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The global financial crisis caused by the Bush administration’s utter failure to supervise our mortgage lending and financial markets properly can only be fixed by going to the root of the problem—the ailing U.S. housing market. The $700 billion financial rescue package now before Congress must enable the U.S. Treasury to purchase troubled mortgage-backed securities in such a way that individual troubled mortgages bundled in these securities can be separated from perfectly solid home mortgages across the country. Treasury can sell the good mortgages back into the market, securing a return for taxpayers, and restructure individual troubled loans so that stressed but responsible homeowners can remain in their homes and avoid foreclosure. Treasury can then also sell these restructured mortgages back to the market once the U.S. housing market recovers, ensuring another return for taxpayers, as the illustration below shows.
This fair and effective deployment of $700 billion will only work if Treasury purchases whole mortgages back from financial institutions. Otherwise, this vast amount of taxpayer money will only be for the benefit of Wall Street, not Main Street and not even the U.S. economy because these toxic mortgage-backed securities will remain toxic at Treasury unless the U.S. housing market also benefits. The Center for American Progress has a detailed plan for Congress to consider—a plan that should have been acted upon by the Bush administration in early 2008. But if Congress acts now to rescue the U.S. housing market—not Wall Street—then the U.S. economy and U.S. taxpayers will be the better for it. Our plan is fair and effective. In contrast, the plan put forward by U.S. Treasury Secretary Henry Paulson is not.
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