![\"The](\"https:\/\/i0.wp.com\/www.dougsbriefcase.com\/blog\/wp-content\/uploads\/2013\/06\/Susette-Kelo-house.jpg\")
<\/a>The gov\u00adern\u00adment seized the land on which Susette Kelo\u2019s house once stood. Will the next bailout involve gov\u00adern\u00adment seizure of pri\u00advate invest\u00adments for \u201cpub\u00adlic use?\u201d [Cred\u00adit: money.cnn.com]<\/p><\/div>Thought you\u2019d heard the last of gov\u00adern\u00adment bailouts? Think again. The Fed\u00ader\u00adal Reserve Bank of New York, which played a cen\u00adtral role in the leg\u00adendary bailouts of 2008 and beyond, has pub\u00adlished a piece call\u00ading on fed\u00ader\u00adal, state and local gov\u00adern\u00adments to join forces in what could be the most far-reach\u00ading bailout of all time. And here\u2019s the kick\u00ader: it is all ben\u00ade\u00adfit and no cost. No, really.\n
The article\u2019s title says it all \u2014 \u201c<\/span>Pay\u00ading Paul and Rob\u00adbing No One.\u201d <\/a>The author, Robert Hock\u00adett, a Cor\u00adnell Uni\u00adver\u00adsi\u00adty pro\u00adfes\u00adsor, believes he has found the El Dora\u00addo of eco\u00adnom\u00adics: the free lunch. Under his plan, mil\u00adlions of under\u00adwa\u00adter home\u00adown\u00aders (peo\u00adple who owe more on their mort\u00adgages than their homes are worth) would have their mort\u00adgage debts slashed and their month\u00adly pay\u00adments eased. By reduc\u00ading the num\u00adber of fore\u00adclo\u00adsures, Hock\u00adett tells us, the mort\u00adgage write\u00addowns would ben\u00ade\u00adfit not only the bailed-out home\u00adown\u00aders them\u00adselves, but also their neigh\u00adbors (few\u00ader vacant hous\u00ades), their local gov\u00adern\u00adments (since the bailed-out res\u00adi\u00addents will be pay\u00ading their prop\u00ader\u00adty tax\u00ades) and the nation\u00adal econ\u00ado\u00admy (since they will be spend\u00ading the mon\u00adey they save on their mort\u00adgage pay\u00adments on some\u00adthing else).<\/p>\n That Hock\u00adett is call\u00ading for anoth\u00ader hous\u00ading bailout prob\u00ada\u00adbly comes as a bit of sur\u00adprise to most read\u00aders. Recent head\u00adlines sug\u00adgest that the hous\u00ading mar\u00adket is back: aver\u00adage prices are up<\/a>,<\/span> along with hous\u00ading starts<\/a>,<\/span> sales of new<\/a> and exist\u00ading<\/a> homes and con\u00adstruc\u00adtion jobs<\/a>. Why fix what ain\u2019t broke?<\/p>\n Hock\u00adett help\u00adful\u00adly digs beneath the cheery head\u00adlines and finds less cheery news. Rely\u00ading on data from Core\u00adL\u00adog\u00adic, Hock\u00adett recites a litany of unpleas\u00adant num\u00adbers. Hous\u00ading prices, though head\u00aded in the right direc\u00adtion, are still 30 per\u00adcent below their peak val\u00adue, he tells us. Worse still, 11 mil\u00adlion mort\u00adgages \u2014 near\u00adly one in four with loans out\u00adstand\u00ading \u2014 are under\u00adwa\u00adter. Of these, he esti\u00admates that 3\u20134 mil\u00adlion are in default, fore\u00adclo\u00adsure, or already fore\u00adclosed and await\u00ading liq\u00adui\u00adda\u00adtion. Anoth\u00ader 2 mil\u00adlion home\u00adown\u00aders are in dis\u00adtress, hav\u00ading missed two to four payments.