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A modest proposal: Buy ALL the mortgages, not the toxic derivatives

bringiton's picture

I am not an economist, but I can do arithmetic.

Please read first.

Current book value of all US housing mortgages is about $10.5 Trillion. Many of these mortgages are headed for default, and it is estimated that the net valuation (mortgage balance minus resale value) of the defaulted properties could reach approximately negative $1 Trillion. This pattern of increasing defaults is well established and will not quickly reverse.

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Because of laws dating from the First Great Depression, banks cannot easily go after the mortgage holders for that net negative; they will have to eat the loss. With the total capitalization of the US banking system being just $1.3 Trillion, it is readily apparent that this deluge of defaults could destroy the whole of the banking industry – and the rest of us with it.

If, however, the government – that is, all of us together – take responsibility for ALL the mortgages and back them for full value, we can for just (just!) a $1 Trillion commitment put an end to the immediate problem.

We, collectively, would buy ALL the mortgages from banks and other secured lenders at book value in return for promissory notes backed by the full faith and credit of the United States. We will pay down those notes with proceeds from future mortgage installment payments and any mortgage payoffs, as well as such payments as can be garnered from selective restructuring of some of the threatened mortgages, the sales of any foreclosed properties, and drawing down as needed from the capitalization commitment amount of $1 Trillion.

The banks will thus be relieved of their entire existent mortgage burden and can go about their other businesses significantly less encumbered.

Holders of the various derivative tranches are currently faced with the natural consequence of the mortgage defaults; a fall in value to zero or near to it. These were highly speculative investments and anyone who didn’t appreciate that was certainly an unwary buyer. However, many of the people who will bear the consequences are elderly, infirm, of limited financial means and entirely innocent of anything more than being willing to entrust their future financial well-being to large firms with previously good reputations. It would be a shame if they are, through their innocence, made to suffer.

By this mechanism of buying ALL current mortgages, however, the now-worthless derivatives will be restored to as much value as they ever had. Everyone wins, now and in the future.

We need not a replica of the original HOLC, but a MEGA-HOLC – one on, ahem, steroids. It doesn’t make financial sense to keep pouring trillions of dollars into the unstable banking system trying to paper over the accounting problems with valueless mortgage derivatives when we could just buy ALL the outstanding mortgages and be out no more than $1 Trillion and have the chance of making back enough money to eventually cover that up-front cost and, maybe, keeping some of those underwater mortgagees in their homes.

Some caveats:

Concurrent with this bailout of the banking sector, there will have to be some righting of past errors. For starters, with the toxic derivatives restored to a semblance of healthiness the banks' balance sheets should look much better and they won’t need as much of the TARP money that they’ve already received. They should start paying it back.

Additionally, our bailing them out doesn’t mean they are free to repeat the idiocy that got them – and us – into trouble. Strict regulations have to be implemented, to bring us back to the status quo ante prior to the loosening of mortgage regulations under Clinton. Those moves, however well-intentioned, were a mistake. To the extent that we decide in future to give some assistance to home ownership for the lower classes, there are other approaches that would work better than loosening of regulatory credit requirements. Tax breaks for builders and owners of smaller, energy-efficient housing constructed around commons greenswards with locally generated power and integrated infrastructure, essentially pre-planned villages, would be one common-sense approach.

And it must be noted that resolving the mortgage crisis doesn’t do away with the rest of the banking sector’s problems. They’ve overextended credit in all manner of means, including automobiles and credit cards, so now the American people as a whole are indebted to an extent greater than our annual GDP.

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This general excess of consumer indebtedness is another tangled problem of immense proportion, and needs to be discussed as a separate post. If it is not properly dealt with, economic collapse will follow regardless of what is done about the mortgage problem. The new BARF Plan won’t do it, just another top-down wrong-headed backasswards approach, but again that will have to be a separate post.

In conclusion:

Separating out just the mortgages from the rest of the banking problems is doable, and if done in toto rather than dealing only with the toxic elements it will be beneficial to all parties including especially the American people. This should be the next step towards economic recovery, using the second TARP funds installment of $350 Billion to get started.

