Thursday, January 29, 2009

Bailout Question of the Day

From teh incredible edible interweb!
Why not give money to homeowners to pay off their mortgages, instead of giving money to the banks? The banks get the money anyways, two birds with one stone, everybody wins. Please educate me as to why this is a bad idea.


IanVisits said...

As I am renting, they can give the money to me, and I'll pass it to the landlord who can pass it to the bank.

Even more people happy :)

Incidentally, as mortgage holders are getting lashing of attention, when is the government going to offer help to renters?

If I had a mortgage and fell into arrears, the banks are being leaned on by the government be nice to me.

As a renter though - one missed payment and I am out on the streets (and unlikely to rent another place either).

Maybe renters aren't sufficiently "middle-england" for the government to worry about.

CityUnslicker said...

if the govt gave me a lash of money, the last thing i would do is pay off my mortgage.

car loans, overdraft - all sorts.

then a needed holiday.

my mortgage is at a historically low rate - why pay that off?

We did not have a mortgage bubble in the UK, a housing bubble yes, but not a mortgage bubble like the US except in buy to let.

The UK banks retail divisions are doing fine - the bits that lost the money bet on derivatives and sub-prime US toxic assets, as well as UK commercial property.

What we should do is encourage the US in this policy as that will help our banks.

canvas said...

Because then EVERYONE is potentially a home owner, right? how can there be 'haves' and 'have nots' - who decides who gets a home paid for - or doesn't? Who decides on the size and location? Who decides? Rubbish idea. dumb idea. doh doh doh as if this was ever a serious suggestion...


Anonymous said...

Isn't this from the daily show?

dizzy said...

Maybe, I found it on a random usenet post.

ifabloke said...

He's right. Give it to the people anyway (as tax refunds?). They will either spend it (good for business!), pay off debts (good for banks) or save it (also good for banks).

Oldrightie said...

Alternatives; let the toxic indebted banks go. £50K deposits underwritten, billionaire deposits, including many stupid and greedy bankers' deposits lost through their own actions. Outstanding mortgage book debt also reduced by direct taxpayers' money returned as debt reduction. Just re-instates mortgage tax relief! Oh! Stupid me, that would help THE PEOPLE, can’t have that, can we. What a vote winner. The windfall to the populace would also reduce their liabilities and improve every area of the economy.Again stupid idea if that helps the masses and not the privileged few. Come on, Conservatives, think outside The Establishment box.
Posted by Oldrightie at 12:14
Labels: another

Similar idea but allows choice of spending.

Alex said...

Not at all genius. There is a simple accounting answer:

If they give the cash to the homeowners to pay off their mortgages, the banks have the cash but they no longer have a mortgage loan receivable.

If the cash is paid to the bank, they have the mortgage loan receivable and a corresponding amount in their shareholders' equity.

Anonymous said...

It is called lowering taxes to stimulate economic activity

Gareth said...

Helicopter money would cause rampant inflation. All that cash milling about would send prices of 'stuff' through the roof.

The Government isn't being quite clear about why gobs of money are being thrown and promised to the banks.

If a bank holds armfuls of assets they can get away with holding only a percentage of the worth as a capital reserve. The best assets have the lowest reserve percentage while the worst need to be covered 100%.

Two things have been happening:

The credit rating agencies cocked up - crap assets previously being graded as top quality have been downgraded, requiring extra capital to provide a larger reserve.

Banks operating offshore special investment vehicles are now having to bring them onto their balance sheets. Offshore entities were not required to maintain a capital reserve. Now the banks are bringing things onto their balance sheets properly they need capital to act as the reserve their offshore businesses didn't need.

This part of things is not a recapitalisation. They never had enough capital in the first place. The FSA should have spotted this long ago.

Lola said...

Alex is right. But, as the point is to rebuild balance sheets of all of us - banks and homeowners alike it would work to give us the money. Suppose you gave the equvalent of the 20K-ish given to the banks as tax rebate to every taxpayer. Some would repay debt so removing an asset from the banks balance sheet but giving them cash (a liability) that they could use to pay off other fixed interest liabilities. The cash gets to the bank but is intermediated by the taxpayer. Plus the creation of credit starts again. Or some may spend the money, hence boosting trade and the cash still gets to the bank. Other would save the money. Others (me) might buy equities.

An even better idea is to (a) either let the banks go bust hence destroying equity and bond holders and then pick up the pieces for instance the mortgage book would be bought for the reason Alex states. Or (b) orce a debt for equity swap. In either case this leaves the 20k available for each taxpayer to rebuild their personal balance sheets.

BTW I posted the same as your quote weeks ago on Mark Wadswoth's blog.

But whatever you do do NOT give the banks cash.