<\/p>\n One solu\u00adtion would be for the banks that hold these mort\u00adgages to vol\u00adun\u00adtar\u00adi\u00adly take loss\u00ades by writ\u00ading down the debt. If a per\u00adson owes, say, $400,000 on a house that\u2019s only worth $300,000, the bank can just tear up the mort\u00adgage and issue a new one for $300,000. The bank, of course, would eat the loss, but the home\u00adown\u00ader is bet\u00adter off and the bank is less like\u00adly to be forced to ini\u00adti\u00adate fore\u00adclo\u00adsure proceedings.<\/p>\n But things just aren\u2019t that sim\u00adple, as Hock\u00adett explains. While banks orig\u00adi\u00adnat\u00aded most of these dis\u00adtressed mort\u00adgages, they no longer own them. Banks typ\u00adi\u00adcal\u00adly sold the mort\u00adgages to enti\u00adties, includ\u00ading pri\u00advate label secu\u00adri\u00adti\u00adza\u00adtion trusts, that bun\u00addled the mort\u00adgages togeth\u00ader into secu\u00adri\u00adties and sold them to investors around the world. Since no sin\u00adgle per\u00adson or bank owns that hypo\u00adthet\u00adi\u00adcal $400,000 under\u00adwa\u00adter mort\u00adgage, no sin\u00adgle enti\u00adty has the author\u00adi\u00adty to write it down to $300,000.<\/p>\n Most con\u00adtracts that gov\u00adern these mort\u00adgage-backed secu\u00adri\u00adties, Hock\u00adett notes, require a super\u00adma\u00adjor\u00adi\u00adty of investors to agree to write down the debt and take a loss. Good luck with that. Own\u00aders of these secu\u00adri\u00adties include indi\u00advid\u00adu\u00adals, pen\u00adsion funds, foun\u00adda\u00adtions, hedge funds, and for\u00adeign gov\u00adern\u00adments, to name a few. Even if they all thought it was a good idea to take a 25 per\u00adcent loss on their invest\u00adments, the prac\u00adti\u00adcal prob\u00adlems of putting that to a vote are insu\u00adper\u00ada\u00adble. And with\u00adout such a vote, the trustees and loan ser\u00advicers could not legal\u00adly agree to the write\u00addown. As Hock\u00adett puts it, there is no \u201ccol\u00adlec\u00adtive agent\u201d empow\u00adered to bail out dis\u00adtressed homeowners.<\/p>\n And that is where Hock\u00adett wants the gov\u00adern\u00adment to step in. If the investors won\u2019t \u2013 or, as a prac\u00adti\u00adcal mat\u00adter, can\u2019t \u2013 sell their mort\u00adgage-backed secu\u00adri\u00adties at a steep loss and allow the under\u00adly\u00ading mort\u00adgages to be restruc\u00adtured, the gov\u00adern\u00adment should take the secu\u00adri\u00adties away from them. The gov\u00adern\u00adment could then write down the val\u00adues of the mort\u00adgages and resell them to investors, includ\u00ading the same investors who were forced to accept the government\u2019s take-it-or-leave-it price.<\/p>\n \u201c<\/span>Solv\u00ading a col\u00adlec\u00adtive action prob\u00adlem requires a col\u00adlec\u00adtive agent,\u201d he tells us. \u201cAs it hap\u00adpens, gov\u00adern\u00adments are also col\u00adlec\u00adtive agents. They are like\u00adwise the sole enti\u00adties autho\u00adrized to side\u00adstep the con\u00adtract rigidi\u00adties of the pool\u00ading and ser\u00advic\u00ading agree\u00adments that stand in the way of broad write\u00addowns for [mort\u00adgages]. But which gov\u00adern\u00adment should take up this man\u00adtle \u2013 fed\u00ader\u00adal, state or local?\u201d<\/p><\/blockquote>\n Hockett\u2019s answer: all of the above.