Diary

Ideas for dealing with the financial crisis

1/ People facing foreclosure should be offered a deal. Instead of paying into Social Security, they would be allowed to use that money to help pay their mortgages, and they would stop accumulating Social Security benefits. Older people would be offered an additional option. Government would offer them a lump sum payout in return for an agreement to reduce the Social Security benefits which they had built up.

This would only be offered in cases where it was very likely to succeed in keeping people in their homes. There would be a minimum level below which Social Security benefits could not be reduced.

2/ People who go through foreclosure should face a lifetime ban on getting another mortgage. Many people, especially in California, are walking away because they have lost a lot of money on their homes and want to stick the bank with the loss. They could pay the mortgage, but it isn’t really in their financial interest to do so. They need to be given a strong incentive to keep paying.

3/ Improving the McCain plan. Like many things in finance, the question is at what PRICE does McCain plan to buy people’s mortgages at? I think there is a role for this plan in trying to avoid an overshoot in the housing market. Buying mortgages at close to the long run historical value of the house would not be a bad scheme. The ratio of house price to household income used to be about 1. See this chart from Calculated Risk.

4/ As a last resort, the Treasury should prepare a detailed plan for a Swedish style nationalization of the US banking system. Publishing such a plan would help confidence in our financial system.

5/ Where is the Obama plan? Presidents can’t just criticize other people’s initiatives. They need plans of their own. Is Obama capable of producing one?

I’ll try to come back this evening or tomorrow morning to answer comments on this diary.