It is a big, bold program of historic and heroic proportions that is simple to understand and financially sound – an investment by the people in the people that keeps management of our invested money out of the hands of those who created this problem. There is no reason to wait, nor is there reason to tie mortgage ownership restructuring to any of the other banking problems as TARP and BARF try to do.

There is even a suitable acronym, courtesy of Roubini: H.O.M.E. (Home Owners’ Mortgage Enterprise). There is also a simple catch-phrase –
“This act is the American People, Investing in Ourselves” – so the required elements of communication are met.

Do it, and do it now.

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coyotecreek's picture
Submitted by coyotecreek on

...that the best stimulus plan would be to give every American of a certain age (and who qualifies under additional standards), $1,000,000. I promise you that I will immediately pay off all of my mortgages (two), buy a new US made car, save at least 10% and spend the rest on US made (only) products.

I'm waiting!!!

BDBlue's picture
Submitted by BDBlue on

That's a big part of our problem (the wimp part, not the willingness to admit it).

Martin Wolf said Obama didn't have the courage to do what needs to be done ("too politically frightened") which is to nationalize the banks and now Obama himself admits it:

TERRY MORAN: There are a lot of economists who look at these banks and they say all that garbage that's in them renders them essentially insolvent. Why not just nationalize the banks?

PRESIDENT OBAMA: Well, you know, it's interesting. There are two countries who have gone through some big financial crises over the last decade or two. One was Japan, which never really acknowledged the scale and magnitude of the problems in their banking system and that resulted in what's called "The Lost Decade." They kept on trying to paper over the problems. The markets sort of stayed up because the Japanese government kept on pumping money in. But, eventually, nothing happened and they didn't see any growth whatsoever.

Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you'd think looking at it, Sweden looks like a good model. Here's the problem; Sweden had like five banks. [LAUGHS] We've got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would -- our assessment was that it wouldn't make sense. And we also have different traditions in this country.

Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America's different. And we want to retain a strong sense of that private capital fulfilling the core -- core investment needs of this country.

And so, what we've tried to do is to apply some of the tough love that's going to be necessary, but do it in a way that's also recognizing we've got big private capital markets and ultimately that's going to be the key to getting credit flowing again.

As others have pointed out, the different number of banks is meaningless because of the different size of the economies (and also because it's really the big half dozen or so banks that are the problem, not thousands). It's the part I bolded that's the real issue. Obama's too much of a wimp to take on the political battle of nationalizing the banks, so we'll just suffer Japan's fate. It's not that he doesn't know the Swedish model works, it's that we have traditions that require us to go with what doesn't work.* He's not stupid, he's just weak. Change you can believe in!

As for buying up all the mortgages, well that would help the people. Plus, Republicans wouldn't like it. So that's never going to happen. Just like nationalizing the banks isn't going to happen.

What makes sense economically and mathematically is irrelevant. The only thing that matters here is that the media keep up its shallow coverage so nobody in this country understands a god-damned thing that's good for them and that Obama keep up his media adoration by going along with it.

I do, however, appreciate the math and think it's good to have it out there. It's funny how much the stimulus had to be trimmed of excess spending on things like parks and such, but there's always more than enough money for the banksters and the Empire. I started to try to add up how much money we'd already given the banks and how much we had spent in Iraq and then compared it to the small amount of actual stimulus that will flow to the people (and that's been whittled down as "pork") but then feared I would jump out a window.

* Funny how often Versailles uses that excuse these days isn't it? We can't solve the banking crisis because of our traditions. We have to have a shitty healthcare system because it would be un-American not to. It's odd how the most powerful people in this country, the people who control so much of our media and culture, just don't have any power to fix anything. They'd love to change it, but you know, that just wouldn't be American. It's almost as if they seek to replace any serious policy discussion with shallow political jingoism to hide their looting of the country.

bringiton's picture
Submitted by bringiton on

You could be living in California like me, where the state problems make the national issues look like child's play...oh, wait....

I don't like nationalizing the banks for a number of reasons. One you already pointed out is that only a fraction of the banks have misbehaved and are in trouble, so why subject them to the same harsh treatment of nationalization as the bad boys?