<\/p>\n \u201c<\/span>Using their tra\u00addi\u00adtion\u00adal emi\u00adnent domain pow\u00aders \u2026 states or their sub-units can com\u00adpul\u00adso\u00adri\u00adly pur\u00adchase under\u00adwa\u00adter loans from pri\u00advate-label secu\u00adri\u00adti\u00adza\u00adtion trusts at fair val\u00adue, deal\u00ading direct\u00adly with trustees and side\u00adstep\u00adping all con\u00adtract rigidi\u00adties. They can then write down the loans \u2026 If need be, emi\u00adnent domain author\u00adi\u00adty can also be used to take sec\u00adond-lien loans at fair value.\u201d<\/p><\/blockquote>\n So local gov\u00adern\u00adments, rely\u00ading on the doc\u00adtrine of emi\u00adnent domain, should sim\u00adply \u201cside\u00adstep all con\u00adtract rigidi\u00adties\u201d and \u201ccom\u00adpul\u00adso\u00adri\u00adly pur\u00adchase\u201d mort\u00adgage-backed secu\u00adri\u00adties that include under\u00adwa\u00adter loans. Gov\u00adern\u00adment should make investors an offer they can\u2019t refuse: sell us your mort\u00adgage-backed bond at a \u201cfair price\u201d \u2013 not what you paid for it and not what you think it might be worth if you held onto it for anoth\u00ader few years \u2013 and sell it to us now.<\/p>\n And where will the states and their sub-units come up with the cash to pay the investors what they and a judge deem a fair price? From the fed\u00ader\u00adal gov\u00adern\u00adment, of course, although the orig\u00adi\u00adnal investors will be allowed to buy back the secu\u00adri\u00adties, assum\u00ading they trust the gov\u00adern\u00adment not to screw them again. Over the longer haul, the gov\u00adern\u00adment will turn a prof\u00adit on this trans\u00adac\u00adtion, so long as the home\u00adown\u00aders stay cur\u00adrent on their new, low\u00ader pay\u00adments and the val\u00adue of their prop\u00ader\u00adties doesn\u2019t dip again. And though Hock\u00adett swears that every\u00adone wins under his scheme, investors that are forced to sell secu\u00adri\u00adties they don\u2019t want to sell at a time and price of the government\u2019s choos\u00ading may feel dif\u00adfer\u00adent\u00adly. The investors are the Peter that Hock\u00adett robs to pay Paul. So much for the free lunch.<\/p>\n But I want to look past that, along with the innu\u00admer\u00adable prac\u00adti\u00adcal prob\u00adlems asso\u00adci\u00adat\u00aded with the gov\u00adern\u00adment seiz\u00ading pri\u00advate invest\u00adments, tear\u00ading up mort\u00adgages, writ\u00ading new ones and sell\u00ading them to investors, not to men\u00adtion the prob\u00adlem of where the gov\u00adern\u00adment will find the mon\u00adey to pull off trans\u00adac\u00adtions involv\u00ading as many as 11 mil\u00adlion homeowners.<\/p>\n Even if all of these prac\u00adti\u00adcal prob\u00adlems could be worked out, the whole scheme depends on gov\u00adern\u00adment buy\u00ading some\u00adthing from peo\u00adple who don\u2019t want to sell it. Hock\u00adett relies on the pow\u00ader of emi\u00adnent domain, men\u00adtioned in the Constitution\u2019s Fifth Amend\u00adment<\/a>,<\/span> which pro\u00advides, \u201cnor shall pri\u00advate prop\u00ader\u00adty be tak\u00aden for pub\u00adlic use, with\u00adout just compensation.\u201d<\/p>\n Known as the \u201cTak\u00adings Clause,\u201d this pro\u00advi\u00adsion stands against the prac\u00adtice that enabled kings to enlarge their estates by seiz\u00ading people\u2019s prop\u00ader\u00adty. Under the Fifth Amend\u00adment, the gov\u00adern\u00adment is empow\u00adered to take prop\u00ader\u00adty for \u201cpub\u00adlic use,\u201d but only if it pro\u00advides the own\u00ader \u201cjust com\u00adpen\u00adsa\u00adtion.