The Other Bailout
| Fri Sep. 19, 2008 9:28 AM PDT
THE OTHER BAILOUT....As a followup to the previous post, I will, of course, note for the record that if Uncle Sam can afford to spend a trillion bucks or so rescuing Wall Street, it would be nice if they could spend a trillion bucks shoring up all the poor saps losing their homes because they can't make the payments on those option ARMs they were talked into buying during the boom years. We could do it if we wanted to, and the risk wouldn't even be appreciably different from the Wall Street bailout. The feds would have to make distinctions (just as they will with overleveraged banks), and some homeowners would qualify for a rescue package while others wouldn't. The ones who qualified would get loan relief, which most of them would eventually make good on, in the form of restructured financing. People would be helped, the subprime crisis would get attacked at its roots, and although it would cost a lot of money up front, in the long term the price might end up being fairly modest (by present-day brobdingnagian standards, that is). Moral hazard is an issue, but no more than it is for the bank bailout.
So: why are we willing to fund an enormous RTC-like agency to bail out bankers, but not an enormous RTC-like institution to bail out ordinary people? Lack of lobbyists? Republican ideology? A desire to punish irresponsibility regardless of the disastrous sytemic consequences? Or what?
Continues Below
Continued From Above
Comments
To your point, Kevin, I bring you Jeff Jarvis and the moral imbalance of bailouts:
http://www.buzzmachine.com/2008/09/19/the-moral-imbalance-of-bailouts/
When Hurricane Ike hit Texas, the government, acting on our behalf, offered bailouts to the thousands whose homes ? built in risk-prone areas ? were damaged or destroyed: payment for hotel rooms, aid in rebuilding. But when your neighbor's house burns down, she gets nothing from us. She gets help only if she has paid for insurance. If that same neighbor gets cancer, she'll also get no help from us unless she or her employer could afford insurance.
But the government is ? we are ? bailing out banks that risked too much on bad investments. By buying time, the bailout could also give a lifeline to people who borrowed too much on their homes. If the neighbor lady overmortgaged herself with a now-toxic loan, she might get a break. But if that neighbor lady defaults because she has cancer and has to pay her medical bills before her responsible 30-year, flat-rate, well-documented mortgage, well, she's out of luck.
Perhaps every sick person without insurance should march on Washington to show that they're a big disaster, too. Perhaps they should add up the impact of their illnesses on the economy to prove their financial weight. To expose the moral relativism of our collective national view of tragedy and obligation, maybe they should put up signs on their homes and wear badges that say, "Bail me out."
To your point, Kevin, I bring you Jeff Jarvis and the moral imbalance of bailouts:
http://www.buzzmachine.com/2008/09/19/the-moral-imbalance-of-bailouts/
When Hurricane Ike hit Texas, the government, acting on our behalf, offered bailouts to the thousands whose homes ? built in risk-prone areas ? were damaged or destroyed: payment for hotel rooms, aid in rebuilding. But when your neighbor's house burns down, she gets nothing from us. She gets help only if she has paid for insurance. If that same neighbor gets cancer, she'll also get no help from us unless she or her employer could afford insurance.
But the government is ? we are ? bailing out banks that risked too much on bad investments. By buying time, the bailout could also give a lifeline to people who borrowed too much on their homes. If the neighbor lady overmortgaged herself with a now-toxic loan, she might get a break. But if that neighbor lady defaults because she has cancer and has to pay her medical bills before her responsible 30-year, flat-rate, well-documented mortgage, well, she's out of luck.
Perhaps every sick person without insurance should march on Washington to show that they're a big disaster, too. Perhaps they should add up the impact of their illnesses on the economy to prove their financial weight. To expose the moral relativism of our collective national view of tragedy and obligation, maybe they should put up signs on their homes and wear badges that say, "Bail me out."
