Mark Winston Griffith

Credit Where Credit Isn’t Due

If there is anything that both the federal government and most economic pundits can agree on when it comes to fixing the subprime crisis, is that the government should not give the subprime loan industry a bailout. Not only does the industry not deserve it, but it would reinforce what some regard in some cases as criminally bad behavior.

But on Wednesday, Howard P. Milstein, chairman and chief executive of New York Private Bank and Trust, in a New York Times op-ed, suggested that the federal government do just that.

You gotta give it to him. He's got a pair of big ones.

Specifically, Milstein argues that the stimulus package that Congress just approved would do little to address the health of the American economy because it fails to ensure that the "financial system is able to extend credit to businesses and consumers." As a fix-it, Milstein proposes that the government enter "into an arrangement with American banks that hold subprime mortgages... The government would guarantee the principal of the mortgages for 15 years. And in exchange the banks would agree to leave their 'teaser' interest rates on those loans in effect for the entire 15 years."

Let's put aside for a moment the fact that some homeowners still won't have the ability to pay back their mortgages because even their teaser rates were too high. Or that this does nothing to take many institutions to task for the abusive and predatory nature of the loans they made. Or the obvious question: What happens to the homeowner after 15 years? Does the rate go back up? Does the homeowner build up 15 years of equity, only to, again, get stuck with a mortgage that they can't afford?

These issues can be worked out another time. For now, the most interesting thing about Millstein's proposal is that it poses a larger, more profound question: Is it worth bailing out financial institutions if it ultimately helps homeowners?

The reality is that most plans and programs that have a chance of helping subprime borrowers will end up helping financial institutions as well. And while the subprime mortgage banks certainly don't deserve to get a helping hand from a government that allowed this crisis to occur in the first place through weak and permissive regulation, homeowners certainly do. If mortgage banks, not to mention the economy, receive residual benefits from an effective foreclosure prevention program of any kind, I can live with that.

Mark Winston Griffith: Author Bio | Other Posts
Posted at 8:10 AM, Feb 08, 2008 in Economy
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