\u201d The Founders meant this as a lim\u00adi\u00adta\u00adtion on gov\u00adern\u00adment, pre\u00advent\u00ading it from fol\u00adlow\u00ading the roy\u00adal prac\u00adtice of help\u00ading them\u00adselves to oth\u00ader people\u2019s prop\u00ader\u00adty. For one, it requires the gov\u00adern\u00adment to pro\u00advide the own\u00aders \u201cjust com\u00adpen\u00adsa\u00adtion.\u201d For anoth\u00ader, they can only acquire a prop\u00ader\u00adty for \u201cpub\u00adlic use\u201d; they can\u2019t take prop\u00ader\u00adty from one pri\u00advate per\u00adson to ben\u00ade\u00adfit another.<\/p>\n At least the Con\u00adsti\u00adtu\u00adtion says they can\u2019t. The Court has dilut\u00aded the \u201cpub\u00adlic use\u201d stric\u00adture in recent years, as a pub\u00adli\u00adca\u00adtion of the Michi\u00adgan Bar<\/a> has noted:<\/p>\n \u201c<\/span>While tra\u00addi\u00adtion\u00adal\u00adly used to build roads, water\u00adways, defense instal\u00adla\u00adtions, gov\u00adern\u00adment and pub\u00adlic build\u00adings, as well as the inter\u00adstate high\u00adway sys\u00adtem, it has in recent years become a favored method for urban devel\u00adop\u00adment, cre\u00adat\u00ading shop\u00adping malls, and build\u00ading big-box retail stores.\u201d<\/p><\/blockquote>\n The muta\u00adtion from \u201cpub\u00adlic use\u201d to \u201cpub\u00adlic pur\u00adpose\u201d was most famous\u00adly on dis\u00adplay a few years back in New Lon\u00addon, Con\u00adnecti\u00adcut. City fathers were dan\u00adgling tax breaks and oth\u00ader good\u00adies to induce phar\u00adma\u00adceu\u00adti\u00adcal giant Pfiz\u00ader to build a new plant in their fair city. With the pro\u00adposed new Pfiz\u00ader plant as its crown jew\u00adel, the city\u2019s urban devel\u00adop\u00adment plan broad\u00adened to include plans for a sprawl\u00ading res\u00adi\u00adden\u00adtial and com\u00admer\u00adcial cen\u00adter, com\u00adplete with restau\u00adrants, retail stores, a hotel and a \u201csmall urban village.\u201d<\/p>\n An eco\u00adnom\u00adic devel\u00adop\u00adment cor\u00adpo\u00adra\u00adtion char\u00adtered to over\u00adsee the project soon start\u00aded to buy up the prop\u00ader\u00adty from pri\u00advate own\u00aders and to use emi\u00adnent domain to seize it from own\u00aders who object\u00aded. Susette Kelo was one of those objec\u00adtors. A mid\u00addle class woman trained as a nurse, she had recent\u00adly bought her house and was unwill\u00ading to part with it. Kelo and her neigh\u00adbors sued the city.<\/p>\n Their case land\u00aded at the US<\/span> Supreme Court in 2005. Kelo and her fel\u00adlow lit\u00adi\u00adgants argued that tak\u00ading their prop\u00ader\u00adty and sell\u00ading it to cor\u00adpo\u00adrate inter\u00adests did not sat\u00adis\u00adfy the Fifth Amendment\u2019s \u201cpub\u00adlic use\u201d require\u00adment. By a 5\u20134 major\u00adi\u00adty, she lost, with the court hold\u00ading that this gov\u00adern\u00adment-com\u00adpelled trans\u00adfer of prop\u00ader\u00adty from one pri\u00advate own\u00ader to anoth\u00ader served a \u201cpub\u00adlic pur\u00adpose\u201d that met the Constitution\u2019s \u201cpub\u00adlic use\u201d test. Writ\u00ading for the four dis\u00adsent\u00ading jus\u00adtices, San\u00addra Day O\u2019Connor<\/a> said:<\/p>\n \u201c<\/span>Today the Court aban\u00addons this long-held, basic lim\u00adi\u00adta\u00adtion