Well-founded criticism abounds that we shouldn't be bailing out large banks that have profited by providing imprudent (and oftentimes scandalous and even criminal) sub-prime loans to homeowners. One oft-mentioned alternative to bailing out the banks is to bail out the homeowners. One might justify this move on the ground that many recipients of sub-prime loans were invited to take out loans with exploding ARMS (adjustable rate mortgages). These are not the ARM's from decades past, mind you. Rather, these are loans that, within a few years of the loan closing, are guaranteed to require monthly payments that the homeowners couldn't afford, regardless of market fluctuations. Imagine, for example, a loan requiring payments of $1,000/month that would rise to $1,800/month within a few years, even when the cost of money stays relatively stable. The mortgage companies offering these types of refinances would be long gone by the time that this kind of loan explodes, forcing many of these homeowners into foreclosure or bankruptcy. In addition to the exploding ARMS, many distressed homeowners were victimized by hidden fees and penalties, including substantial pre-payment penalties, as well as "yield spread premiums," which are essentially under-the-table bribes paid to brokers. But why did so many homeowners sign up for loans they wouldn't be able to afford? Many of them were lied to by the mortgage companies (disclosure: In my law practice, I've represented many of these folks). Other borrowers were clearly irresponsible. Most of of the borrowers suffer from a condition mathematician John Paulos calls “innumeracy”: the “inability to deal comfortably with the fundamental notions of number and chance.” I'm not accusing the borrows of stupidity; rather, they tend to lack a specific skill set, the origin of which often extends all the way back to the grade school struggles with mathematics. The above observations serve as context to a discussion of a potential plan of action. The simple question are these: Should we bail out distressed homeowners? [more . . . ]