Also the scope of emotional disruption will be far greater here than in Sweden, where the economy is already highly socialized. Now to be clear, that is in my mind all the more reason for us to become more socialized but we aren't, and there simply isn't a political means by which we can get there quickly outside of broad dictatorial claims by Obama. My suggestion would require some dictatorial behavior because it only works if we take all the mortgages, no opt-out allowed, but it is limited in scope to one specific class of assets and we'll pay for them. So long as the banks, the shareholders and the investors in derivatives come out ahead, who can complain and not be mocked?

I believe you're quite wrong to call Obama a coward, but maybe I'm looking at him wrong. I managed to get away with refusing to serve in Vietnam, and got called a coward for it then. I felt I was just being sensible in not taking part in an unneccessary and nasty fight that could easily destroy me. What do you think?

BDBlue's picture
Submitted by BDBlue on

that's what I think! For starters, TPTB are threatening to yank me back to D.C. and as fucked up as California is, it at least has better weather.

As for nationalizing the banks, I don't think we should nationalize all of them. But when so many smart people - Wolf, Galbraith, Stiglitz - all say the same thing, I think it's good to seriously think about nationalizing the most problematic banks. Just the top half dozen or so that are really bad off. The biggest few are bankrupt and all we've been doing is hiding that fact by throwing money at them and letting them over-value assets. But it will likely take more assets to fix their balance sheets than they are worth. (I hope Geithner was being truthful about the stress test - that could actually be useful.) In that sense, nationalizing is basically nothing more than packaging the bankruptcy. And I don't care if they call it nationalizing or not. Call it Operation Warm Puppy or the Capitalist Free Market System Rules Plan, anything to get them to deal honestly with the banks and their worthless assets.

The really scary part, IMO, is that Geithner, et al, still don't seem to know the scope of potential losses. It's like we're committing to fill a hole, but nobody knows how deep it is. Your math basically shows this - we've already committed more to cleaning up the mortgage mess than nearly every mortgage in this country, good and bad, are worth. Insanity.

My own prediction is that it's deeper than we can imagine and we're going to run out of backfill for it. Much better to force the shareholders and bondholders to take the loss than all of the country. Painful either way, but at least that's not committing the rest of us to an insane amount of money, which is what I suspect they intend to do.

Truthfully, I like your idea better. But that would be even more difficult to sell than nationalizing banks. Think of the fear the GOP could generate with the idea the Government was going to own your mortgage!

Besides which, I'm pretty sure there's a D.C. rule that says an idea's chances of success are inversely proportional to how much sense it makes. Your idea is imminently sensible. Thus, it is doomed.

Agh, now I'm even more depressed. But at least I'm depressed in California.

bringiton's picture
Submitted by bringiton on

is like a decade in Hell.

No, seriously. A year might be interesting. There's a lot of beautiful country around there, and enough time to do the Smithsonian justice would be sweet. The cost of upheaval, though, personally and financially, is a worry and more than a year, maybe two, would for me be completely depressing just from the weather.

Hope it all works out favorably - or at least tolerably - for you. Be careful jogging in Rock Creek Park.

Davidson's picture
Submitted by Davidson on

During the primaries, Obama was absolutely ruthless. He has no problem rolling over anyone, stopping at nothing to win. Nothing. I've yet to see him have the courage to take on a bigger, badder foe, but he's not afraid to get ugly (Overkill was his strategy against Clinton). He was chosen simply because he'll do the bidding of the establishment--no matter what. That's it. I don't think he even understands (or cares) that the Swedish plan will work compared to whatever Geithner or Summers is offering. He always struck me as having the political tendencies of a a Reagan yuppie. That's why he won't "get it." That and the only principle I've seen him go to the mat for is his own career advancement.

