Wednesday, November 19, 2008

Paulson and Frank et al Differ on Intended Use of The TARP Bailout Funds - My Solution

These politicians sure make it hard to be post-partisan.
Congress democrats yesterday argued, as President-elect champions as well, that the TARP assets need to be used for direct foreclosure relief. As quoted in the NYTimes Editorial this morning, Frank seems to have read the bill and Paulson maybe not,
Mr. Frank pointed out several sections of the bailout law that direct the
treasury secretary to engage in foreclosure prevention. Perhaps the most
important of those provisions authorizes the treasury secretary to “
use loan
guarantees and credit enhancements to facilitate loan modifications to prevent avoidable foreclosures.”

So here is the problem, if being post-partisan is about maximizing opportunity and economic mobility and the right wing is ultimately about the solidification of power in the hands of the few, it becomes very easy to demonize Mr. Paulson. Paulson's unwillingness to address the actual victims in the crisis appears so crass. His actions thus far and his plans give way to the charge that he and the remaining days of the Bush administration is just giving away BILLIONS with a B to financial CEOs and stockholders. Why? Because they can.

What Paulson's unbalanced approach does is leads to further distrust by us lower middle class folk of the entire system. In fact, Robert Reich, in his blog makes just these cynical (and possibly true??) claims.

What happened to all the money? About a third has gone into dividends the banks
are paying their shareholders. Some of the rest into executive salaries and
bonuses. Another portion toward acquisitions designed to raise share values.
Another chunk for bailing out giant insurer, AIG.That's not what taxpayers
bargained for...

Come on you guys. You are making it hard to be post-partisan here. Reich's point is that the bailout money went not to fix credit but to fix investments. This is a pretty dire if true. The fact is that as many economists have been saying, Paulson is just wrong on his approach.

Paulson's Root Cause Analysis is Wrong

This is pretty simple. The problem is we had an artificial housing bubble. The bubble pushed housing way up. Bank balance sheets are now all screwed up and people are in foreclosure at such a rate that no one knows where the bottoms is. This lack of an ability to actual value people's mortgages has led to a total freeze of the credit markets. The containment action is pretty simple. To contain the problem, we need to find the housing bottom by re-valuing and setting prices on mortgages. This is exactly what Paulson is unwilling to do. The containment action that addresses the actual problem is FORECLOSURE RELIEF. This is a no brainer.

Think about it the bubble was artificial so we need to look backwards as if the bubble never happened and revalue the loans at a reasonable price for the homes and reasonable structures to the mortgages. How come a simpleton like me can figure this out. It makes one a tad upset!!! The bottom is actually pretty easy to find.

Why is Paulson unwilling to do this? This is pretty obvious. If this happens the balance sheets of the banks will be so out of whack that a lot will go out of business. The banks are going to have to suffer a lot. That is just the bottom line. There is no saving investors in this one. The banks are going to be way upside down.

The second thing we will need to do as I work through this is actually give bridge loans to a lot of banks. Basically Paulson tried to start with this step. He gave money to the banks without containing the real problem which is that we do not know the value of the assets. So, the loans [capital infusion] are being wasted.

Lastly, next year some time, we deal with the root cause and legislate regulation against what really is real estate speculation. There shall be no interest only loans. There shall be no sub-prime high risk loans. There shall be no default credit swaps to offset risk. This would take a lot of study to really understand what to do and I am not yet an expert (give me a few days). But the basic questions should be, "How do we prevent a bubble?" We need to keep demand and prices more stable. Sorry folks no flipping houses in a post-partisan world.

Think stability. It undermines our get rich quick fantasies, but it is far better for all of us in the long run.

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