Monday, October 6, 2008

How the Federal Government Can Bailout the Taxpayer

I was tempted to title this posting, "Everything Old is New Again." Frankly, the situation faced now by the U.S. federal government (and, if my information is correct, the government of the Republic of Ireland, at least in part, which just bailed out the six largest banks in the country) is analogous to that which faced the United States in 1862: a seemingly senseless and increasingly unpopular war, a crumbling economy, high taxes, eroding national credit, inflation of the currency . . . the list could go on endlessly.

What paved the way for the economic rebirth of the United States after the Civil War was Abraham Lincoln's 1862 Homestead Act. This "privatized" the immense holdings of federal land in the west, and provided both the resource base and market for the industrial expansion of the eastern states. This led to the United States, which in the early 19th century was a very minor player in commerce and industrial development on the global stage, eventually becoming a world leader in industry, commerce, and agriculture.

Our proposed "Homeowners' Equity Corporation," or "HEC," would do much the same, only more. A HEC is a proposed for-profit, professionally-managed 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 their current market values.

HECs — like leveraged ESOPs — would obtain acquisition loans from commercial banks, which in turn would discount the loans at the local Federal Reserve under Section 13 of the Federal Reserve Act at a rate reflecting transaction costs and a revised risk premium, thereby creating an asset-backed currency. 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. The shares could be retained within the HEC in segregated, directly-owned accounts, or accumulated in a "Capital Homestead Account." 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, administration, 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.

Donations to CESJ are tax deductible in the United States under IRC § 501(c)(3):





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