I never thought Clinton as a liberal savior, but she had something Obama doesn't: principles. She also had a governing philosophy. She knew what she was talking about when it came to the economy. That's why the establishment--Democratic and media--came out swinging against Clinton to favor Obama: their financial backers were terrified of what she'd do with regards to the economy (e.g., HOLC, putting us on the path for actual universal health care, nationalizing banks, etc.), in addition to social issues. Again, they're so desperate to hold onto the current parasitic system they'd go after a damn Clinton! A mainstream, corporate Democrat was too "liberal" for them. I don't care what others say, she was distinctly to the left of him on domestic issues and actually had a record she could stand on (i.e. of the two, she was credible).

And yes, they certainly are looting the country. I can't believe this will be the second time I'll witness the wholesale theft of a country. As I said earlier, I was there in Buenos Aires in December 2001 and now America (!) is being picked clean. Trust me, these "people" have no shame. People, including children, died in Argentina because of the financial assault and they only ratcheted up the austerity measures. They are truly evil. And they will do the same here. Just watch.

It's incredible! Next up: Social Security.

BDBlue's picture
Submitted by BDBlue on

What I mean by weak is that he's unwilling to take on the establishment, especially the media. It's not just that he's bought and paid for (although like nearly everyone who rises in either party, he is), it's that he seems constitutionally incapable of taking on any aspect of the system. That seems particularly true when it comes to bucking the press narrative. I've never seen Obama really take on any narrative, no matter how corrosive. Indeed, his most ruthless attacks on Clinton during the primaries were extensions of the press narrative - the misogyny, Harry & Louise, social security. Where he's weak is in challenging any of the press narratives around our politics and culture. He's all about reinforcing the Village's memes.

BDBlue's picture
Submitted by BDBlue on

The silence from Congress and the President on any kind of HOLC plan has been deafening. It's like single payer, there's almost no coverage of it.

Submitted by jawbone on

than Krugman. Very worried, thinks this mess will cost trillions (that's more trillions than already spent, as I understood it). He said over and over how expensive clearing up the banking mess will be--and partly bcz no pol in the US can take the bull by the horns (well, bear by the whatever) and do what will need to be done sometime in the future. Rogoff worried about running out of will and money.

BIO, feeling I get is that the bank rescue/rehab is going to eat up more than we can imagine.

bringiton's picture
Submitted by bringiton on

going at it by purchasing the toxic assets or infusing capital to balance them out. That's the net-net of penciling out the $1.5 Quadrillion in derivatives. It cannot be done.

What can work is what I've proposed, because we use the same principles of leverage that banks use and the same bundling of assets in a positive way that were misused in the derivatives creation. We could just buy out all the mortages for 10.5 Trillion and walk away, but why do that when we can have them for 10% of book value or less and have a shot at making back the amount we have at risk?

Geithner's BARF plan is, well, barf. Never was much impressed with him anyway, he blathers, and now it is obvious that he has such limited imagination that he shouldn't be trusted with policy formation. Figuring out how to get something done is not the same as figuring out what to do. Once tasked I'm sure he could hack his way through the banking thicket and implement policy, but he hasn't got the chops to come up with something useful to do in the first place.

bringiton's picture
Submitted by bringiton on

Perhaps when you have more time you'll take another look at it as well. He's not saying what you present as a summary.

Roubini says:

There are four basic approaches to a clean-up of a banking system that is facing a systemic crisis:

1. recapitalization together with the purchase by a government “bad bank” of the toxic assets;

2. recapitalization together with government guarantees – after a first loss by the banks – of the toxic assets;

3. private purchase of toxic assets with a government guarantee and/or – semi-equivalently - provision of public capital to set up a public-private bad bank where private investors participate in the purchase of such assets (something similar to the US government plan presented by Tim Geithner today for a Public-Private Investment Fund);

4. outright government takeover (call it nationalization or “receivership" if you don’t like the dirty N-word) of insolvent banks to be cleaned after takeover and then resold to the private sector.

He limits himself to just four available options by insisting on organizing his approach around either the existing bank structure - only the "bad" banks - or by only focusing on the toxic assets. I say that both of these approaches are fatally flawed.

Buying the toxic assets gains us nothing; we are throwing good money after bad. Nationalizing the bad banks is the same thing. The toxicity does not disappear just becasue we have paid for it.

