Wednesday, September 24, 2008

Government of, by, and for ... the banks (updated)

From the New York Times:

What About the Rest of Us?


Published: September 25, 2008

Lawmakers were still wrangling Thursday night about the Bush administration’s $700 billion bailout of the financial system. Political theater was mainly responsible for the delay, but it will be worth the wait if lawmakers take the time to make sure that the plan includes real relief for homeowners and not only for Wall Street.

The problems in the financial system have their roots in the housing bust, as do the problems of America’s homeowners. Millions face foreclosure, and millions more are watching their equity being wiped out as foreclosures provoke price declines.

The problems became even more evident Thursday night with the federal seizure and sale of Washington Mutual to JPMorgan Chase.

It’s unacceptable that lawmakers have yet to come out squarely in favor of bold homeowner relief in the bailout bill. Treasury Secretary Henry Paulson, the biggest advocate of bailing out Wall Street, is also a big roadblock to helping hard-pressed borrowers. He wants to keep relying on the mortgage industry to voluntarily rework troubled loans, even though that approach has failed to stem the foreclosure tide — and does a disservice to the taxpayers whose money he would put at risk in the bailout.

Many of the assets that Mr. Paulson wants to buy with the $700 billion have gone sour because they are tied to mortgages that have defaulted or are at risk of default. Unless homeowners get some help — and its a pittance compared to what Mr. Paulson wants to give to bankers — the downward spiral of defaults, foreclosures and tumbling home prices will continue, which could push down the value of those assets even further.

We could make a strong moral argument that the government has a greater responsibility to help homeowners than it does to bail out Wall Street. But we don’t have to. Basic economics argues for a robust plan to stanch foreclosures and thereby protect the taxpayers’ $700 billion investment.

Mr. Paulson has long opposed what is probably the best way to help Americans stay in their homes: allowing a bankruptcy court to reduce the size of bankrupt borrowers’ mortgages. Unfortunately, but predictably, drafts of the bailout plan circulated late Thursday do not mention that relief.

It is simply outrageous that every type of secured debt — except the mortgage on a primary home — can be reworked in bankruptcy court. The law was designed to protect lenders, who have obviously and disastrously abused that protection. There would be no favors dispensed in bankruptcy proceedings. Lenders would have to accept less of a payback and borrowers would have to submit to the oversight of the bankruptcy court for years.

But the bankruptcy process would mean many fewer foreclosures. And that would halt the downward slide in home prices, reduce the number of vacant homes — and the blight that comes with them — and help preserve equity for all homeowners. It would cost the taxpayer nothing.

Arguments against bankruptcy relief for mortgages have all been raised and refuted in Congressional hearings and debates over the past year.

There should be no more balking. Any bailout bill must allow struggling homeowners to modify their mortgages in bankruptcy court. Mr. Paulson should drop his opposition now. If he won’t, Congress should insist on the bailout for homeowners. Americans’ $700 billion investment needs to be protected.


And, Krugman gets it right-- again
:

September 26, 2008
Op-Ed Columnist

Where Are the Grown-Ups?

Many people on both the right and the left are outraged at the idea of using taxpayer money to bail out America’s financial system. They’re right to be outraged, but doing nothing isn’t a serious option. Right now, players throughout the system are refusing to lend and hoarding cash — and this collapse of credit reminds many economists of the run on the banks that brought on the Great Depression.

It’s true that we don’t know for sure that the parallel is a fair one. Maybe we can let Wall Street implode and Main Street would escape largely unscathed. But that’s not a chance we want to take.

So the grown-up thing is to do something to rescue the financial system. The big question is, are there any grown-ups around — and will they be able to take charge?

Earlier this week, Henry Paulson, the Treasury secretary, tried to convince Congress that he was the grown-up in the room, come to protect us from danger. And he demanded total authority over the rescue: $700 billion to be used at his discretion, with immunity for future review.

Congress balked. No government official should be entrusted with that kind of monarchical privilege, least of all an official belonging to the administration that misled America into war. Furthermore, Mr. Paulson’s track record is anything but reassuring: he was way behind the curve in appreciating the depth of the nation’s financial woes, and it’s partly his fault that we’ve reached the current moment of meltdown.

Besides, Mr. Paulson never offered a convincing explanation of how his plan was supposed to work — and the judgment of many economists was, in fact, that it wouldn’t work unless it amounted to a huge welfare program for the financial industry.

But if Mr. Paulson isn’t the grown-up we need, are Congressional leaders ready and able to fill the role?

Well, the bipartisan “agreement on principles” released on Thursday looks a lot better than the original Paulson plan. In fact, it puts Mr. Paulson himself under much-needed adult supervision, calling for an oversight board “with cease and desist authority.” It also limits Mr. Paulson’s allowance: he only (only!) gets to use $250 billion right away.

Meanwhile, the agreement calls for limits on executive pay at firms that get federal money. Most important, it “requires that any transaction include equity sharing.”

Why is that so important? The fundamental problem with our financial system is that the fallout from the housing bust has left financial institutions with too little capital. When he finally deigned to offer an explanation of his plan, Mr. Paulson argued that he could solve this problem through “price discovery” — that once taxpayer funds had created a market for mortgage-related toxic waste, everyone would realize that the toxic waste is actually worth much more than it currently sells for, solving the capital problem. Never say never, I guess — but you don’t want to bet $700 billion on wishful thinking.

The odds are, instead, that the U.S. government will end up having to do what governments always do in financial crises: use taxpayers’ money to pump capital into the financial system. Under the original Paulson plan, the Treasury would probably have done this by buying toxic waste for much more than it was worth — and gotten nothing in return. What taxpayers should get is what people who provide capital are entitled to: a share in ownership. And that’s what the equity sharing is about.

The Congressional plan, then, looks a lot better — a lot more adult — than the Paulson plan did. That said, it’s very short on detail, and the details are crucial. What prices will taxpayers pay to take over some of that toxic waste? How much equity will they get in return? Those numbers will make all the difference.

And in any case, it seems that we don’t have a deal.

This has to be a bipartisan plan, and not just at the leadership level. Democrats won’t pass the plan without votes from rank-and-file Republicans — and as of Thursday night, those rank-and-file Republicans were balking.

Furthermore, one non-rank-and-file Republican, Senator John McCain, is apparently playing spoiler. Earlier this week, while refusing to say whether he supported the Paulson plan, he claimed not to have had a chance to read it; the plan is all of three pages long. Then he inserted himself into the delicate negotiations over the Congressional plan, insisting on a White House meeting at which he reportedly said little — but during which consensus collapsed.

The bottom line, then, is that there do seem to be some adults in Congress, ready to do something to help us get through this crisis. But the adults are not yet in charge.


http://www.nytimes.com/2008/09/26/opinion/26krugman.html?_r=1&hp&oref=slogin



Our choice to solve all this:

On the Left
:






and, On the Right
:

1 comment:

  1. The symptoms of depressions vary from person to person. Some may get rid of it easily while some are not able to get over it for a long time. The first symptom is change in behavior. When somebody behaves in a strange way than normally he does. He is supposed to be under depression. http://www.xanax-effects.com/

    ReplyDelete