Bail Out Homeowners Instead of Banks? Term Paper

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Wall Street Bailout -- Part II

Wall Street Bailout

The government-orchestrated bailout of the banks has been hailed and yet also condemned due to its perceived efficacy or lack thereof. Jeffrey Fuhrer suggested a path that was a lot cheaper and perhaps a lot less encouraging and propagating of the bad habits of banks and government entities that led to the crisis. This alternative, of course, was the individual homeowner bailout. Indeed, bailing out homeowners directly would have cost a mere fraction of what it did indeed cost to bail out Citibank, Wells Fargo and the other banks. However, neither solution alone has a clear advantage over the other when looking at all relevant circumstances. While doing a homeowner bailout would have had its merits, doing just the bank or homeowner bailouts individually probably would not have been as effective as doing them both in concert.

Analysis

This report will start with a compare and contrast of what the two plans called for. The Fuhrer bailout plan to bail out the homeowners was fairly basic. Rather than give the $700 billion in loans to the banks, it was suggested by Fuhrer that money be given directly to homeowners but on a much smaller overall scale. Instead of spending the majority of a trillion dollars, it was suggested that only twenty-five to fifty billion was necessary to get the job done with a lot of that keeping people in their homes and a lot of the rest being distributed in the form of short-term loans that could then be paid back at some future date. Barack Obama championed a similar although much smaller program that helped some families but left others in a crisis. Further, many of those that got assistance did not receive enough to stay in their homes.

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Many others still owned more on their mortgage loans than their house was worth. If the assistance was not enough to make their overall home equity positive or at least catch the homeowners up on late payments, then the bailout was perceived to be not enough. Known as Home Affordable Modification Program (HAMP), the Obama-championed program was deemed to ineffectual and incomplete in entirely too many instances (Baker).

In comparison, what was actually done was a bailout of mostly the banks through cash infusions in the form of loans that had to be paid back. Also prevalent were guided bankruptcies and absorption of failed institutions into larger and more stable institutions. Rather than give more assistance to homeowners, the idea primarily used was to shore up the financial institutions. The common rationale was to avoid runs on funds and other negative events that could have made the situation worse through paranoia. Keeping the system stable with the ostensible full faith and credit of the federal government was seen as the more important factor and that decision was probably the right one if only one of the two bailout types was used. However, the Troubled Asset Relief Program (TARP) program alone did not have to be the only solution used. However, it was indeed the primary solution chosen.

To suggest that a HAMP-style program using more of Fuhrer's style being used in addition to, rather than instead of, the TARP program is worthy of note and review. However, using the homeowner bailout instead of the bank bailout would have been a bad idea on a number of levels. During the Great Recession, there were a number of banks that did fail or….....

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