If we approach the problem from the aspect of addressing a particular class of assets, ALL mortages, essentially cutting across the grain of our conventional two-dimensional boxes-and-lines concept of banks, we can extract both distressed mortgages and the healthy ones and by guaranteeing them ALL we transform the toxic mortgage derivatives into relatively health instruments.

We can't do it piecemeal without horrendous cost, and all of Roubini's "solutions" have no hope of ever making back our investment. They are traps, not as bad as the TARP and BARF approaches but they are only half-measures and still too expensive.

Big problems require big solutions. Buy up ALL the mortgages.

Submitted by lambert on

I don't think there are toxic mortgages -- there's no issue in principle about valuing a mortgage, because at the end of the day there's always a house in a physical location that has some value. That goes even if the paperwork is fraudulent or missing, which it often is, because even that can be priced in.

It's the derivatives that are toxic, not the mortages themselves. See Gao Xiqing's metaphor here:

First of all, you have this book to sell. [He picks up a leather-bound book.] This is worth something, because of all the labor and so on you put in it. But then someone says, “I don’t have to sell the book itself! I have a mirror, and I can sell the mirror image of the book!” Okay. That’s a stock certificate. And then someone else says, “I have another mirror—I can sell a mirror image of that mirror.” Derivatives. That’s fine too, for a while. Then you have 10,000 mirrors, and the image is almost perfect. People start to believe that these mirrors are almost the real thing. But at some point, the image is interrupted. And all the rest will go.

The problem is always phrased that "we don't know how to value the toxic assets," because as derivatives, they're so "complex" (and "innovative"). Well, that just means that they're obfuscatory, in the same way that Enron was "complex" (and "innovative"), and for the exact same reasons: looting and fraud. In fact, the market knows all too well how to value the these assets: They are worth nothing, just like Enron was worth nothing (except for its original boring pipeline business). It's just that nobody can say so.

Therefore, I don't think we should pay a penny for the derivatives. They have no more value than the assets that underlie them, which, yes, we should buy.

If (a) I understand the proposal and (b) understand the finance correctly. Honestly, if I understood money, I'd have some.

UPDATE One way to test this theory would be to propose to pay banksters in toxc assets. That will sort out the value question fast enough.

geneo's picture
Submitted by geneo on

Since there are so many toxic assets, you could even pay them $1.25 worth of toxic assets at face value for every dollar of compensation they're due.

If the worthless paper is worth what they say, no rational person could turn that deal down!

bringiton's picture
Submitted by bringiton on

I did try.

I propose that we buy the mortgages - just the mortgages - but ALL of them.

Some of the mortgages are healthy, some are what is called distressed - in arrears or in foreclosure. We should take those AND all the healthy ones into one large pool.

I DO NOT advocate buying any derivatives, toxic or otherwise. They are scattered all over the place and it will be both an endless mess and an endless drain on money to try and buy them up. Why should we? We shouldn’t.

If we can control the mortgages and guarantee their book value (at a maximum cost to taxpayers of $1 Trillion), then the threat of failure that has driven mortgage-based derivatives down to zero will be relieved. They will assume a natural value. What ever the value is, it will be a damn sight more than zero.

Thus we "fix" the toxic derivative threat not by squandering more money but by investing it. Any rational Capitalist should embrace this approach. The Predator Capitalists, however, always assume they will come out on top of any struggle and the Predators still hold the balance of power.

Suggesting use of the toxic derivatives to pay people is cutesy, but it would require placing a value on them; both to get them off the company's books and to evaluate income tax for the recipient. As you have pointed out, this is exactly the problem - if the derivatives are accurately priced, the banks will be in big trouble. Across the industry, the whole structure is in negative balance. The biggest banks should be closed down, but what then to do with the investors? Easy to say screw 'em, but by far the vast majority who would end up losers are elderly individuals or public entities like foreign governments, whose losses would create enormous pain and suffering.

The best course is to re-create value for the derivatives. The best way to do that is to guarantee the worth of the mortgages upon which they depend. My proposal will do that. I have yet to see another proposal that will do the same.