on gov\u00adern\u00adment pow\u00ader. Under the ban\u00adner of eco\u00adnom\u00adic devel\u00adop\u00adment, all pri\u00advate prop\u00ader\u00adty is now vul\u00adner\u00ada\u00adble to being tak\u00aden and trans\u00adferred to anoth\u00ader pri\u00advate own\u00ader, so long as it might be upgraded\u2014i. e., giv\u00aden to an own\u00ader who will use it in a way that the leg\u00adis\u00adla\u00adture deems more ben\u00ade\u00adfi\u00adcial to the public\u2014in the process. To rea\u00adson, as the Court does, that the inci\u00adden\u00adtal pub\u00adlic ben\u00ade\u00adfits result\u00ading from the sub\u00adse\u00adquent ordi\u00adnary use of pri\u00advate prop\u00ader\u00adty ren\u00adder eco\u00adnom\u00adic devel\u00adop\u00adment tak\u00adings \u2018for pub\u00adlic use\u2019 is to wash out any dis\u00adtinc\u00adtion between pri\u00advate and pub\u00adlic use of property\u2014and there\u00adby effec\u00adtive\u00adly to delete the words \u2018for pub\u00adlic use\u2019 from the Tak\u00adings Clause of the Fifth Amend\u00adment. Accord\u00ading\u00adly I respect\u00adful\u00adly dissent.\u201d<\/p><\/blockquote>\n The Kelo <\/em>rul\u00ading, O\u2019Con\u00adnor says, shreds the Fifth Amend\u00admen\u00adt\u2019s \u201cpub\u00adlic use\u201d lim\u00adi\u00adta\u00adtion. The Court allowed the gov\u00adern\u00adment to seize Susette Kelo\u2019s prop\u00ader\u00adty, not because it was need\u00aded for a road or a school, but because it thought that pri\u00advate devel\u00adop\u00aders could exe\u00adcute a project that would gen\u00ader\u00adate more tax revenue.<\/p>\n Hock\u00adett seeks to exploit Kelo\u2019s<\/em> expan\u00adsive inter\u00adpre\u00adta\u00adtion of the Tak\u00adings Clause that allows gov\u00adern\u00adment to com\u00adpel the trans\u00adfer of prop\u00ader\u00adty to ben\u00ade\u00adfit one pri\u00advate actor over anoth\u00ader. He wants the gov\u00adern\u00adment to seize the assets of investors to ben\u00ade\u00adfit mort\u00adgage hold\u00aders. He argues that his plan would serve a \u201cpub\u00adlic pur\u00adpose\u201d by help\u00ading com\u00admu\u00adni\u00adties still reel\u00ading from the real estate crash of 2008. If the City of New Lon\u00addon ful\u00adfilled a \u201cpub\u00adlic pur\u00adpose\u201d by forc\u00ading Susette Kelo to sell her prop\u00ader\u00adty for the ben\u00ade\u00adfit of pri\u00advate devel\u00adop\u00aders, wouldn\u2019t a forced sale of mort\u00adgage-backed secu\u00adri\u00adties to write down the mort\u00adgages of dis\u00adtressed home\u00adown\u00aders serve a sim\u00adi\u00adlar\u00adly \u201cpub\u00adlic pur\u00adpose?\u201d If aggres\u00adsive gov\u00adern\u00adment inter\u00adven\u00adtion in the hous\u00ading mar\u00adket so far has fall\u00aden short, why not try some\u00adthing real\u00adly aggressive?<\/p>\n The sober\u00ading results of such aggres\u00adsive gov\u00adern\u00adment over\u00adreach were on dis\u00adplay in April when Susette Kelo tes\u00adti\u00adfied before the House Judi\u00adcia\u00adry Com\u00admit\u00adtee<\/a>. She called on law\u00admak\u00aders to restrain the use of emi\u00adnent domain pow\u00ader that Hock\u00adett wants to expand.<\/p>\n \u201c<\/span>My name is Susette Kelo,\u201d she told the com\u00admit\u00adtee, \u201cand I used to live in New Lon\u00addon, CT<\/span>.