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Bloomberg View: Betting on Solar Energy; Fixing the Mortgage Mess


HOW GOVERNMENT SHOULD BET THE SUN

In a cringeworthy failure, California solar panel maker Solyndra collapsed on Aug. 31 and filed for bankruptcy, just two years after winning $535 million of federal loan guarantees. Solyndra’s rapid rise and fall should have played out entirely in the private sector. Silicon Valley is thick with venture capitalists willing to finance risky, iconoclastic startups. Ever since its founding in 2005, Solyndra had no trouble finding such supporters.

All told, Solyndra raised $1.1 billion from private sources. The extra federal support ended up having the well-intended but unfortunate effect of letting Solyndra ramp up manufacturing in a hurry, even as evidence was emerging that the company had badly misread the changing economics of the solar panel market. A few years ago, prices for the silicon wafers used in most flat solar panels were soaring. Solyndra proposed building an entirely different panel, using cylindrical tubes coated with thin films of copper-indium-gallium-selenide that would pick up light from any direction.

In funding documents, Solyndra insisted that its tubes would be far cheaper than the silicon alternative. No such luck. Silicon prices have plunged nearly 90 percent from their peak in 2008, making conventional panels the better bargains. Solyndra now blames its cost disadvantage on the Chinese government’s willingness to subsidize its own solar panel industry. Such complaints sound petulant, given Solyndra’s own reliance on government support.

A day after Solyndra’s failure, it was heartening to see the Energy Dept. award a total of $145 million to 69 solar energy projects taking place in universities, government research labs, and major corporations. Many of those grants are for as little as $750,000 apiece. Each batch of grants targets a current impediment to cheaper solar power—then provides initial support for a dozen or more different ideas that might lead to energy breakthroughs.

Steering small amounts of money to many early stage researchers is a far better way for government to operate. Misfires don’t cost much. Successes can be huge. Private-funding alternatives are patchy at best, because these researchers’ ideas might not pay off for a decade or more. Pouring half a billion dollars into a single company is asking for trouble. Making lots of small grants to cutting-edge research labs is wise.

 

ON HOMEOWNER DEBT, THE PRINCIPAL’S THE THING

The President’s advisers are studying what economists such as Morgan Stanley’s David Greenlaw have called a “slam-dunk stimulus.” The idea: Push mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) to refinance the loans of millions of homeowners who otherwise wouldn’t qualify because they owe more than their houses are worth. With mortgage rates at extreme lows, such a move could free up billions of dollars in spending money. Also, by focusing on borrowers who are current on their payments, it would reward homeowners who have acted responsibly.

Attractive as it sounds, the slam-dunk would in some ways miss the hoop. For one thing, the potential boost would be small in the context of the $15 trillion U.S. economy—an added $20 billion to $40 billion for U.S. consumers, according to economists at Goldman Sachs, enough to increase annual economic growth by only 0.1 to 0.3 percentage points. Beyond that, the sudden demand for new mortgages could defeat its own purpose by prompting banks to push rates back up again. Most important, the idea ignores a defining feature of the current economic slump: Responsible people who are still deep in debt don’t go out and spend.

A better strategy would be to avert foreclosures by writing down the principal on loans. Consider, for example, a $100,000 loan on a house that’s now worth $60,000. A 50 percent writedown, assuming it made the loan affordable to the borrower, would leave the lender with an asset worth $50,000 and a homeowner motivated to invest time and effort in increasing the house’s value.

That’s a lot more than what the lender would probably recover by ultimately selling the house after years of foreclosure costs and further depreciation. As of August, recoveries on defaulted loans made in 2006 and 2007 without government guarantees averaged 34 percent of the original balance and were headed down, according to data compiled by Amherst Securities Group.

If done on a grand scale, principal reductions would go a long way toward eliminating the debt burden that is hindering the recovery. Some 13.3 million U.S. mortgage borrowers owe almost as much as or more than their homes are worth, according to data provider CoreLogic (CLGX). Writedowns for all of them could cut the country’s ratio of household debt to disposable income from the current 115 percent to 100 percent.

Crucially, the debt relief would come at minimal added cost to the U.S. taxpayer. Banks, including Fannie Mae and Freddie Mac, might require further bailouts right away, but those would probably be more expensive if put off longer. To give taxpayers some benefit and reduce any incentive for borrowers to abuse the program, the government could levy a tax on price gains enjoyed by homeowners who receive principal relief.

The solution wouldn’t be entirely fair. It wouldn’t help people who were careful not to borrow more than they could afford and so avoided getting caught up in the housing boom. But those people, too, stand to gain if their neighbors keep up their houses and the economy improves—and they would be worse off if millions of their fellow Americans remain in a 21st  century version of debtor’s prison.

To read Jonathan Weil on saving banks to sue them, and Robert Wright on security and instinct, go to: Bloomberg.com/view.

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Companies Mentioned

  • FNMA
    (Federal National Mortgage Association)
    • $3.15 USD
    • -0.15
    • -4.76%
  • FMCC
    (Federal Home Loan Mortgage Corp)
    • $3.18 USD
    • -0.10
    • -3.14%
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