November 12, 2008
Economics Department
The Indecision Will Continue Until the Economy Improves
So, that big emergency bailout that Treasury Secretary Paulson said we needed in such a hurry? Now he's saying we didn't need it after all.
WASHINGTON - The government has abandoned the original centerpiece of its $700 billion rescue effort for the financial system and will not use the money to purchase troubled bank assets.
Treasury Secretary Henry Paulson said Wednesday that the administration will continue to use $250 billion of the program to purchase stock in banks as a way to bolster their balance sheets and encourage them to resume more normal lending. He also announced that the administration was looking at a major expansion of the program into the markets that provide support for credit card debt, auto loans and student loans.
Essentially, Paulson is admitting he didn't know what he was doing when he panicked us into giving him all that money.
So now the government will spend only $250 billion and use the remaining $450 billion to pay down the deficit.
Hah! Just kidding. No, they want to spend it on something else, anything else. They don't even know what yet:
Paulson said the administration is exploring other options, including expanding the program beyond banks to nonbank financial institutions which provide essential credit to both businesses and consumers. He suggested that capital could be provided to institutions on a matching basis in which the government would supply money to those able to raise money on their own.
And for a bunch of Republicans who are supposed to be against big government (I know, I know) they still don't understand that they are screwing up the economy by not leaving it alone:
"Our financial system remains fragile in the face of an economic downturn here and abroad," Paulson said. "Market turmoil will not abate until the biggest part of the housing correction is behind us. Our primary focus must be recovery and repair."
Yes, the housing correction is the primary cause and, yes, it will cause trouble until we've dealt with it, but "market turmoil will not abate" until you stop rearranging $100 billion chunks of it by fiat, forcing the market to react to your every whim!
The bailout money also should be used to support efforts to keep mortgage borrowers from losing their homes because of soaring default levels, he said.
Uh, keeping the housing market from correcting itself is not how you put the housing correction behind us. (Although, if we're going to just throw money at the problem, which appears to be the plan, this is probably not the worst place to throw it. I can't believe I'm saying this.)
Elsewhere, Paulson praised a new set of guidelines issued Wednesday by the Federal Reserve and other bank regulators, saying that they addressed a crucial issue of making sure that banks continue to lend at adequate levels.
The guidelines urge institutions to continue lending to credit worthy borrowers and to work with mortgage borrowers to avoid defaults. In addition, the guidelines encourage the banks to set dividend payments for shareholders and compensation for executives with the current crisis in mind.
This is turning out just like my rent control example (just skip down to it). The banks aren't responding to the incentives in the way the government wants them to, so the folks running the government are involving themselves more and more in the market to try to control it. If this keeps up, by summer the feds will be denouncing bankers for their greed and indicting them for not following the ever-changing rules.
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I can't believe you said that, either. I don't think I could be much more in favor of making adjustments so that folks who have overextended themselves have a chance to keep (or, at least, make a graceful downsizing exit from) the homes that they overextended themselves to get mortgages on, but a straightforward bailout seems to me to be the worst way to throw money at the problem, and then fail, and then not have the money. (There are apparently something like eight million mortgages that are going to be foreclosed on over the next year or so, and the three hundred fifty billion that'll be left after the present spree is done barely covers the average foreclosure cost.)
I don't think bankruptcy-mandated cramdowns are a great idea, either, but they're pretty clearly (IMHO, and all) better than the money-throwing approach.
My own theory is that the pain and cost should be borne, as much as possible, by the parties to the mortgages, for the 'moral hazard' issues, perhaps even more than to keep me out of paying for more of it than I should have to, as I didn't either take out a bozoid mortgage, nor invest in them.
Which is why I like the proposal where somebody can go to his mortgage holder, give back the mortgage, stay in the house, and pay rent for up to five years, then reclaim the mortgage at market value, with the mortgage holder getting 50% of the profits if/when the property is sold. It would let the people most closely involved both share the pain and work toward establishing the value of the mortgage as a saleable instrument.