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Today’s Wall Street Journal has an interesting piece on what the Treasury Department’s bailout plan does not address: the root cause of the financial crisis. Apparently, the funds do little, directly, to prevent foreclosures and stabilize home prices. Instead the amorphous blob of billions—-as I like to think of it—-will go to “taking stakes in major financial institutions and temporarily guaranteeing certain new bank debt,” which “could cushion the economy and thus the housing market from further blows,” according to the Journal. Here’s why foreclosures are tied to falling home prices:
As more Americans end up “under water,” or owing more on homes than they are currently worth, more people are likely to walk away from mortgages, causing foreclosures to rise further and adding to negative market psychology.
The new Hope for Homeowners program is supposed to support people that need help. Unfortunately, its scope is limited, as the article points out:
One problem with the refinancing program is that it will help only 400,000 troubled homeowners, according to some estimates, well short of the nearly 12 million Americans who owe more on their mortgages than their homes are worth and are in danger of default.
This is why people didn’t support the bailout initially! Because they had no clue how it was going to help them! And, still, where is the explanation?