Submitted by lambert on

Sure, buy the mortages, not the derivatives. Neat idea, and why not indeed? Surely it makes more sense to from a policy perspective to invest the taxpayers money in housing stock as opposed to hookers and blow for the banksters, equivalent though the two may be from a purely hedonic perspective.

It's the phrase "toxic assets" that threw me, I think -- since derivatives are assets too, even if these particular derivatives are without value. (It's important to keep the distinction clear and hammer on the idea that only the derivatives are toxic because otherwise the Conservatives can drag you down in the weeds with arguments about Fannie Mae selling bad mortages to the colored people).

I'm in "ha ha only serious" mode on paying the banksters in toxic assets; I'd love to see the guy Stoller works for propose it, purely in ballbusting mode. You point out that they can't be valued, and I argue that they can and have been, at nothing, but let's not quibble, because the beauty part of the idea is that the banksters can't admit they're worthless.

Why not create an entirely new entity, and transfer the mortgages and the investors to it? (Galbraith at Democracy Now, too late for me to find the link now, has a good interview on why all the managers need to be fired.)

I see the argument on screwing the investors, and it would be great if we could find a way not to screw the widows and orphans, but OTOH, a lot of the value was just fake, manufactured bullshit, bets with no backing. I don't see how you can recreate that value no matter what. To descend to fake math, as if I were a real economist, V = M + Bs, or Value = Mortages + Bullshit. Your proposal says have the government buy M. OK, that's HOLC. But the investors purchased at V when Bs was a high number. Now Bs turns out to be 0. How is it possible to make the investors whole without creating more Bs, no matter who owns M?

bringiton's picture
Submitted by bringiton on

Funny how I sometimes see what I thought I wrote rather than the actual words written. Hope my copy editors get back from vacation real soon.

bringiton's picture
Submitted by bringiton on

"can" can be.

[Ah, the Clinton years, so full of eloquence and clarity of expression.]

Of course, literally speaking you can assign a value to the mortgage-backed derivatives. But from a practical stance you actually can't, because as soon as you do the true value, the market value of many of them will be seen to be zero or near enough and that will show that the true book value of assets in many banks is below the minimum reserve required by law to support the magnitude of their loans. The banks would then immediately have to be restructured in bankruptcy, sold or closed. The biggest insolvent banks are, quite factually, too big to allow any of those to happen.

The "toxic" derivatives aren't toxic because they have factually lost their value. They become toxic precisely by being formally valued, because once assigned a true market value rather than their fantasy book value they will kill the host that owns them. This whole idiotically profligate dance with TARP and the trillions of dollars spewed via various arcane authorities by the Fed is to prop up the banks against what is a widening fear regarding the extent of those worthless derivatives, because real value assets in the form of deposits have been fleeing the worst-off banks – and many healthy banks – by the hundreds of billions. Assigning a true market value to the derivatives would only accelerate that cash flight.

It’s like a long-standing marriage gone stale; the only thing holding it together is the willingness of the parties to honor each other’s lies.

A couple of things have happened here. One, instead of just a couple of tranches, bundled mortgages pieced out to various investors to spread the risk, the unregulated investment bankers kept reassembling and re-chopping. At this point there are tranches neck-deep and nobody really knows who owns what in terms of the original mortgages on which the tranches are based. So there's that uncertainty.

Secondly, there was no restraint on granting mortgages. Brokers just made stuff up, mortgage companies looked the other way, commercial banks asked no questions, investment banks were begging for more mortgages to bundle and chop up and re-bundle and chop up again, everyone making out by taking exorbitant fees and the Devil take the hindmost.

That worked fine enough while housing real estate values were rising, but once they began to fall the sub-prime fraction couldn't re-finance and couldn't make their payments in the face of their rising "adjustable" interest rates; they began to default on their mortgages, in ever-increasing numbers. Bummer, for everyone.