My limited understanding of this says part of the problem with helping the people with actual mortgages was that the owners of the bonds that these mortgages wound up in needed to be a) identified b) convinced to allow it. This could possibly be a benefit of the government buying these bonds. However, another problem was that many swaps were written such that the counterparties also had to agree. I'm wondering what kind of issue it will be for these people (who will essentially be insuring risk-free debt) to insist on getting something out of the deal as well, just because they can. Quite possibly I have this all wrong, but I'm curious as to how something that Treasury cooks up over a weekend, then modified by Congress, will bollocks up these complicated issues.
go to pbs.org and vote on the question "do you think sarah palin is qualified to be the vice president of the united states":
While "fail big enough and they will give you a medal" certainly applies here, there's another thing.
The analagous bailout to homeowners wouldn't be refinancing, necessarily. It would be that the Fed would buy your home, maybe at 80% of what you paid, and rent it back to you at a rate that is higher than what rents are going for. Likely you would have the option of buying it back from them, but any down payment you made previously would be gone.
I can't see this program being all that popular. Furthermore, it would require huge amounts of manpower to do appraisals and paperwork, and couldn't be ramped up very quickly because of that.
Submitted by newsandverse (not verified) on Fri Sep. 19, 2008 10:11 AM PDT.
BAILOUTS TO FAILOUTS: A NEWS AND VERSE EXTRA
A guide to contemporary use
BAILOUT=Rescue, by government, of important economic entity
AILOUT=Rescue of healthcare industry
ALEOUT=Rescue of Bennigan's
BALEOUT=Rescue of Columbian or Jamaican economy (see also: cotton, hay)
BRAILLEOUT=Rescue you can't see coming
DALEOUT=Rescue of NASCAR (see also: Roy Rogers)
FLAILOUT=Rescue by FEMA
FRAILOUT=Rescue of an elderly presidential candidate
GALEOUT=Rescue of Jim Cantore (see also: HAILOUT)
GRAILOUT=Rescue of Michael Palin (see also: Monty Python, Indiana Jones)
NAILOUT=Rescue of construction firm (see also: Asian salon, Press-on)
MALEOUT=Rescue of sexist political candidate
MAILOUT=Rescue by white, powdery substance (see also: FBI)
EMAILOUT=Rescue of Gov. Palin's Yahoo! account
BLACKMAILOUT=Rescue by extortion
BLACKMALEOUT=Rescue by Dem. Presidential candidate
PAILOUT=Rescue by trickle-down economics
PALEOUT=Rescue by goth
QUAYLEOUT=Rescue of any unqualified Vice-presidential candidate
SALEOUT=Rescue of pandering political campaign
SCALEOUT=Rescue of Weight Watchers (see also: America's Biggest Loser)
SHALEOUT=Rescue of oil company (see also: Gulf of Mexico, ANWR)
SNAILOUT=Any rescue involving US Postal Service
STALEOUT=Rescue of lipstick jokes (see also: Pigs, Pit Bulls, Estee Lauder)
VEILOUT=Rescue at the altar
VAILOUT=Rescue of anyone who pays $100+ to fall down a mountain
SURVEILOUT=###REDACTED BY HOMELAND SECURITY###
ZALEOUT=Rescue of cheap wedding rings
FAILOUT=Destiny of most bailouts
www.newsandverse.com
...ripped from the headlines
Nouriel Roubini suggests the same thing today and suggests some of the conditions that might be applied to such a program. Given that Roubini has pretty much been the only person showing any concept of what needs to be done, I'm going with him over Ben and Hank.
We need a new HOLC - more than a new RTC or RFC- to provide massive debt relief to the household sector. We need to create the HOME (Home Owners' Mortgage Enterprise)
To your point, Kevin, I bring you Jeff Jarvis and the moral imbalance of bailouts:
http://www.buzzmachine.com/2008/09/19/the-moral-imbalance-of-bailouts/
When Hurricane Ike hit Texas, the government, acting on our behalf, offered bailouts to the thousands whose homes built in risk-prone areas were damaged or destroyed: payment for hotel rooms, aid in rebuilding. But when your neighbor's house burns down, she gets nothing from us. She gets help only if she has paid for insurance. If that same neighbor gets cancer, she'll also get no help from us unless she or her employer could afford insurance.
