I’ve been hearing a lot recently about a so-called “trickle-up” approach to straightening out the financial system. The idea is that, rather than forking over hundreds of billions of dollars to speculators, we should give it instead to distressed homeowners. The government could issues grants or subsidized loans to folks having trouble making their mortgage payments; this would serve two purposes, to keep people in their homes and, by greatly reducing the default rate, validating the financial assets derived from mortgages.
Nice try, but it won’t work.
First, there is a nasty problem of equity vs cost: the program is affordable only if you give the money to the subset of owners falling behind in their payments, but why should they be the only ones to get a price break. Speaking just for myself, I own a house and have not skipped a payment yet, although not without occasional struggle. Why them and not me? Multiply this by a few million and you have a real question.
Second, and much more to the point financially, the underlying problem is a housing bubble. Prices overshot by about 30% or so on a national average, and a mountain of securities were piled on top. How will helping people make onerous payments correct this? Answer: you can only prevent the deflation of the bubble by permanently (or at least indefinitely) blowing more air into it. To sustain the overvaluation of a house, you not only have to subsidize its current financing, you have to subside new buyers so that the old ones can sell at the inflated price. If you don’t, the house drops in value and you are back to square one as far as derivative assets are concerned. The real point is that it is futile for the government to try to hold back the deflation of the bubble by throwing money at it. The prices have to come down one way or another.
This is why I like Dean Baker’s approach. He would let the mortgages fail but allow people to stay in their homes as renters. From a progressive point of view I see no particular value in mass home ownership. (Why should people concentrate their savings into a single asset, their home, rather than diversify? Or rather than own their own job, which could provide a greater measure of income security?) What needs to be prevented, however, is mass eviction.