Trickle-Up: What a Progressive Bailout Would Look Like

By Joshua Holland, AlterNet. Posted September 28, 2008.

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.

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Joshua Holland is an AlterNet staff writer.