Index fund maven John Bogle -- founder and former CEO of the Vanguard Group -- is saying the success of the U.S. economy now hinges on helping mortgage holders through a new federal financial bailout.
"We once said, we have companies that are too large to fail and homeowners that are too small to bail. We have to help the mortgage owners; that's the only way to get around it," Bogle told CNBC.
Modifications of the interest rate and payment terms for mortgages need to be part of the homeowner bailout, said Bogle.
"Rewriting the terms, the maturities, the payments, the interest rates all have to be part of that," said Bogle. "That's going to be a tough job."
Most provocatively, Bogle said that a large staff of government bureaucrats is going to need to be dedicated to the task of managing this proposed bailout and other bailouts of struggling sectors of the U.S. economy.
But, it is worth the effort, and costs may be offset a bit, by the fact that the government is giving capital to banks across the U.S. at a very cheap price. Government bureaucrats should focus on doing what they have been authorized to do already by legislation, Bogle said.
"The TARP doesn't even seem to be concerned, at the moment, about the acquisition of troubled assets. Dubai would pay more than Washington D.C. for capital in these banks," said Bogle.
Many financial analysts fear that rising mortgage defaults may lead to a record number of foreclosures and a further weakening of the housing market.
But, this concern must be balanced with the recognition that temporary measures often become permanent laws that last well beyond the crisis that generating them, eventually causing significant harm down the line for the economy.
The problem still facing financial markets and the economy stems from the historically low interest rates that prompted millions of Americans to refinance their fixed rate mortgages. These lower interest rates meant that buyers could afford larger mortgages.
Effectively, a bidding war broke out that raised the prices of homes.
Thus, not all policy experts agree with Bogle's take on the bailout.
An analysis by the Heritage Foundation released on Friday indicates that the federal government does not have the authority to use the TARP to aid consumers, or automakers, only financial institutions.
“More problematic is Treasury's lack of statutory authority to direct TARP dollars. While the statute, passed by Congress in October, grants the Secretary extremely broad discretion to decide how to employ the funds, it clearly limits the recipients to financial institutions,” according to the Heritage Foundation analysis.
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