Pump-Primed Mortgage Backup and Home Improvement Roger Knights (original version written in 2009) Here's my bailout-the-banks-via-the-borrowers solution.

I suggest that the gov't. make offers such as Rex & Co. used to do; IOW, offering homeowners money now in exchange for a share of future profits on the sale of the house. (Say, giving homeowners 15% of the house's current valuation in exchange for half the upside above its current market value.) This payment would be the premium of a call option on the house-values upside. This money would buffer the effects of the current crunch on the homeowner, allowing him to make his mortgage payments and/or renegotiate his mortgage, while being a good long-term buy for the gov't. Its win/win. It would be less wasteful than other alternatives the administration is likely to consider. And it wouldn't create much moral hazard (i.e., it wouldnt shelter house-flipping speculators from their losses), since borrowers would be deprived of a hefty slice of the upside on their house prices: Going further, I think the gov't should offer to pay for homeimprovement projects for home-owners, again in exchange for a share of future profits on the sale of the housewhose value would be enhanced by these improvements. There are certain desirable home improvements that wouldnt require skilled labor, such as adding fencing, home security, and earthquake protection. Millions could be hired to do these tasks after a bit of videotaped training. This technique could initially be used to fund the purchase and installation of energy-saving enhancements, like insulation, attic fans, south-side awnings, white-painted roofs, and heat pumps. The US needs to cut its energy consumption, and a little governmental nudging is OK to get us there. These initiatives would have these benefits: Theyd stimulate lots of economic activity; upgrade the country's housing stock; make life pleasanter for home-owners and their neighbors (who'd live in an upgraded neighborhood); reduce crime; and be a good investment for the gov't. in the long run. They would also be politically popular. (Assuming they work.)

---------On Nov. 2, 2009, Business Week published a three-sentence version of my letter above (hit page-down twice once there): http://www.businessweek.com/magazine/content/09_44/c4153fee dback078424.htm?chan=magazine+channel_business+views ----------On the Seeking Alpha financial site I got 25 thumbs-down on my suggestion above, presumably because it struck readers as too collectivist. In my defense, I said that I wouldn't have proposed it if I didn't think that the likely alternatives within the political mainstream weren't worse. I'm not in favor of government intervention or dirigisme generally, but, if some sort of second stimulus package is coming, as seems likely, and if unemployment is becoming a focus of the current administration, then what is the best outcome we can hope for? IMO, it would be something that:
1. At least gives the government some collateral in

exchange for what it spends. I.e., there's a chance of its getting its money back, or even profiting, eventually.
2. At least provides benefits for a large number (millions)

of citizens, both the homeowners who'd get upgraded houses at no cost and the currently unemployed.
3. Substantially reduces the amount spent on

unemployment compensation.
4. Can be implemented nearly immediately. 5. Has low bureaucratic overhead and relatively low

likelihood of massive fraud.

6. Can be terminated fairly easily, when conditions

improve. This, I think, is pump-priming at its best. Its like a communal barn-raising. (If only FDR had done more along these lines, hed be remembered more fondly today.) As Brad DeLong wrote, "having the government hire unemployed people to do useful things and paying for it by printing up money at basically zero budgetary cost (right now) is an even better policy. Even if consumers do save all that money, fiscal stimulus on the spending side still has an impact: useful stuff gets done."