A Possible, Pricey Solution to the Mortgage Mess

Maybe Uncle Sam should pony up $200 billion and buy all the subprime loans.


Ed Yardeni of Oak Associates thinks he knows how to stop the credit crunch:

We have to consider the possibility that the Fed can't save the financial system all by itself with the blunt tools it has. So, I have another idea. Why not set up a government guaranteed Sub-prime Resolution Trust Corporation? It would buy all sub-prime mortgages (even those that are delinquent, but haven't defaulted) and related securities at 80 cents on the dollar and issue government-backed bonds. The government (we, the taxpayers) would provide the capital, i.e., take the hits if the mortgages are eventually resolved at less than 80 cents. Most estimates are that the problem will eventually cost $200 billion, roughly the size of the current annual federal deficit. I think it's a price worth paying to put this sorry mess behind us. In the early 1990s, we set up the RTC to clean up the S&L debacle, which cost about half as much to accomplish as the estimated $500 billion. By the way, the problem with freezing resets (the Arnold Schwarzenegger solution) is that so many ARMs have been securitized.