I have made it clear I do not believe we need a bailout, but if we do, can we at least have a reasonable one? Here is my proposal.

First, let us not load it down with "economic stimulus" and other unrelated matters. I would like to start a trend in Washington, single purpose bills, which address only one goal each. That way politicians can't create a bill to, say, fund the troops, and then tack on farm subsidies, and then attack subsidy opponents for their lack of support for the troops. It would be hard to do by law, or even congressional rules, but if we just start the tradition, maybe we can enforce it as a custom. So, one law, one purpose. The bailout is just to make up the losses on these bad mortgages the government forced into the flow of commerce.

Second, we can't worry about letting people in default keep their houses. People who didn't take subprime loans lose their houses if they default, so why should poor borrowers who bought houses they can't afford get to hit the lottery? If you don't pay, you don't stay. Simple. The law should not be in the habit of handing out freebies. (Of course, this bailout is a freebie, which is why I oppose it, but since the government created the bad loans, I suppose it is somewhat justified, in some sense.)

Third, we are not here to create a bonanza, or to benefit bottom feeders who buy up bad loans at below market prices then collect from Uncle Sam. The best anyone can hope for is to make up what they laid out, no interest, no appreciation, just to be made whole at the time of purchase.

And now on to the specifics.

If you hold a loan, the first thing you are required to do is prove the purchase price you paid. That is the value of the loan. If you originated the loan, the loan is worth the loan amount, but for anyone else, the loan is worth what they paid for it. In the case of bundled loans, we would obviously need to create some formula to assign value to individual loans, but the principle should still be that loans are worth what was paid. (I won't bore readers with a description of my idea of interest weighted values for bundled loans to account for relative risk. That would just be cruel to inflict upon you.)

The first obligation before collecting is to show that the loan is in default. And by "in default" I mean really in default. Not a "slow pay", not "it has 3 30's", I mean there has been no activity for 120 days, that there is no money coming in at all. When you buy a 12% interest loan you have to know you are going to be racking up the 60-day late notices, so you can't claim that is in default. By default I mean there has been no money for several months and no sign any is ever coming in again.

The second obligation before collecting anything would be to try to collect on the loan. If you are capable of doing so as part of your normal business activities, you must try to collect the payments owed from the borrower. The minimal amount of effort can be specified by congress, but at the very least, there must be demand letters presented.

Third, if your collection efforts fail, you must foreclose and sell the property. The value of that sale will be offset against the price at which you purchased the loan. That will give you the amount which you will be reimbursed.

If you can't normally handle collections, then you must make an effort to sell the loan to someone who does perform such collections. You are only obligated to sell if you can get a price equal to, say, 90% of your purchase price, but if you could sell at that price, and do not do so, you forgo any reimbursement.

And, to prevent fraud on the part of buyers of loans, we should set up a registry. Any loan which falls under the bailout has to be registered upon sale, and the purchase price, as well as the price at which the seller originally purchased it are both recorded, and the lower of the two are used as the value. This is to prevent industrious individuals from selling loans back and forth at increasing values to drive up their book value and collect inflated amounts form the government.

Finally, there will be a short time horizon, say a year. If you have not completed all the required steps and filed for compensation, then you  must not be in such dire straights that you need compensation. That way we are not stuck with a perpetual new bureaucracy which could be expanded to handle future bailouts. We know this will end someday.

I realize this isn't perfect, and I oppose a bailout in any form. But if we must have a bailout, why can't we have something simple like this, rather than the convoluted laws that are now being bandied about?

Obviously, because a simple law leaves no room for congress to tack on pet projects, and it does not provide any gains for important constituencies. And, of course, a law which required people to try to help themselves first would be considered "heartless", we can't ask people to help themselves.

So we will never see anything as simple as a bailout which simply makes up losses. Instead we see even nominally conservative politicians offering convoluted, elaborate, intrusive schemes.

POSTSCRIPT

Actually, my 90% sale price may be overly generous. People who are in the practice of buying up subprime loans anticipate a certain percentage of defaults even when the government doesn't short circuit the system.

Perhaps a more fair system would be to find out what the normal default rate is on comparable loans in the past three or five years. If ti is say 25%, then you will be required to sell loans at anything down to 75% of purchase price, to mirror the anticipated losses. That way we won't be reimbursing at a rate greater than they would have expected had the loan performed normally.

And that, truly, is one of the big lies of the bailout. The idea that subprime loans were previously stable instruments that only now are failing. They were risky investments all along. To talk about them as if blue chips failed is bizarre.