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Politics : View from the Center and Left -- Ignore unavailable to you. Want to Upgrade?

To: Sam who wrote (89275)	10/9/2008 5:24:07 AM
From: thames_sider	Read Replies (1) \| Respond to of 541958

Well, he was right about the emergency rate cut coordinated across the G7. Let's assume he's right and this plan isn't going to work. I have one other suggestion to throw into the mix. A large part of the issue stems ultimately from mortgages worth more than the dwellings they're secured on, hence the loss of value of the MBS including these. Some suggest directly recapitalising the banks, effectively so they can handle the losses. Paulson seems to favour buying up the MBS, I guess at a better price than prevalent now (and then presumably either flipping them when/if things recover, or holding to maturity and hoping most of the mortgages eventually do get paid off). How's about, rather than owning chunks of banks or securities, the state uses the money to buy shares of the actual houses at the root of the crisis? Since in any case you are going to be taking a loss to bail someone out, why not share the rescue as widely as possible, and help the individuals themselves: and own a solid asset rather than a theoretical one. And, crucially, I'm sure the bill was worded loosely enough that it allows the purchase of "other assets" so not excluding the properties themselves - in other words it already grants the rights to do this. For primary residences: individuals enter the scheme, and the Fed (via some intermediary, the newly nationalised Fannie and Freddie? agencies working at state level?) takes over some %age of their house, based on the mortgage amount (less any rolled-up interest). Fed pays a going interest rate, maybe not an inflated sub-prime rate but a standardised mortgage rate including capital repayment for the term of the mortgage. The owners continue to live there and pay the rest on the same terms. As and when the house is sold, the returns go to them and Fed pro-rata. If they stay to maturity then they own some portion of the house and pay a rental to the Fed on the residual, or they could take out terms directly with the Fed to buy the latter out once their own circumstances permit. The MBS keeps a fair part of its value, probably enough that most won't blow up. And although the Fed still adds a lot to debt it's spread over a ~30-year span, and it's getting an asset which should retain value afterwards. For second+ homes, i.e. the objects of speculation, I don't think there's such a need to pay full value, but maybe still buy them at something like 70-80% of mortgage and then rent them out at a similar equivalent to the above rate. Agreed, it means the Fed is subsidising an excessive housing market, but it can still allow gradual deflation, and avoid the pain of the drastic crunch. The rents should cover much of the ongoing costs, and the Fed winds up with solid assets which can be released gradually onto the market returning capital: or in the interim kept as rentals to allow continuing income, to house low-income families, returning vets, or whoever. We used to have great stocks of such social housing (council housing) in this country and it made a very good buffer for the rental sector. I admit I can't see this being popular with the far right, given the expansion of the state: nor on Wall Street as they don't get the money directly themselves. I feel that those drawbacks are not showstoppers. The banks themselves will be able to place more reliance on their loans, which should have more value. So they can lend to one another with more confidence (and I assume that the guarantees on deposits would remain for the time being) and don't need to hoard cash. And the CDS which bet that the lenders will fail, and collect such huge sums on this basis, should expire worthless as although banks may take a hefty haircut - as they have - the majority of loans will be paid back, less lucratively than junk but still repaid. Not to forget the bonus that you avoid having millions of families homeless and bankrupt. I think that's a good thing. Thoughts, anyone?

To: Sam who wrote (89275)	10/9/2008 9:38:14 AM
From: Cogito	Read Replies (1) \| Respond to of 541958

>>Edge of the Abyss<< Sam - The author of that article loses me with paragraphs like these: >>Stiglitz says: “There is a growing consensus among economists that any bail-out based on Paulson’s plan won’t work. If so, the huge increase in the national debt and the realization that even $700bn is not enough to rescue the US economy will erode confidence further and aggravate its weakness.” Stiglitz’s point is proven by the fact that the Dow Jones cratered after reports circulated that the House had passed the bailout.<< The market hasn't sent much of a consistent message. The market rallied on news that a bailout plan was in the works - Paulson's plan. Then the market rallied on the news that a deal had been hammered out and that the House was going to vote later that day. The market then cratered on the news that the plan hadn't passed the house. So later, a porked-up version of the plan passed both Houses of Congress and was signed in record time. And the market cratered. I'm not sure how you can take the last data point and conclude that "the market" feels any particular way, while ignoring the other data points. - Allen