Bad Debt

Andrew Samwick articulates an intelligent methodology for handling the Mortgage Crisis. There must be several abbreviated asides to any proposed legislation. Lenders must be restricted from selling any Residence without prior 90 Day notification to the Mortgage Holder, even if the Holder reverts to simple Rent-Paying. The Mortgage Holder, though, must not get a Free Pass. The Holder should be prohibited from engaging in a future Mortgage, except to pay off the previous Entailing Mortgage, for a Period of 36 Months. I would suggest all Bundling Agents of Mortgage-backed Securities which fail must return all Bonuses and value of Stock Options and Grants, though they need not return their basic Salaries and Benefits. The Whole of any legislation should be directed at punishing egregious behavior leading to Market failures.

Arnold Kling takes the position that either Borrowers or Financiers must take the Fall, i.e., that the burden cannot be split once the Mortgages are bundled. I believe this position is too static, and Investment Depositors can be left out of the Equation entirely. My thought follows the line that the bundling institutions must take the Fall, with Borrowers restricted from their previous excess financing. The Above Plan envisions Borrowers paying a Substitute Rent in place of the Mortgage commitment, leaving Depositors some reduced Interest Dividend; to achieve this, though, they would have to accept inability to sell the Securities. The lack of Judgement on the part of the bundling institutions, on the other hand, should pay a definite Cost for such misjudgement by loss of Profits. Legislative action is far preferable to the present expected Lawsuits.

The Fed action bothers me because this is a Prop Job to stabilize the financial markets, something I have trouble with as it forestalls real Venting of bad debt from the loan apparatus. As long as the debt is on the Books listed as Full Value, the bad debt is going to affect every aspect of the financial world, from the construct of Reserves to the proper End-Timing of loans. Now no one would claim I am as financially astute as Ben Bernanke or the rest of the Fed Board, but Someone should quantify how much bad debt is out there, and the End-Time when We will be free of it. We are oversubscribed with excess Book loans, all of which are in doubt, and trying to sweep the mess under the rug won’t necessarily cure anything. lgl