Bailout money should be used to buy foreclosures

In the spirit of bailouts, we should all go take out as many credit cards as we can and max them out on assets which will depreciate in value. Personally, I’m buying Redskins season tickets and a flat panel TV for every room in the house. You should too. Think of how much the economy would grow if all of us went out and spent our credit limit. Now there is a stimulus package. Who cares if it’s artificial and propped up by incredible leverage. This is no different than what happened during the housing boom on both Wall Street and Main Street.

If enough of us do it and can’t pay it off we can count on the government to bail us out. Right? We will have created a systemic risk to our economy and now a days the term systemic risk is defined as “worth a taxpayer funded bailout”. At least that is the message D.C. is sending out.

The bailout is designed to buy up toxic mortgage backed securities clogging up the inter-bank lending system which is spreading to business and consumer lending. These mortgage-backed securities are deemed the catalyst to the economic crisis and by nipping this in the bud things will be fine. Well this is not the catalyst. Foreclosures are the catalyst.

Foreclosures are killing the economy and its financial system in two main ways. The flood of foreclosures is driving home prices down as exemplified by the S&P Case/Schiller Index showing a 16 percent drop in prices over the last year. Foreclosures are increasing supply and putting downward pressure on homes prices. Banks have flooded the housing market with short sales and foreclosures pushing prices lower as they compete to dump collateral — bringing non-troubled home sale prices down with them. These lower prices breed bigger losses for financial institutions owning mortgage backed securities. These losses at big financial institutions are how the foreclosure crisis is the spreading to Wall Street and Main Street.

An economist at UCLA, Dr. Ed Leamer, in a recent piece pointed out America was richer by $2 trillion thanks to the home price boom earlier this decade. This as we now know was an artificial increase in wealth, and now American wealth must return to its true equilibrium. The bailout for Wall St. with taxpaying dollars is getting in the way of this return to equilibrium.

We are all humans and do not mind having an artificial economy in the long run in sacrifice for short term inflated wealth. In the sense of this natural human tendency to seek security in the short term versus long term stability, a bailout is needed. But let’s be sure the bailout addresses the true problem. That $700 billion for mortgage backed securities may be put to better use buying houses in or near foreclosure. The same Dr. Leamer makes an astute observation; the government could buy 2.3 million homes at an average price of $300,000 with $700 billion. Judging by the line for Section 8 housing recently there is a need for affordable government housing anyway. Why not kill two birds with one bailout?

Business columnist Worth Richardson can be reached at