But the government is we are bailing out banks that risked too much on bad investments. By buying time, the bailout could also give a lifeline to people who borrowed too much on their homes. If the neighbor lady overmortgaged herself with a now-toxic loan, she might get a break. But if that neighbor lady defaults because she has cancer and has to pay her medical bills before her responsible 30-year, flat-rate, well-documented mortgage, well, she's out of luck.
Perhaps every sick person without insurance should march on Washington to show that they're a big disaster, too. Perhaps they should add up the impact of their illnesses on the economy to prove their financial weight. To expose the moral relativism of our collective national view of tragedy and obligation, maybe they should put up signs on their homes and wear badges that say, "Bail me out."
I don't know much about this, but isn't bailing out the homeowners who are at risk of losing their homes really the same as bailing out the financial corporations that hold the at risk mortgages? I mean, in effect.
It seems to me that if we help out homeowners who honestly deserve help, the mortgages (that they would otherwise default on) would become valuable again; the banks and investment funds holding them would suddenly have assetts whose value has been restored, and the insurance companies (like AIG) that insured those risky mortgages would no longer be looking at having to pay off on the defaulted mortgages.
Am I missing something? (Besides the obvious point that Republicans are always willing to bail out their campaign contributors, but not the folks that actually vote for them and pay the taxes.)
I am so glad you wrote this!
I thought of this just this morning. We bought our house in 2005 and, of course, it is now not worth what we paid for it. Yes, we are making our mortgage payments but it sure sticks in my craw that not only am I still on the hook (you know, dealing with the consquences of my financial decisions, yada, yada, yada) but now I will also be paying as Joan Q. Taxpayer to bail out all these banks!
I swear if one more condescending conservative nitwit tells me that I deserve to reap what I have sowed, I will scream!
Submitted by Rick B (not verified) on Fri Sep. 19, 2008 11:32 AM PDT.
How are the feds going to set market prices for the bad loans they buy?
Why not pass a bill letting bankruptcy judges set the value of the mortgages in bankruptcy, then then have the bankruptcy courts turn that process over to the new Resolution Trust - like agency to handle administratively so that the 25% of the value of the home normally lost to the bankruptcy process is avoided?
The banks would lose negotiating leverage, but with that 25% cost of the mortgage lost in the bankruptcy process they could still come out with better balance sheets. In addition, the case-by-case evaluation of each troubled mortgage compared to all the other similar mortgages in each region would set a much more realistic price on the assets that come out of the process.
I like helping the little guy much as anyone, but I'd like to know if the shareholders of these rescued institutions are taking a hit before assuming great inequities b/w their treatment and at-risk homeowners. For example, did AIG shareholders see their stock values plummet due to the dilution that comes with the gov'ts ownership stake? I think Krugman is taking a wait-and-see attitude on the latest buyouts until it becomes clear how much pain is going to get imposed on shareholders. He wants a lot, so do I, but if so, equity would demand that we let the little guy foreclose. Anyway, for the moment, I'm holding off on my outraged call for fairness...though on hair-trigger alert.
Submitted by Pudentilla (not verified) on Fri Sep. 19, 2008 12:01 PM PDT.
Moral Hazard. We can't subject the aristocrats to us because, they say, we, the little people, would be annihilated by the weight of their various colossuses should they shatter beneath the weight of their own culpability. But if we, the little people, one by one, collapse, well then, there's something salutory about seeing a man ruined for his own mistake.
Reader - nothing is going to stabilize the housing market because houses are still too expensive for the middle class to purchase on 30/yr fixed with 10% down.
Until prices drop to where people can buy again, housing does not stabilize.
If homeowners were bailed out & they kept paying their mortgages, wouldn't that mean that the bankers wouldn't need to be bailed out?
Back in the 80s my mother-in-law had cds in an S&L at a fantastic rate of interest. When the bank was sold, the new owners unilaterally lowered the interest rate so when they became due, she was paid interest at the lower rate.