Certainly, some of the various subordinate tranches from some originators have lost their value already; no money will ever come to their owners, and thre is nothing to be done about that. But the greater loss in market value is from uncertainty and fear. As the foreclosures start to rise, not just among the sub-prime mortgages but now in the prime segment as well with a recession and skyrocketing unemployment, and given that nobody holding subordinate tranches has any clue whether they hold paper based on secure mortgages or distressed ones, the market value of many tranches has dropped to zero. No one will buy them now because there is no way to anticipate future value. Some of the bearish estimates of the total number of mortgages that will default are as high as 30% of all those outstanding; that is unlikely, but fear that it may happen has destroyed the market for many of the derivatives out of proportion to reality.

If, on the other hand, a credible creditor such as the United States of America were to buy up ALL the mortgages, solid and distressed alike, and guarantee the value as written for ALL of them, then the fear dissipates. Give or take the vagaries of the marketplace, in which some defaults are expected and some losses occur, investors will be able to deal with a moderate level of uncertainty as they always have. The subordinate tranches will assume value because there will be a market; there will be a market because investors will reasonably believe that a reasonable disbursement of reasonably anticipated funds is reasonably likely to occur. It is that anticipation of future value that makes a market.

All snark aside, there is value to hope.

pie's picture
Submitted by pie on

I haven't been to the NewsHour webpage in a long time, but I used to go there on a regular basis when it was still palatable. I found that not all videos were made available. Those were usually controversial, so I'm not surprised that this one may not be there. OTOH, some showed up the next day. Check tomorrow.

I have to say that the people at NewsHour sorely disappointed me as the Bush war propaganda machine got cranked up. Pat Lang used to appear frequently, but that all came to an end, too. There was no real debate anymore. I just stopped watching.

Submitted by jawbone on

PAUL KRUGMAN:...the way a lot of us have been looking at this is that it looks as if a substantial part of the banking system -- quite a lot of the major banks -- are probably actually not viable right now. ...-- if you were really going to look at what the market would be willing to pay for their assets, they actually are insolvent.

...-- what's called for, ultimately, is something like what happens with a failed bank. The government does not shut it down. The government seizes it, cleans out the stockholders, what was done with failed savings and loans. The government takes the bad assets, also pays off some of the debt, essentially a temporary nationalization, getting banks back. They did not bite that bullet, but they did not rule it out, either.

GWEN IFILL: They bit part -- he went kind of halfway on that, didn't he?

PAUL KRUGMAN: Yes...the favorable interpretation from my point of view is that this whole thing with the stress testing may end up being sort of a Trojan horse to smuggle the good guys into the fortress, that the public isn't ready, Congress isn't ready for major nationalization, but this is a way to set things up so that, if that proves to be necessary when you can take a good, hard look at the books, we sort of got the mechanism in place.

That's what we're hoping the plan means, but, you know, it was really pretty unclear what exactly is going on.
Snip
KENNETH ROGOFF: Well, I agree with what Paul said. I mean, they're going to look at the books and go, "Oh, my gosh, look how deep the hole is. It's a couple trillion dollars," if we're realistic.

And the question is, what are they going to do? How much are the taxpayers going to go in? I think we do need some form of receivership, FDIC workout, call it nationalization, to try to clean up the banks and re-privatize them.

I worry that, if they're not planning to do that pretty quickly, we're going to be a year from now, we're going to have spent the stimulus money without having the banking system jump-started at the same time, we're going to have spent a lot of this money -- which could end up trillions, really -- on the banking system, and we're not going to have got things going.

I think they need to move decisively soon and not just sit on this. Hopefully what Paul said is right. This is a stocking [stalking] horse; they're going to do it. But I would have liked to see something much more decisive now.

Well, <>I think, before this is over, we're going to be talking many more trillions of dollars. I think that's just going to get spent. And the issue is to spend it productively.
Snip
GWEN IFILL: Ken Rogoff, we're talking trillions of dollars here just so far. Is it enough? Is it too much?

KENNETH ROGOFF: Well, I think, before this is over, we're going to be talking many more trillions of dollars. I think that's just going to get spent. And the issue is to spend it productively.

The fiscal package is a way to jump-start the economy, but it needs to be done in conjunction with a realistic banking program. I'm not sure we're seeing it yet. I worry that time is just going to drag on and we're still going to be in the soup. I think this is going to end up costing many trillions of dollars.

