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Bailout Critics Say It Won't Fix Underlying Problem

ARI SHAPIRO, host:

As the House gets ready to vote on the financial bailout package, there's a growing consensus that the plan won't fix an underlying problem behind the whole mess: all those foreclosures. Some prominent liberals and conservatives are calling for dramatic action. NPR's Chris Arnold reports.

CHRIS ARNOLD: There are few people who have a keener sense of the direction of the world's financial markets than George Soros. Soros has made billions of dollars by intuiting the rise and fall of currencies and understanding economic turmoil. We spoke with Soros yesterday and asked him just how bad a situation he thinks we're in right now.

Mr. GEORGE SOROS (Chairman, Soros Fund Management, LLC; Founder, The Open Society Institute): We are in the crisis of a lifetime, and it is absolutely essential that the government intervene and preserve the financial system.

ARNOLD: How much time do we have to figure this out and make sure we do it the right way?

Mr. SOROS: Unfortunately, we have no time. This bill, I'm afraid it's not well-considered. It could be much better designed, but there is no time to redesign it.

ARNOLD: For one thing, Soros says, rather than have the government buy all this bad debt, it would be better if it just directly invests cash into the banks to prop them up and gets stock in return. But going forward, he says, there's another fundamental flaw.

Mr. SOROS: It only addresses one side of the problem - that is saving the financial system. But there's a whole other aspect, and that is the housing market and the position of the householders that is not addressed in this legislation.

ARNOLD: Soros says the ongoing wave of foreclosures could push down home prices further, and he thinks that could put tens of millions of homeowners upside down in their loans, where they owe more than their house is worth. That could spark even more foreclosures.

Mr. SOROS: That could spread like a virus, particularly if you have widespread unemployment. And then you have another breakdown. That will be another crisis, and I think it's predictable and it's fixable. We have time to do it. And I think we ought to get started on it.

ARNOLD: Soros thinks the government should take dramatic steps to help refinance people across the country into more affordable loans. So do a lot of other people, both liberals and conservatives. Soros is famously supportive of Democrats, but another loud call to stop foreclosures is coming from a former top aide to President George Bush. Glenn Hubbard is dean of Columbia Business School and was chairman of President Bush's Council of Economic Advisers. He's come up with a pretty bold proposal.

Dr. GLENN HUBBARD (Dean, Columbia Business School; Former Chairman, Council of Economic Advisers): The idea is to allow anyone who's got a primary residence mortgage. No investors, no condo flippers, but everybody who lives in their own home to refinance into a 5.25 percent mortgage. That, of course, is below current mortgage rates.

ARNOLD: Hubbard is not just talking about people facing foreclosure. He's talking about everyone. You, me, all American homeowners or home buyers could get a 5.25 percent, 30-year fixed-rate loan if they can make the payments. Hubbard says the reason to do that is that it would make homes more affordable, give home buyers more bang for their buck, and that would prop up home prices and hopefully stop them from falling further.

Dr. HUBBARD: If we could fix falling housing prices, we would not only help millions of homeowners but also be able to help the balance sheets of financial institutions and reduce the cost of any government intervention.

ARNOLD: People who are upside down in their loans would get some help if they could afford the home that they're living in at the current value. The government and lenders would both share the loss to write the loan down to 95 percent of the value of the house. So people with solid jobs who can basically afford their homes would get to keep them. Chris Mayer is another Columbia University economist working on the plan.

Dr. CHRIS MAYER (Columbia Business School): Those are the people that we all think, as Americans, ought to be able to be able to stay in their homes.

ARNOLD: People familiar with the matter say the administration and Congress have both been talking to Hubbard and Mayer. Soros says he likes the sound of the idea, too, though he would also like to get rid of the perverse incentives that led so many companies to approve so many bad loans. Chris Arnold, NPR News. Transcript provided by NPR, Copyright NPR.

NPR transcripts are created on a rush deadline by an NPR contractor. This text may not be in its final form and may be updated or revised in the future. Accuracy and availability may vary. The authoritative record of NPR’s programming is the audio record.

NPR correspondent Chris Arnold is based in Boston. His reports are heard regularly on NPR's award-winning newsmagazines Morning Edition, All Things Considered, and Weekend Edition. He joined NPR in 1996 and was based in San Francisco before moving to Boston in 2001.