High as the sky

I've been a bit quiet of late. It's not that I don't have much to say, but, frankly, Josh is doing such a good job that as long as that link to TPM is over there on the left side of the page, I'm pretty comfortable about the message.

That being said, the whole bailout package is just one big disaster, and it's made that way not just because the proposal itself is horrible, but the conceptual framework behind it is focused on protecting the wrong side of the equation. We need to stop focusing on bailing out the fools who led the charge that placed us in this mess, e.g. the investment bankers, brokers and so-called financial professionals, and instead focus on protecting the consumers and homeowners. Now I know that sounds like a populist or, as the right would have it, socialist standpoint. Fine, whatever.

But my focus isn't on who "deserves" protection but rather on where we can do the most good without encouraging more bad behavior.

And it seems to me by crafting a recovery plan (rather than a "bailout") that focuses on getting the homeowners out of the bad mortgages that are the underlying garbage in this whole mess, would be much more productive and valuable in the short and long run.

Rather than writing checks to corporations, then, we should instead focus on the government taking over defaulted mortgages, albeit at renegotiated amounts. If the federal government comes in and buys a defaulting mortgage, the banks would agree to reduce the principal to some percentage of current appraised value, for example 65% or so (could be less or more, may depend on region or overall price, etc., but needs to be based on some rational formula - my inclination is to make it as low as possible, though). In exchange, the homeowner is released from the mortgage and title transfers to the federal government, and the homeowner leases back the property from the federal government. The homeowner gets a option to repurchase the home from the government at a price approximating the original (not discounted - they do not get rewarded) principal plus some interest factor, perhaps with deductions based on the value of the rent paid over time. Banks get some immediately liquidity but have to take a loss. The CDO's are valued at something, so a floor is established. Banks can then rely on each others' assets. The government price gets set low enough that if private companies can offer a better deal, or the floor that the government sets helps stabilize the market, there is opportunity for investors and bankers to come in and offer a better deal (yeah, I guess that would possibly leave the feds with the crappy assets, which is why you set the price really low). Everyone bears some burden, but nobody is let off scot-free, bad behavior is not incentivized too much, and the free market is allowed to continue to operate with simply a new form of price support.

Why is nothing like this on the table?

UPDATE: Thursday morning, Sully points to this, which is the first thing I've seen that talks about something like what I mention above.