Better bailout plan?

"One likely way the new folks could proceed is to stay away from the tar pit of trying to bail out institutions directly and instead opt for an indirect approach. Specifically, the government might choose to bail out homeowners instead. Suppose all homeowners were allowed to refinance their existing mortgage at some low subsidized rate that was
also extended to all new buyers, say 4 percent. One catch--the government would have recourse to the borrower and not just the house in the case of default. This is a huge broadening of the plan originally suggested by Martin Feldstein. Not everyone would take this up because it would mean they would have to pay the money back and not just default on their mortgage. So, it would quickly separate the good mortgages from the bad ones that are creating problems in the system.

For those who did take up the plan, a wave of prepayments would begin that would trigger positive cash flow and reduce the risk to all that derivative paper the financial service industry now holds. Prices on that paper would quickly rise and firms would enjoy both more liquidity and more capital. For those who did not refinance, the expectation would be that the house was so far under water that it will ultimately produce a loss. This would help clarify precisely just how much the losses were in the system and on each of the many securitized products and mortgage derivatives as well.

But the biggest advantage is that it avoids the quagmire in which the political class now finds itself. No need for direct bailouts, no need to warehouse paper, no need to hire geeks to figure it all out, and no instant billionaires who simply gamed the system. Better yet for those up for election, no political complaints since it is the voters themselves who were being bailed out."

Lawrence B. Lindsey, a former governor of the Federal Reserve, was special assistant to President Bush for economic policy and director of the National Economic Council at the White House. His most recent book is What a President Should Know .  .  . but Most Learn Too Late (Rowman and Littlefield).

http://www.weeklystandard.com/Content/Public/Articles/000/000/015/604avgrb.asp?pg=2