Professor Stiglitz believes that the President's bailout for ailing banks is a win-win-lose proposition with the government coming up with the short end of the stick (Obama's ersatz capitalism, New York Times, April1, 2009: A25). I agree.
There is however a solution that could be a win-win-win.
That would be for the government to focus on the real problem -- delinquent mortgages rather than on the toxic derivatives built on these mortgages.
My plan would represent a major tweaking of the present H4H plan and has the advantages of simplicity.
In H4H the mortgage is written down before the government will partner with a homeowner. My modification would be for government and homeowner to partner on the current value of the mortgage. The homeowner pays what he or she can, the government picks up the rest. Over time, both homeowner and government build up equity in the home based in proportion to the investment they have made.
What will this do?
First housing markets will be stabilized as there will be no foreclosure; people can stay in their homes and their children can continue in their current schools; neighborhoods will be stabilized and, over time, prices will rise again.
Last and not least, the banks will be made whole without the government having to buy these toxic assets and without complicated auctions that no one, least of all the financiers, can understand.
Of course there is a downside: the scoundrels and greed ones who gave and entered into unwise mortgages will be saved. But given the current downspin of the economy, that seems a small price to pay for stability.