Why not bail out the homeowners and mandate that a new fair rate is and has been in effect for these mortgages.
Limit it to 2 mortgages if you want to cut out the speculators.
I have a question for anyone who might have the numbers (Kevin?): why can't the damn mortgages be rewritten? Recapitalize the amount anyone is behind, then make it a fixed interest rate with a term (even if it goes beyond 30 years) that produces a monthly payment the house-owner could pay.
Sure, the banks holding these mortgages would lose money. They're doing that anyway. Why couldn't the banks be forced to rewrite loans, and the government bail them out of the difference between their planned profits, based on the old mortgages, and whatever they'll take in based on the new mortgages?
"The analagous bailout to homeowners wouldn't be refinancing, necessarily.
...
Posted by: Doctor Jay on 09/19/08
-------------
Actually, part of the Dodd-Shelby-Frank housing bill/Law is designed to refi ARM mortgages into fixed-rate types if both lender and borrower agree. I don't know about speed of the process, but some of that is available now.
They might need to add more money to that program later, but it's designed to not really require much. It's refinancing mostly and not much backstopping.
The devil is in the details.
A lot of these rescue packages involve an exchange of assets. Such programs don't add to the total demand for goods and services in the economy. They do raise moral hazard issues though, as they reduce the private costs of past bad decisions.
Admittedly some extra stimulus now wouldn't be a bad thing. But we shouldn't think that a $90 billion bridge loan to AIG is equivalent to, say, spending an additional $90 billion on roads and after-school programs. Extra spending adds to demand for goods and services. The AIG loan does not, to a first approximation.
As for a home owner bailout, I would need to learn about the particulars of the proposal.
"Reader - nothing is going to stabilize the housing market because houses are still too expensive for the middle class to purchase on 30/yr fixed with 10% down.
Until prices drop to where people can buy again, housing does not stabilize."
Posted by: Art Eclectic on 09/19/08
--------------
Part of the Dodd-Shelby-Frank Housing bill/Law lets lenders & borrowers refinance ARM mortgages, but part of the deal required by the government is that the lender accept a large loss up front (perhaps 20-25%) and the borrower who later-on sells for a profit hands part of that back (not sure how much). This way the government can push people to lowering housing prices quickly and yet not cost government a ton of cash.
A new HOLC (HOLC = Home Owners Loan Corporation), such as Senator Hillary Clinton suggested yesterday on the Senate floor, might do similar things except on a larger scale.
There is also the idea of government buying up the worst mortgages and after refinancing them reselling them on the market. A HOLC might do the same and again not lose much money.
Awesome group of economists working on this with Treasury.
Kevin, your plan is the model of common sense. But if we are to believe the people in charge, there is no time...the collapse could happen next week.
Provided we are being told the truth, the best scenario is to act now to do whatever it takes to avert total financial collapse, then have a President Obama implement your plan next year.
MarkH - a refinance on an overpriced asset still leaves you with an overpriced asset.
Just because you keep any more people from going underwater doesn't alleviate the enormous numbers of empty houses that are not selling because they have not yet reached the correct market price.
You are only solving half of the problem.
Kevin--You're completely missing the point. The "bailout" is to prevent a systemic financial collapse, that would set in motion a long and deep recession, and possibly another Great Depression, destroying Main Street as well as Wall Street. If properly structured, financial firms will take their full fundamental value losses (that represented by the underlying stream of mortgage payment), just not the full mark-to-market losses on currently illiquid assets that would cause them to collapse. You describe the Treasury as spending a trillion. The odds that it will make a profit instead are very high; if there are losses instead, they would be a small fraction of that trillion. Finally, when you are this close to systemic financial collapse, you don't want to play chicken by tying a measure to something ancillary. (To be sure, relief for distressed homeowners would be a good thing, and I hope it will be part of the measure proposed.) When you're falling off a cliff, you need to reach for something--with both hands.
