our corporate execs started making rock star money, top CEOs took home 30 to 40 times what their workers were making; last year they grabbed 344 times as much as their workers, according to the annual Executive Excess report.)

Those would be longer-term projects for after the election. But for now, having the government spend those hundreds of billions of dollars buying up properties rather than dubious securities would be a bailout that keeps families in their homes and loosens the credit markets but doesn't reward Wall Street's wheeler-dealers for their recklessness.

This article was edited after publication.

Joshua Holland is an AlterNet staff writer.

 
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