\u201d<\/p>\n She went on to describe how she had \u201cfinal\u00adly found this per\u00adfect lit\u00adtle Vic\u00adto\u00adri\u00adan cot\u00adtage with beau\u00adti\u00adful views of the water\u201d in 1997. \u201cI paint\u00aded it salmon pink,\u201d she said, \u201cbecause that is my favorite color.\u201d<\/p>\n But the gov\u00adern\u00adment also had its eyes on her dream house. Return\u00ading home on the day before Thanks\u00adgiv\u00ading in 2000, she found a note from the New Lon\u00addon sher\u00adiff taped to her door, \u201cstat\u00ading that the home had been con\u00addemned by the City of New London.\u201d<\/p>\n Kelo lost her bat\u00adtle with the gov\u00adern\u00adment. But in the end, iron\u00adi\u00adcal\u00adly, she fared bet\u00adter than they. She was able to move her Vic\u00adto\u00adri\u00adan cot\u00adtage out of the city and onto anoth\u00ader property.<\/p>\n The out\u00adcome of the city\u2019s urban renew\u00adal project was not so hap\u00adpy. In uphold\u00ading the city government\u2019s pow\u00ader to seize Kelo\u2019s prop\u00ader\u00adty, the major\u00adi\u00adty of jus\u00adtices waxed rhap\u00adsod\u00adic about the plan\u2019s pre\u00adsumed pub\u00adlic benefits:<\/p>\n \u201c<\/span>The City has care\u00adful\u00adly for\u00admu\u00adlat\u00aded an eco\u00adnom\u00adic devel\u00adop\u00adment plan,\u201d the Court wrote, \u201cthat it believes will pro\u00advide appre\u00adcia\u00adble ben\u00ade\u00adfits to the com\u00admu\u00adni\u00adty, including\u2014but by no means lim\u00adit\u00aded to\u2014new jobs and increased tax rev\u00adenue. As with oth\u00ader exer\u00adcis\u00ades in urban plan\u00adning and devel\u00adop\u00adment, the City is endeav\u00ador\u00ading to coor\u00addi\u00adnate a vari\u00adety of com\u00admer\u00adcial, res\u00adi\u00adden\u00adtial, and recre\u00adation\u00adal uses of land, with the hope that they will form a whole greater than the sum of its parts.\u201d<\/p><\/blockquote>\n But the city\u2019s actions did not pro\u00adduce the Court\u2019s imag\u00adined results. Pfiz\u00ader aban\u00addoned its plans to build a new cam\u00adpus there in 2009. Investors lost inter\u00adest in the adja\u00adcent land and the pri\u00advate devel\u00adop\u00ader who was in charge of the works pulled out. The Seat\u00adtle Times<\/a> recent\u00adly described the area where Susette Kelo\u2019s house once stood:<\/p>\n \u201c<\/span>Weeds, glass, bricks, pieces of pipe and shin\u00adgle splin\u00adters have replaced the knot of aging homes at the site of the nation\u2019s most noto\u00adri\u00adous emi\u00adnent domain project. There are a few signs of life: Fer\u00adal cats glare at vis\u00adi\u00adtors from a minia\u00adture jun\u00adgle of Queen Anne\u2019s lace, this\u00adtle and gold\u00aden\u00adrod. Gulls swoop between the lot\u2019s tow\u00ader\u00ading trees and the adja\u00adcent sewage treat\u00adment plant.\u201d<\/p><\/blockquote>\n Pol\u00adi\u00adcy\u00admak\u00aders should pon\u00adder that out\u00adcome should they ever be tempt\u00aded to imple\u00adment Pro\u00adfes\u00adsor Hockett\u2019s far more ambi\u00adtious gov\u00adern\u00adment pow\u00ader grab for a \u201cpub\u00adlic purpose.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":" Thought you\u2019d heard the last about gov\u00adern\u00adment bailouts? Nope. A Cor\u00adnell pro\u00adfes\u00adsor is urg\u00ading the gov\u00adern\u00adment to adopt a brand new bailout scheme. And he says it\u2019s all ben\u00ade\u00adfit and no cost. No, real\u00adly. Con\u00adtin\u00adue read\u00ading