This will be a short and simple diary. Because the idea involved is so obvious, it won't take more than a few sentences to explain.
Underneath the all the conflicting rationales behind Paulson's bailout plan is a simple fact: US citizens, on average, owe more on their mortgages than property valuations justify. Giving Wall Street firms bunch of the Public's money to offset their losses won't change that underlying fact. Further, it will worsen the situation for homeowners given that the very same people who are unable to pay their mortgage loans will be required to pay off the bailout. Just who are they trying to save anyway?
Here's a Main Street solution: Why not change the rules for 401K retirement accounts to allow individuals to liquidate all or part of their retirement holdings without penalty, as long as the money is transferred to their mortgage holder to pay down principal on their home. The money should also be available to help individuals refinance out of dangerous variable interest rate HELoC (Home Equity Lines of Credit) and ARM loans.
In each case, if the homeowner has enough funds saved in his or her 401K to offset their negative equity stake and/or get out from under a risky loan, the homeowner wins and the mortgage banks win. Society wins. Also, no public funds would have been used. And US citizens wouldn't be held responsible for paying off a bunch of Wall Street parasites who lost everything due to their irresponsible profligacy. Thus, a moral hazard for the rich would not - this time, at least - have been promoted as U.S. fiscal policy. Just an idea.
Discuss.