A Critical Review of Andrea Owens’ “The Mortgage Bailout that Worked.”

While the Harvard Business Review (HBR) has yet to publish anything specifically on the Obama Mortgage Stimulus Plan as of yet, this recent blog entry might give an idea as to what the HBR’s point of view might be. This is a very interesting piece, as it is a historical lesson on mortgage bailout plans and how they might work. In the 1920s, real estate, like in the 1990s, was considered a very safe investment. In New York just prior to the great crash, several dozen real estate guaranty companies sprang up, offering what amounted to â€Å"mutual funds† for investing in mortgages.These funds were guaranteed by the insurance division of the state of New York. Needless to say, with a few years, these investments sprang out of control. In fact, the companies themselves began to invest in their own guaranty schemes. They charged a fee of roughly 1% of the annual interest on the paper (not the real value). As soon as a slowdown hit, the guaranty firms put their marketing sche mes into a higher gear, selling more and more of them, even waving their fee for a time. When the collapse came by 1932, the marketing went even higher, and more mortgages were sold at more and more advantageous rates.Some were noticing that these guaranty firms were â€Å"on the hook† for some very questionable loans. They sold discounted mortgages to attempt to pay off already inflated mortgage values. It was a scam based on a lie. In 1932, the firms held the tremendous sum of about $2. 7 billion in paper, that itself represented about $809 million in actual value. The final collapse came in the Spring of 1935, and finally, the state stepped in. The measures the state took is really the lesson here. First, the state of New York passed two laws. The first was the Mortgage Moratorium Act.This basically stated that the homeowner cannot lose his home through foreclosure so long as the taxes and interest were paid. Second, the state created an institution called the mortgage Com mission whose job it was to take over the mortgages and seek to reclaim their value. The point of this latter institution was to maintain real estate values as close to the numbers on the paper as possible. It is here where the state met with some success. This commission hired a large number of researchers and investigators to track down each and every property that was represented (distortions and all) on the now worthless paper.Each property, once identified and appraised, was to be disposed of either through sale or rental. Those properties with unfinished improvements were kept afloat until the improvements were finished. The state assisted in any improvements at all on the properties that may maintain their value. But what is impressive is that, at least according to the HBR, by 1935-1936, the state had reclaimed about 84% of the paper value of these properties, which is quite impressive given the nature of the scam.Now, that being said, what are the issues that derive from th is relative to Obama and the mortgage stimulus/bailout? There are two: first, that those who are involved in the bailout/stimulus need to, like the state of New York many moons ago, keep track of all the properties that are recorded on the paper. And second, that the bailout/stimulus money be used to maintain property values to the greatest extent possible given the available liquidity. What the authors of such articles always forget is that there are real people under all this paper.People who have been taken advantage of for the profit of a few. Here, criminal acts have been perpetrated for the sake of quick profits: as a matter of course, it is the homeowner, rather than the schemers, that is punished. Hence, the remainder of this paper will deal with several issues that derive from the stimulus and the historical take on it from our chosen author. 1. Regardless of the nature of the stimulus, all foreclosures must be stopped immediately. It is not the fault fo the homeowner that they have been taken advantage of.Like the New York situation, no foreclosures should proceed even if the taxes cannot be paid. This is a form of reimbursement for the homeowner of the encouragement of such speculation under the fraudulent banner of â€Å"the free market,† which is neither free nor a market: it is the state’s guarantee of personal privilege. 2. All real estate taxes should be suspended for a single year. This will act as a negative stimulus for homeowners. That is, families that own their own homes should be free of real estate taxes for a single year.Like the New York case in the 1930s, the fact is that the regulators and the state was asleep at the switch while all of this was going on. The state, largely captive by the major speculators, refused to take action. Hence, the state that acted as a facilitator to these schemers/speculators. As a result, the state does not deserve the reward of smooth tax collection. If there is to be a moratorium on fore closures, then there also needs to be a cancellation of taxes on real estate for families who own homes, as well as a cancellation of any back taxes on property, etc.3. If the bailout is to proceed, then in addition to the above, the checks (which represent their own money anyway) should be made out to the homeowner, and not to the schemers or â€Å"guaranty firms. † 4. While it might sound extreme, the schemers and their hangers on should be sentenced to work camps for their role in the scam. If these people view money as the result of scam, then they need to be taught that the origin of value is work, that is, labor. Labor, not fancy financial footwork, is the source of wealth.The middlemen and speculators merely shift it around. If the value of the paper in their hands does not match the actual value of the real estate, that missing value did not disappear, it merely changed hands. The above ideas in terms of the bailout/stimulus itself, therefore, should be involved in re couping that value and transferring it to the taxpayer and homeowner. The fact remains that the middle class homeowner does not have an interest group or lobby that protects them. The schemers do, and the poor do, but the middle class taxpayer does not. 5.If the stimulus is to continue, then it seems reasonable to hold tha a certain percentage of the money should go to bringing the poor into the ranks f the middle class by subsidizing their entry into home ownership and financial stability. By the same toke, the state of indebtedness of the middle class should also be alleviated with this same money. In such a case, it will be a bailout in the truest sense of the word: not a bailout fo the financial system, but of individual poor and middle class taxpayers whose surplus value has been shipped to overseas tax havens and â€Å"foundations.† The reality here is that this crisis is systemic, not aberrational. The HBR’s primary sin is that they insist that this scam is not built into the system, but the result of a handful of criminal minds. In this they are wrong. The system has this kind of scam built into its very concept of value. The issues that can â€Å"unpack† this statement can be summarized this way: 1. The question of value: the manipulation of the value of labor is separated from the actual act of labor and work. In other words, the value of labor is taken by the schemers and manipulated for their own profit.But the fact is that that value is not theirs, but the labor that has created it in the first place: this includes the actual physical labor of building a house, but also the intellectual labor that provides the plans, the geography, the blueprints, etc. The surplus value of their work is taken by the likes of Madoff, and then gambled against other similar feats of labor. The fact is that this surplus value belongs to no one but the labor that created it. Hence, the scam is built into the system, and not aberrational. 2.Hence, i f taxes and foreclosures are all eliminated by state fiat (for a certain amount of time) it is merely a matter of financial reparation, not some sort of a gift, or a kind of state benevolence. This money and the labor it represents belongs to the middle class. Hence it is their own money that is being returned to them. 3. The stress in financial circles is not creation. The entire point of labor is to create things out of their natural state that makes life easier for humanity. While this seems elementary, the Wall Street mentality has no concept of it.Speculation itself is a kind of mystification in that speculation is a matter of gambling paper (in fact, representing labor on the ground) against other pieces of paper representing the same thing. When the value of this paper is inflated due to skillful gambling, who is to pay? The very same people who created the real (i. e. non paper) value in the first place. Therefore, the question of the bailout stimulus is misplaced, unless it aims not at the mortgage industry or finance in general, but the middle class whose chronic state of indebtedness is being exacerbated by more and more taxes.While it remains the cases that the system itself is responsible for the crisis, the middle class, always n the lookout for a good deal, made certain they were easy targets for the scam. But this is not the fault of this class–the very backbone of home-ownership. Hence, the schemers need to be punished, and the scammed bailed out, not the other way around. Value must be rejoined to the actual function of labor, rather than the fictional value of paper.