Common Sense Triumphs Over Ideology

THE BE YOUR OWN ECONOMIST ® BLOG

It appears that the Bush Administration will let common sense triumph over ideology.

We hear no more talk of moral hazard and the evil of bailouts. It’s time to get to work.

If a homeowner has a $500,000 mortgage on a house whose value has fallen to $300,000, whoever holds that mortgage is in trouble. The homeowner can’t or won’t pay, and the mortgage-holder can’t realistically continue to value the mortgage at $500,000. It can’t be sold for more than $300,000, either.

A bailout will save the mortgage-holder by taking the mortgage off the holder’s hands for $500,000 while writing down the mortgage’s value to $300,000. That way foreclosure is avoided and the homeowner remains in the house.

The federal government, of course, must pay the $200,000 shortfall. Multiply that by all the distressed home-loans, and you can see why hundreds of billions of dollars may be needed.

The ideologs will be displeased. They’ll complain of moral hazard. But at least we’ll extinguish the fire before the neighborhood goes up in flames.

© 2008 Michael B. Lehmann