PAUL KRUGMAN: Gwen, can I just weigh in? I mean, what we know from previous crises -- a lot of it, actually, Ken Rogoff's work -- is that these things tend to be very, very expensive.

And one of the problems we're having right now, which I think is part of why everyone was disappointed with this announcement, is that nobody is really ready to wrap their minds around the scale of what needs to be done. And even the Obama administration is not ready to wrap its mind around that. (My emphasis)

I'm not sure whether all those trillions refer to getting the banks back on an even keel since at one point Rogoff talks about a $2 Trillion hole re: the Big Banks. And the rest of the trillions seem, to me, to refer to the job creating/saving stimulus funds. But I could be wrong.

Alice Rivlin seemed to be playing the administration spokesperson, and the fourth member of the panel was an investment manager, Donald Marron, founder and chairman of Lightyear Capital, a private equity firm that invests exclusively in the financial services industry.

T/U, Hipparchia. I see the video link up at the start of the transcript with the download link (for podcast). The video must go up later in the evening. It used to be that the daily program was "above the fold" on the home page; now that is in a small column. Seems to me the site is less user friendly, but someone thinks it's the cat's whiskers....

Submitted by hipparchia on

buy all the houses!

i've been thinking for quite a while that we should just buy up all the mortgages, then restructure them all into ordinary old-fashioned conventional loans, with low interest rates. probably ought to reset the value of the houses while we're at it, pop that bubble now now now.

i take issue with your tightening of the credit rules though. yes, a lot of people outright lied to get mortgages they couldn't afford, but that means we need to be instituting better fraud detection and prosecution, rather than making it harder for honest folks to get a helping hand.

nationalizing the mortgage industry is probably better than nationalizing the banking industry, but what got us into this mess is exactly what got us into the first [and one hopes, only] great depression: the merging of the banks, stock brokerages, and insurance companies, complete with zero oversight of leveraging/capitalization. we can't let the banks fail because they're also the stock market and the insurance companies.

not that i'm entirely opposed to nationalizing the insurance industry, as the health insurance and property insurance sections of the industry have proven to be less useful than bloodsucking leeches.

bring back glass-steagall and usury laws. rein in the robber barons and the corporations, not the people.

bringiton's picture
Submitted by bringiton on

You're shocked at that, I suppose.

Don't want to have the government be in the mortgage business, but this mess needs solving and this is the cheapest and most certain way to do it. With proper regulations and functional regulators and penalties with some sting, the mortgage business can function as it should. Once we've bought the existing pool of mortgages, we should let the professionals do what they do but have them on a real short leash - and a shock collar.

When I say tighten the credit rules, I'm on the consumer's side. There is too much shuck and jive, too much room for lenders to screw borrowers, too much ability to suck people in to purchases they can't afford. We don't do any favors for people by burdening them with debt they can't pay.

Here's my plan for helping people buy the things they need plus some stuff they just want:

Increase their income.

We've been using tax policy for 30+ years to shift income away from the masses and into the pockets of the top 1%. We've been using public policy in general since for ever to systematically shift wealth upward instead of an equitable distribution, to the point where the system is collapsing.

We need to use public policy for the benefit of the public. We need to use tax policy to raise the wages of the masses. We need to structure wealth accumulation policy so average people can secure their futures. We need to ensure universal health care, universal free higher education, universal healthy meals for school children and wages high enough that one income can sustain a nuclear family. We need to design new housing so an average family can buy a home and not so strap themselves they live in fear from paycheck to paycheck.

We need a revolution, and one way or another we'll get one. It will be better for the socioeconomic elite if they decide to share the wealth rather than have it taken from them.

koan's picture
Submitted by koan on

We've been using tax policy for 30+ years to shift income away from the masses and into the pockets of the top 1%. We've been using public policy in general since for ever to systematically shift wealth upward instead of an equitable distribution..

We need to use public policy for the benefit of the public. We need to use tax policy to raise the wages of the masses. We need to structure wealth accumulation policy so average people can secure their futures

.

Bingo.

Why is it the simplest points are such the hardest to sell?

koan's picture
Submitted by koan on

double drop, deleted by author.