See highlighted paragraph #12, below, for the argument I think has merit.
Cash for Trash
By PAUL KRUGMAN
Published: September 21, 2008
Some skeptics are calling Henry Paulson’s $700 billion rescue plan for the U.S. financial system “cash for trash.” Others are calling the proposed legislation the Authorization for Use of Financial Force, after the Authorization for Use of Military Force, the infamous bill that gave the Bush administration the green light to invade Iraq.
There’s justice in the gibes. Everyone agrees that something major must be done. But Mr. Paulson is demanding extraordinary power for himself — and for his successor — to deploy taxpayers’ money on behalf of a plan that, as far as I can see, doesn’t make sense.
Some are saying that we should simply trust Mr. Paulson, because he’s a smart guy who knows what he’s doing. But that’s only half true: he is a smart guy, but what, exactly, in the experience of the past year and a half — a period during which Mr. Paulson repeatedly declared the financial crisis “contained,” and then offered a series of unsuccessful fixes — justifies the belief that he knows what he’s doing? He’s making it up as he goes along, just like the rest of us.
So let’s try to think this through for ourselves. I have a four-step view of the financial crisis:
1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.
2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.
3. Because financial institutions have too little capital relative to their debt, they haven’t been able or willing to provide the credit the economy needs.
4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the “paradox of deleveraging.”
The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?
Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn’t clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.
Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I’m not happy with this plan?
*****----->>> The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don’t go to the people who made the mess in the first place.*****<<<-----
That’s what happened in the savings and loan crisis: the feds took over ownership of the bad banks, not just their bad assets. It’s also what happened with Fannie and Freddie. (And by the way, that rescue has done what it was supposed to. Mortgage interest rates have come down sharply since the federal takeover.)
But Mr. Paulson insists that he wants a “clean” plan. “Clean,” in this context, means a taxpayer-financed bailout with no strings attached — no quid pro quo on the part of those being bailed out. Why is that a good thing? Add to this the fact that Mr. Paulson is also demanding dictatorial authority, plus immunity from review “by any court of law or any administrative agency,” and this adds up to an unacceptable proposal.
I’m aware that Congress is under enormous pressure to agree to the Paulson plan in the next few days, with at most a few modifications that make it slightly less bad. Basically, after having spent a year and a half telling everyone that things were under control, the Bush administration says that the sky is falling, and that to save the world we have to do exactly what it says now now now.
But I’d urge Congress to pause for a minute, take a deep breath, and try to seriously rework the structure of the plan, making it a plan that addresses the real problem. Don’t let yourself be railroaded — if this plan goes through in anything like its current form, we’ll all be very sorry in the not-too-distant future.
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posted on September 23, 2008 10:04:38 PM new
Is it just coincidence? It seems that in recent history, Republican reluctance to regulate corporate greed has resulted in tremendous downfalls in the economy which has taken a democratic president to pull us out of. Edited to add: although inflation was rampant during Ford's administration and he was ineffectual in handling it (it was Carter's administration that was able to contain it), it was Nixon's legacy that created it, not Ford's, whom I still highly respect.
[ edited by pixiamom on Sep 23, 2008 10:16 PM ]
posted on September 24, 2008 08:54:10 AM new
What's ugliest about this bailout plan is how all these maggot CEO's who caused this mess will walk away with millions, and Bush is opposed to doing anything to punish them by taking away their fat severance packages. Typical, and sickening.
posted on September 24, 2008 09:06:27 AM new
Profe, I don't like that either. If the bailout doesn't occur how many of those companies would fold? Those CEO's wouldn't be getting any bonuses at that point so why should they receive a bonus if the bailout happens.
Instead of bailing out the businesses, the government should bailout the homeowners who were tricked into fraudulent mortgages.
Big business gets the help but the average worker still gets screwed.
posted on September 24, 2008 11:45:33 AM new
The "problem" came from giving mortgages to "average" people who could not afford a house.
Every liberal in the country applauded the "sign your name, get a house" policy before. You should be happy, you get to buy your neighbor a house, because it is his "right" to own one.
And, I don't see how everyone is "surprised". I posted a year (or was it 2) ago that my broker said this was all going to collapse. He also claims the 700bil is a fraction of the true amount.
posted on September 24, 2008 12:30:41 PM newEvery liberal in the country applauded the "sign your name, get a house" policy before. You should be happy, you get to buy your neighbor a house, because it is his "right" to own one.
