What is the nature of the crisis? The details can be insanely complex, but the basics are fairly simple. The bursting of the housing bubble has led to large losses for anyone who bought assets backed by mortgage payments; these losses have left many financial institutions with too much debt and too little capital to provide the credit the economy needs; troubled financial institutions have tried to meet their debts and increase their capital by selling assets, but this has driven asset prices down, reducing their capital even further.
Short and sweet. He then explains why HOLC/HOME alone cannot get us out of this pickle:
What can be done to stem the crisis? Aid to homeowners, though desirable, can’t prevent large losses on bad loans, and in any case will take effect too slowly to help in the current panic. The natural thing to do, then — and the solution adopted in many previous financial crises — is to deal with the problem of inadequate financial capital by having governments provide financial institutions with more capital in return for a share of ownership.
So, fast action by pumping in capital with strings attached to get the banks ready to begin cleaning out the Augean Stables of their mortage realted activities. In my opinion, the only reason to buy the actual assets is to stitch mortgages back together from the securities and make the speculators eat the loss when HOLC/HOME gets underway.
My suggestion is that the mortgages that get written down are flagged in some way such that if the property is sold prior to the end of the mortgage, the government gets to take any appreciation on the house up to the amount of the original loan that got the lender in such trouble. Why, especially if the loan has been renegotiated? To address moral hazard and prevent profiteering. You have to hold the asset full term or else you pay a big penalty on profits, kinda like a 401(k). By making it end with the completion of the contract, you enable to owner to pass on the increased value to the next generation or reap the benefits of their own patience. Thus, wealth building without rewarding bad behavior.
Back to Krugman. He talks about what Gordon Brown is doing (go read the piece, it's got a lot of interesting observations) and then hauls up Hanky Panky Paulson for some general slapping:
As I said, we still don’t know whether these moves will work. But policy is, finally, being driven by a clear view of what needs to be done. Which raises the question, why did that clear view have to come from London rather than Washington?
It’s hard to avoid the sense that Mr. Paulson’s initial response was distorted by ideology. Remember, he works for an administration whose philosophy of government can be summed up as “private good, public bad,” which must have made it hard to face up to the need for partial government ownership of the financial sector.
I also wonder how much the Femafication of government under President Bush contributed to Mr. Paulson’s fumble. All across the executive branch, knowledgeable professionals have been driven out; there may not have been anyone left at Treasury with the stature and background to tell Mr. Paulson that he wasn’t making sense.
I think that's a pretty good bet. Incompetance rising to the highest level concomitant with complete devotion to the greed mentality of the Bushies. But I think there's another reason running around here which is the desire to shit the bed so badly that nothing can make it useable again. The more I look at the Hanky Panky, particularly with the more recent rumors that Paulson will not buy preferred shares when injecting capital, wanting to give his Merry Bankster buddies all the money and none of the accountability, the more I think this cannot be by accident. This is about leaving a broken and bankrupt system behind with the government's hands tied.
You don't have to be smart to be vindictive.
Anglachel
4 comments:
We are trying to guess what Paulson's motives are. Experience tells us that simple explanations are the best.
Paulson started with a bail out plan that was delivered with warning: it has to be agreed to promptly, the plan cannot be amended, only Paulson will decide on the allocation of the money and any change to this plan will doom everything. In retrospect the that initial plan looks beyond ridiculous now.
Paulson clearly intented to to spread the money among his Wall Street friends. I believe we give Paulson credit he doesn't deserve. Success and intelligences are orthogonal.
Without going on with the argument, I want to say that Paulson just doesn't know better. His Republican/Bush ideology keeps him away from taking over banks or portions of them. His limited analysis and narrow creativity got him stuck in place. Even after getting the bail out money, he still isn't doing anything the last two week under the guise of building a WPA like for the rich and that of course must take several months.
So what was the rush to start with?
I do believe that Paulson simply doesn't have a clue and resists buying one.
I tend to agree with lakelobos. If they are incompetent, they are incompetent. By the same token, Iraq is not some brilliant move to stick a Democratic administration with a failed policy. It's simply a policy they massively botched due to blind adherence to a failed ideology.
The same goes for their economic policy. I don't think Paulson represents femification of Treasury. After all, Paulson actually was good at whatever it was he was doing at Goldman Sachs. The same could not be said for "heckuva job Brownie". Paulson's problem is just that he has a very blinkered worldview and does not recognize policy alternatives that clash with that worldview.
Of course, the end result is the same: the next administration will start broke and with its hands tied.
Apropos of this, Paul Krugman has been awarded this year's Nobel Prize in Economics.
Way to go, Krugman! They couldn't have picked a better nominee.
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