The family probably will say, “Great.”

But they will have to make a concession. That’s where the new public/private partnership makes its killing. Its Savior Bank, funded with private money that is to take the “risk” (and also the rewards) will say to the family that agrees to renegotiate its mortgage: “Now that the government has taken a loss while we’ve let you stay in your home, we need to recover the money that’s been lost. So when the time comes for you to sell, or to renegotiate your mortgage, our Savior Bank will receive the capital gain up to the original amount written off. If we’ve made you whole, we want to be made whole too.”

In other words, if the homeowner sells the property for $400,000, the Savior Bank will get $150,000 of the capital gain. If the property sells for $500,000, the bank will get $250,000. And if it sells for more, thanks to some new clone of Alan Greenspan acting as bubblemeister, the capital gain will be split in some way. If the split is 50/50, then if the home sells for $600,000, the owner at that time will split the $100,000 further capital gain with the Savior Bank. The Savior Bank will thus make much more through its share of capital gains than it extracts in interest!

This plan will be even better for Wall Street than the Greenspan bubble was! Last time around, it was the middle class that got the gains. To be sure, it really was the bank that got the gains, because mortgage interest charges absorbed the entire rental value. But at least homeowners had a chance at the free ride, if they didn’t squander their money in refinancing their mortgages. And many did use their homes “like a piggy bank” to support their living standards.

But this time around, Wall Street is not obliged to make its money by making middle class homeowners rich. Debt-strapped homeowners are willing to settle merely for a plan that leaves them in their homes! It can get for itself the capital gains that have been the driving force of U.S. “wealth creation,” Alan Greenspan bubble-style.
The irony is that the only kind of policies that are politically correct these days are those that make the situation worse: yet more government money in the hope that banks will create yet more credit/debt to raise house prices and make them even more unaffordable; to inflate a new bubble; to give what really should be called the “bad banks” – the Big Four or Five where the junk mortgages, junk CDOs and junk derivatives resulting from junk mathematics are concentrated – yet more money to buy out smaller banks that have not yet been infected with reckless financial opportunism.

And by the same token, lobbyists for these bad banks are screaming at the top of their voices that all solutions to the problem are politically incorrect: debt writedowns to bring the debt burden within the ability to pay. That is what the market is supposed to do – by bankruptcy in an anarchic collapse, if not by reasoned government policy. The bad banks, after demanding “free markets” all these years, have stopped the free market when it comes anywhere near them and their bonuses. For them, markets are free of regulation against predatory lending; free of taxing the wealthy so as to shift the burden onto labor; free for the financial sector to wrap itself around the “real” economy like a parasitic vine around a tree and extract the entire surplus in the form of financial engineering.

This is a travesty of freedom. But worst of all is the “freedom” of today’s economic discussion from the wisdom of classical political economy and from the experience of economic history regarding how societies have coped with the debt overhead through the ages.

An alternative policy to save the economy from being “rescued” by Wall Street
There is an alternative to ward all this off. A debt writedown, followed by a land tax so that the “free lunch” (what John Stuart Mill called the “unearned increment” of rising land prices, a gain that landlords made “in their sleep”) would serve as the tax base rather than labor and industry being burdened with an income tax.

One move would be to prevent banks from lending against the land’s value. They could lend against buildings, but not land. This would cut the maximum permissible loan to 50 to 60 per cent of the total property price – unless the government did what classical economists advocated and tax the land’s market price (its rental value) as the tax base, shifting the tax back off of labor. This would achieve the kind of free markets that Adam Smith, John Stuart Mill and Alfred Marshall described, and which the Progressive Era aimed to achieve with America’s first income tax in 1913.

A land tax would prevent housing prices from rising again. This would save homeowners from taking on so much debt in order to obtain housing. And it would save the economy from seeing “wealth creation” take the form of the “unearned increment” being capitalized into higher bank loans with their associated carrying charges (interest and amortization). The key to real estate bubbles is to inflate site valuations.Posted by(Bulatlat.com)

Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, mh@michael-hudson.com

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