Since when is Bush a liberal or did you forget that Bush pushed the "get a house" policy as well.
But I believe owning something is a part of the American Dream, as well. I believe when somebody owns their own home, they're realizing the American Dream. They can say it's my home, it's nobody else's home. (Applause.) And we saw that yesterday in Atlanta, when we went to the new homes of the new homeowners. And I saw with pride firsthand, the man say, welcome to my home. He didn't say, welcome to government's home; he didn't say, welcome to my neighbor's home; he said, welcome to my home. I own the home, and you're welcome to come in the home, and I appreciate it. (Applause.) He was a proud man. He was proud that he owns the property. And I was proud for him. And I want that pride to extend all throughout our country.
One of the things that we've got to do is to address problems straight on and deal with them in a way that helps us meet goals. And so I want to talk about a couple of goals and -- one goal and a problem.
The goal is, everybody who wants to own a home has got a shot at doing so. The problem is we have what we call a homeownership gap in America. Three-quarters of Anglos own their homes, and yet less than 50 percent of African Americans and Hispanics own homes. That ownership gap signals that something might be wrong in the land of plenty. And we need to do something about it.
We are here in Washington, D.C. to address problems. So I've set this goal for the country. We want 5.5 million more homeowners by 2010 -- million more minority homeowners by 2010. (Applause.) Five-and-a-half million families by 2010 will own a home. That is our goal. It is a realistic goal. But it's going to mean we're going to have to work hard to achieve the goal, all of us. And by all of us, I mean not only the federal government, but the private sector, as well.
And so I want to, one, encourage you to do everything you can to work in a realistic, smart way to get this done. I repeat, we're here for a reason. And part of the reason is to make this dream extend everywhere.
I'm going to do my part by setting the goal, by reminding people of the goal, by heralding the goal, and by calling people into action, both the federal level, state level, local level, and in the private sector. (Applause.)
And so what are the barriers that we can deal with here in Washington? Well, probably the single barrier to first-time homeownership is high down payments. People take a look at the down payment, they say that's too high, I'm not buying. They may have the desire to buy, but they don't have the wherewithal to handle the down payment. We can deal with that. And so I've asked Congress to fully fund an American Dream down payment fund which will help a low-income family to qualify to buy, to buy. (Applause.)
We believe when this fund is fully funded and properly administered, which it will be under the Bush administration, that over 40,000 families a year -- 40,000 families a year -- will be able to realize the dream we want them to be able to realize, and that's owning their own home. (Applause.)
The second barrier to ownership is the lack of affordable housing. There are neighborhoods in America where you just can't find a house that's affordable to purchase, and we need to deal with that problem. The best way to do so, I think, is to set up a single family affordable housing tax credit to the tune of $2.4 billion over the next five years to encourage affordable single family housing in inner-city America. (Applause.)
The third problem is the fact that the rules are too complex. People get discouraged by the fine print on the contracts. They take a look and say, well, I'm not so sure I want to sign this. There's too many words. (Laughter.) There's too many pitfalls. So one of the things that the Secretary is going to do is he's going to simplify the closing documents and all the documents that have to deal with homeownership.
It is essential that we make it easier for people to buy a home, not harder. And in order to do so, we've got to educate folks. Some of us take homeownership for granted, but there are people -- obviously, the home purchase is a significant, significant decision by our fellow Americans. We've got people who have newly arrived to our country, don't know the customs. We've got people in certain neighborhoods that just aren't really sure what it means to buy a home. And it seems like to us that it makes sense to have a outreach program, an education program that explains the whys and wherefores of buying a house, to make it easier for people to not only understand the legal implications and ramifications, but to make it easier to understand how to get a good loan.
There's some people out there that can fall prey to unscrupulous lenders, and we have an obligation to educate and to use our resource base to help people understand how to purchase a home and what -- where the good opportunities might exist for home purchasing.
Finally, we want to make sure the Section 8 homeownership program is fully implemented. This is a program that provides vouchers for first-time home buyers which they can use for down payments and/or mortgage payments. (Applause.)
So this is an ambitious start here at the federal level. And, again, I repeat, you all need to help us every way you can. But the private sector needs to help, too. They need to help, too. Of course, it's in their interest. If you're a realtor, it's in your interest that somebody be interested in buying a home. If you're a homebuilder, it's in your interest that somebody be interested in buying a home.
