The Bailout -- another persepctive (part 3)

What is the purpose of the bailout fund?  Even the proponents don't agree on this.

It seems clear from Paulson's initial proposal, and Bernake's testimony yesterday, that they see the fund as a fix for a market that has "gone irrational." The fund is thus a solution to market failure.  Seen in this light, the fund is a kind of subsidy to the financial industry -- the size of the subsidy depending on whether the current market or Paulson/Bernake are right about the true value of these assets.

But yesterday I proposed viewing the bailout fund as a moment to put the issue behind us -- a collective act of putting cards on the table.  Not only is this approach seemingly more politically viable, but it should reduce the risk to the treasury, since the government either forces the banks to take a "haircut" upfront or recoups on the back end through an equity stake -- or some combination of the two.  Here the bailout fund serves to guarantee that we have hit a true bottom in the market, since the banks part with the assets once and for all.

Clearly the theory behind the bailout fund is important and needs to be resolved.  Otherwise Paulson/Bernake and Congress will continue to talk past each other.

Comments

[Jason Kilborn]

I totally agree that your proposed purpose is the more constructive and likely one, and I feel much more comfortable now that someone with more expertise has expressed sentiments similar to those I've been going out on a limb with recently. See http://ucclaw.blogspot.com/2008/09/if-you-follow-only-one-issue-in-this.html and http://ucclaw.blogspot.com/2008/09/one-thing-markets-hate-worse-than.html Thanks for offering your insights!

[Patches]

I still can't see how the ability to lend more money is going to stop foreclosures. It most likely will have no effect on current foreclosures. If the “deal” goes thru, which I may not be totally opposed to, aren't banks going to be more cautious on whom they lend to? Where does that leave everyone else? So now the paper belongs to the government, so what? Now to do a Mod, they have to go thru the government to modify (or now we have one decision maker well besides the servicer), where is that provision at? Who is going to make the decision or vote to approve a mod? So does anyone really think that lenders will really refi 80/20 Arms after the government takes over the “toxic” debt? The government wants some sort of recoupment right? Some sort of stake? Why will the government be willing to take a loss on the paper?

[Raymond Bell]

Maybe a part four: Gather economic professors who have no financial ties or obligations, especially to Countrywide and others, to put recomendations together that are short term and eventually long term. Theory and philospophy are valuable tools unless the enemy has already breached the front line.Every consumer will be stuck on the beach head waiting for incoming rounds and especially the "consumers" I care about: My Children and Grand Children. Lets not wait for an invitation..just step up and do it.

[bailey]

BB was annointed in Jan.,'06. In the Spring of '06 he said housing prices were driven by "fundamentals". Dean Baker was writing of the impending fallout (if we didn't act to correct it) all the way back in '02 and the housing bubble peaked in the winter of '06. Yet, I haven't heard one Congressman, one media representative, one person anywhere, ask him to explain how he could have been so out of touch to a financial CATASTROPHY that's likely to shape the lives and opportunities of our kids & grandkids? The sad & simple truth is, there's a price to be paid for the dumbing down of America and it will be huge.

[Barry Epstein]

No matter what the $ amount of the bailout if the monies are not tied to re-investing the monies in the FHA/GSE mortgage market the residential mortgage market will remain @ a stand still.

If a bank has its illiquid assets bought for $50MM it must "pledge" to re-invest the monies either in refinancing potential borrowers who are in or near foreclosure, as long as they can qualify using full documentation, and a defined cram down as specified by the new FHA Housing resolution, and or new purchases.

In this way liquidity will come back to the market place and the housing market will begin to stabilize.

Without a direct tie to the bailout monies it will have little positive affect on the residential mortgage market and the economy will @ best remain become a recession!