Web Letters: Throwing Good Money...

Thank you for the follow up. I wrote a web letter in response to an article about this bailout on September 19, 2008, suggesting that the US Treasury use the money for fixing the many defaulting sub-prime mortgages.

The Treasury could have called a moratorium on home foreclosures and the defaulting loans could have been successfully segregated like the mortgages in the savings and loan crisis. This would have allowed normal traffic in home sales to resume with the least disruption. Our government keeps statistics on the number and type of home mortgages written, and there were 1.5 trillion dollars in sub-prime mortgages, as this article points out. This knowledge could have given the Treasury a problem that they could quantify, deal with and contain. They could have deployed the $700 billion to renegotiate the fraction of $1.5 trillion of sub-prime mortgages that were failing. This appeared to be doable with $700 billion, and would have prevented the increasing momentum of the downward spiral of real estate assets that belong to the public and the ensuing devaluation of bank assets. Buying toxic assets should be avoided because their value comes directly from the cash flow of the fixed sub-prime mortgages and they cannot be quantified.

So why hasn't the Treasury been working to stop foreclosures for the last three months, as Congress has asked? We don't know, but we do know that because of their inaction they have let the momentum for falling home prices increase and the spiral of deflation has spread into all sectors of the economy. These homeowner assets are the largest category of assets in the country and the foreclosures are like a virus invading the economy. This inaction by the Treasury causes the need for the proposed stimulus package to grow by multiples and it has established recessionary psychology into the economy.

Congress spoke out three months ago and the Treasury did not buy the toxic assets directly but instead gave the money to selected banks--which accomplished the same results as buying the assets. This exercise is pointless, because it is a temporary fix for the banks while foreclosures, the underlying cause of the economic decline, continue.

If you step back and look at it with some perspective, we are taking public money from the tax base and giving it to the "private banks," who are consolidating their control over the economy and who are now making decisions for our Democracy. As a rule of thumb the government should always assume control in any situation where its deploys government money. No venture capital money would ever make this kind of mistake.

During the last eight years fiscal policy has inflated the economy like a balloon with easy but expensive credit while at the same time spending all available cash outside of the country. Now the private banks who have been given decision-making control have shut off lending. What do you think will happen to this balloon? Will the government drown in the bathtub?

William J. Hague

Hoboken, NJ