And so, therefore, I've called -- yesterday, I called upon the private sector to help us and help the home buyers. We need more capital in the private markets for first-time, low-income buyers. And I'm proud to report that Fannie Mae has heard the call and, as I understand, it's about $440 billion over a period of time. They've used their influence to create that much capital available for the type of home buyer we're talking about here. It's in their charter; it now needs to be implemented. Freddie Mac is interested in helping. I appreciate both of those agencies providing the underpinnings of good capital.
There's a lot of faith-based programs that want to be involved with educating people about how to buy a home. And we're going to have an active outreach from HUD. (Applause.)
And so this ambitious goal is going to be met. I believe it will be, just so long as we keep focused, and remember that security at home is -- economic security at home is just an important part of -- as homeland security. And owning a home is part of that economic security. It's also a part of making sure that this country fulfills its great hope and vision.
See, I tell people -- and I believe this -- that out of the evil done to America will come some incredible good. (Applause.) You know, they thought they were attacking a country so weak and so feeble that we might file a lawsuit or two, and that's all we'd do. (Laughter.) That's what they thought. We're showing them the different face of America. We're showing them that we're plenty tough. When it comes to taking somebody trying to take away our freedoms, we're tough, and we're going to remain tough and steadfast. (Applause.)
But I also want people to see the deep compassion of America, as well. I want the world to see the other side of our character, which is the soft side, the decent side, the loving side. I want people to know that when we talk about dreams, we mean big dreams. And when we talk about a free society, we want a society in which every citizen has the chance to advance, not just a few.
And part of the cornerstone of America is the ability for somebody, regardless of where they're from, regardless of where they were born, to say, this is my home; I own this home, it is my piece of property, it is my part of the American experience. It is essential that we stay focused on the goal, and work hard to achieve that goal. And when it's all said and done, we can look back and say, because of my work, because of our collective work, America is a better place. Out of evil came incredible good.
posted on September 24, 2008 01:15:29 PM new
Somehow you like to "invent" things that I say. I said nothing about who was for/against anything. My intention was to stop the endless "oppressors of the people" quotes from the PC handbook and the "XXX was against it after he/she was for it" litany.
This similar to my suggesting not to quote stupid polls (Kenyan newspapers not withstanding)in lieu of Gallup due to historic accuracy, becomes "McCain was ahead" as the reason.
posted on September 24, 2008 01:57:28 PM newEvery liberal in the country applauded the "sign your name, get a house" policy before. You should be happy, you get to buy your neighbor a house, because it is his "right" to own one.
Do you even re-read your posts, because they really should be checked?
posted on September 25, 2008 06:59:46 AM new
And your response had nothing to do with your original statement of "Every liberal in the country applauded the "sign your name, get a house" policy before. You should be happy, you get to buy your neighbor a house, because it is his "right" to own one."
If you still insist your statement is true then back up your statement with facts for a change instead of pulling a Linda and lumping everyone one in a single category.
posted on September 25, 2008 07:43:09 AM new
logansdad,
This is exactly what squirrel does. NO FACTS. Never backs anything up, does not answer direct questions about HIS posts.
posted on September 25, 2008 08:47:07 AM new
I read the post after yours squirrel, I even moved my lips to make sure all the big words made sense. Then I read your response. In it, you said:
I said nothing about who was for/against anything.
So please explain how,
Every liberal in the country applauded the "sign your name, get a house" policy before.
is NOT saying who was for something. It most certainly is.
posted on September 25, 2008 09:03:51 AM newThis is exactly what squirrel does. NO FACTS. Never backs anything up, does not answer direct questions about HIS posts.
We are used to it. After all we had other Republican posters here that did the same thing.
One thing you forgot to mention is that squirrel runs and hides when he is backed into a corner.
posted on September 25, 2008 05:35:20 PM new
Hank Greenberg who used to run AIG was worth 20 billions in 2005,now he is worth 1 billion (with his AIG stock) and he will be selling them starting tomorrow.
Would you be in line to have some of his AIG stock?
Plenty of yachts,race cars,oil paintings for sale on the East Coast.
*
Gulag-a Soviet era concentration camp is now reincarnated as EBAY with 13,000 rules.
