Last week I posted a link to and some quotes from an article in the Times about the problems caused in unwinding securitized loans. Today's Times has a column by regular op-ed columnist and Princeton economist Paul Krugman, "Workouts, Not Bailouts," in which Krugman proposes a solution to the problem. A quote:
This looks to me like a clear case for government intervention: there’s a serious market failure, and fixing that failure could greatly help thousands, maybe hundreds of thousands, of Americans. The federal government shouldn’t be providing bailouts, but it should be helping to arrange workouts.
And we’ve done this sort of thing before — for third-world countries, not for U.S. citizens. * * *
The mechanics of a domestic version would need a lot of work, from lawyers as well as financial experts. My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms. But I’m happy to listen to better ideas.
