Sheila Bair's calculations

America Wants To Know spent several years working in game show development (you'll like our tidbits® puzzles, in case you haven't tried them yet), and one of the things we learned is that no matter how good something looks on paper, you don't know if it will really work until you stand it up and do a run-through.

A run-through is a kind of rehearsal in which people playing contestants stand at mock podiums and play the game.

When choosing the contestants for the run-through, it's very important to get people you don't know. You need people who don't work for the company, who don't want to work for the company, and who aren't sleeping with the producer.

That's because you want the contestants to focus exclusively on playing the game to win.

Usually you find out right away if the game has a problem.

For instance, you might find out that the exciting finish to the show where the contestant risks it all to win big is instead a numbingly dull ending because the contestant is going to play it safe every time.

People play differently when it's their money.

On Friday, Federal Deposit Insurance Corp. Chairman Sheila Bair unveiled a wildcat proposal to use some of the federal bailout funds to modify mortgages for homeowners who have fallen behind in their payments.

It's a wildcat proposal because Treasury Secretary Hank Paulson says he won't go along with it, but Chairman Bair is putting it out there anyway.

Here's a graphic from the FDIC's web site explaining Chairman Bair's plan:



Don't make a face, it looks every bit as good on paper as "Headline Chasers" did.

If you've been watching the news since the government's $700 billion bailout proposal was first shoved up Capitol Hill, you have been watching a run-through of plans not too different from this one.

What have we learned?

We have learned that everybody will wait to see what the government will do for them before they will buy, sell, borrow, lend, or drop their price.

We have learned that if the government offers to step in and force lenders to forgive the debt of delinquent borrowers, everybody wants to stop making payments so they can get in on the free money.

We have learned that a CEO would have to be barking mad to run the business without first making every possible effort to qualify for some of those federal bailout funds.

We have learned that every city and state government in America has Neel Kashkari on speed-dial.

We have learned that Congress wants to crush the shareholders of any company that benefits in any way from bailout money, whether the company sought the funds or had the money forced on it by the Treasury Department.

These are pictures of hummingbirds drinking from a shot glass at America Wants to Know's Southern California residence.

Would you like to know how the hummingbirds learned to drink from a shot glass?

They had Citigroup at 45.

The unresolvable conflict in all the bailout proposals is the impossibility of distinguishing between people who deserve to be in trouble and people who don't. There's no way the government can avoid using your tax dollars to subsidize people who knowingly bought houses they couldn't afford, or who took all the equity out of their houses and bought time-shares in Florida, cruises to Alaska, new kitchens, new cars, new hardwood floors, and lots of other great game show prizes.

Sheila Bair admitted as much in an interview Friday on NPR's "Morning Edition":

NPR ANCHOR STEVE INSKEEP: I just want to understand something here, though.

BAIR: Sure.

INSKEEP: Because you’re talking about, now, if your proposal were accepted, renegotiating mortgages where somebody’s spending about a third of their income on the mortgage every month. How on Earth are you going to distinguish between the people who got in over their heads, were a little bit deceived by the person who sold them the loan, and those people who just made a conscious choice to buy a big house, and they’re out there paying right now, and suddenly, you’re going to let them off the hook for part of their payment?

BAIR: Right, well, you know, I think -- first of all, we would -- you’d have to below the conforming loan limit, so it wouldn’t -- for the super expensive houses, this program would not be available.

And yes, there may be some who knew that they had an unaffordable mortgage and took it anyway, and got into that house. And you know what? Yes, you’re right, they’re going to be benefiting by this.

But you know what else? Why take a punitive step of forcing them into foreclosure -- you’re going to have another empty house sitting on the neighborhood for over a year. Who does that help? I don’t think that helps anyone.

She doesn't? This is where a game show run-through would be just the thing to help Chairman Bair think.

This is the part where contestant C, the one who hasn't been heard from yet, uses all his cash and some of his parents' cash to make a down payment on a foreclosed property that's selling for a lot less than before and then wins the game in a thrilling come-from-behind finish.

If the government wants to subsidize somebody to prop up home prices and stop the meltdown, the person to subsidize is the next buyer, not the last one.

All those young couples living in their parents' basements to save money would benefit from a federal loan program of low-interest, forty-year amortization mortgages, just like the one that's currently being offered to delinquent borrowers.

If the government announced a program like that and specified that it was for a limited time, all the potential buyers out there in the country would be shaken loose and motivated to make their move into the market.

That's better than what they're doing now, which is sitting still and feeling terrified that it's too soon to buy. They're perfectly rational to believe that interest rates and prices may go lower the longer they wait.

But if a temporary low-cost federal mortgage program suddenly appeared -- for credit-worthy principal-residence buyers with a down payment -- it would be perfectly rational to rush right out and buy before prices start to go up, or before the house you want is sold to somebody else who's tired of living in his parents' basement.

New buyers on firm financial footing are the real solution to the foreclosure crisis.

Don't shed too many tears for the bubble-riders who scoffed at the need to have equity in their homes.

They'll always have Paris.



Text and Photos Copyright 2008

Editor's note: You might be interested in the earlier posts, "A better solution to the foreclosure crisis" and "Hank Paulson's casting call."


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