Does Bailout Lack Adequate Consumer Help?

The $700 billion bailout plan addresses the mortgage crisis by reaching out to institutions and investors. FDIC Chairperson Sheila Bair and other politicians are baffled by the strategy; why not help homeowners instead?

Now that lawmakers have passed the federal bailout plan, they can get to work on stabilizing the economy. But a debate about the plan's usefulness is seething, and the drama's on par with any episode of Grey's Anatomy.

Homeowners get hope, eventually

For months, lawmakers debated about helping at-risk homeowners. One side argued that it wasn't fair to bail out homeowners who bought homes that they couldn't afford. The other side claimed that providing homeowner assistance would divert a much larger economic crisis. The talks boiled down to a solution known as Hope for Homeowners-a program that encourages loan restructuring, but requires the homeowner to pay for it with an equity sharing arrangement. That program went into effect on October 1, 2008, long after the housing crisis began.

Wall Street commands quick, decisive action

In late-September, President George Bush and Treasury Secretary Henry Paulson asked Congress to authorize the Treasury to purchase bad mortgage-related securities. The request was prompted by the failure of AIG, Lehman Brothers, Fannie Mae, and Freddie Mac-all of which happened just a few weeks prior. By October 3, the two houses of Congress had temporarily resolved their differences on the measure, and the Treasury was authorized to act.

Bair criticizes bailout

If it bothers you that Wall Street commanded such immediate attention, while homeowners are still waiting, you're in good company. FDIC Chairperson Sheila Bair isn't so fond of the bailout plan, either. She's questioning the strategy of addressing the mortgage crisis by helping the institutional investor instead of homeowners. Institutions stand to lose the gobs of money they invested-an activity that normally offers no guarantees-while homeowners are losing their homes.  

Bair isn't alone in her criticism. Presidential candidate John McCain agrees. So does Senator Robert Menendez, (D-NJ) and banking panel Chairperson Christopher Dodd (D-CT). All of them are asking the Bush administration, the Treasury, and Congress why there isn't more help for homeowners. The bailout creates a massive and expensive safety net for financial industry executives and rich investors. But for homeowners and consumers, it only offers a few measly tax breaks.

Dodd goes DIY

Dodd wants to take matters into his own hands. He's drafting a proposal that will incorporate these four initiatives:

• A 90-day moratorium on foreclosures

• More legislation to stamp out predatory lending

• Credit card lending reform

• Bankruptcy reform, to allow greater protections for homes in bankruptcy proceedings

Some of Dodd's initiatives, particularly bankruptcy reform, have historically been unpopular with many politicians. The plot of this story will thicken when Dodd tries to win support on Capitol Hill. In the meantime, homeowners hoping for their own bailout will have to keep waiting.