Thursday, August 28, 2008

"Why Fannie and Freddie Will Survive (Alas)"

Here is the text of yet another letter to the Wall Street Journal. Perhaps if some of our readers will take the text and edit it for their own purposes and send something in, the Journal might take some notice of the Just Third Way.

Holman W. Jenkins, Jr.'s "Business World" column of 08/27/08 ("Why Fannie and Freddie Will Survive (Alas)," Wall Street Journal, A13) identifies the key issue in the mortgage crisis: the two lending giants don't need capital. Ordinary people do.

Fortunately, there is a way within the free market that ordinary people can gain access to the means of acquiring and possessing capital. Called "Capital Homesteading," it is based on the "binary economics" of Louis O. Kelso and Mortimer J. Adler, detailed in their book, The Capitalist Manifesto (1958), now celebrating the 50th anniversary of its publication.

One application of Capital Homesteading that has been developed is called the "Homeowners' Equity Corporation" ("HEC"). A HEC is a proposed for-profit stock corporation whose shareholders would be homeowners in danger of foreclosure. HECs — and there should be many, to provide redundancy, lower risk, and ensure competition in a community — would purchase distressed properties at the current market value. HECs would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve at a rate reflecting transaction costs and a revised risk premium. The homes could then be leased at a realistic market rate to their former owners or new tenants.

The tenant would earn shares in the HEC as lease payments were made sufficient to cover debt service, maintenance, and taxes. When the acquisition loan for a particular property was fully paid, the tenant could exchange his or her HEC shares for title, or continue as a tenant/shareholder at a reduced lease payment, sufficient to cover maintenance and property taxes.

Financing the purchase of properties through the Federal Reserve System and its member banks would cost the taxpayer nothing and be the first step in restoring a currency backed by hard assets instead of government debt. Let the free market decide what happens to Fannie Mae and Freddie Mac. The HEC may require some enabling legislation from Congress to give it powers similar to those currently enjoyed by leveraged ESOPs, but, after that, the State can step aside, and, except for its regulatory role, let people solve their own problems without imposing any more burdens on the taxpayer.

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