A Modest Proposal:  The housing crisis worsened over the summer of 2008, prompting Congress to debate various bailout proposals. But the housing market worsened, raising the default rate on mortgages. The entire inverted pyramid of derivatives built on top of the mortgage market further worsened, adding yet more pressure to the credit crisis. The bankruptcy of Lehman Brothers and the nationalization of AIG were the results.

The response to this financial crisis from the Treasury Secretary Hank Paulson borders on Insanity: An outrageous trillion dollar plus bailout, with the potential for unlimited expenditures at the behest of the Treasury Secretary. It is a terribly expensive plan, one that prevents judicial or administrative or budgetary review. It is fraught with moral hazard, rewarding bad judgment and excessive risk taking. It punishes the prudent and rewards the profligate.It focuses on all the wrong issues.

Worst of all, it is unlikely to work.

Most of the current solutions under discussion amount to throwing obscene amounts of money at the problem, rather than recognizing what the key issues are.

These approaches have several fundamental problems. The goals are less than desirable: 1) they attempt to keep people in homes they cannot afford; 2) The Paulson plan takes bad loans off of the books of poor lenders, and dumps them onto taxpayers; 3) They maintain price supports for homes that remain significantly over-priced. 

At the heart of the $700 billion dollar unlimited finance Paulson bailout is the desire to move weak performing or poorly made loans off of the books of the lenders who made them and onto the taxpayers back (likely via the FHA). To understand the folly of the this housing bailout, one must grasp the magnitude of the prior housing boom, as well as the historical norms that exists in the American housing market.

The current proposal moves bad mortgages from the irresponsible lenders to the innocent. It punishes every taxpayer who was prudent, and every homeowner that behaved in a responsible manner. It eliminates the sanctity of contracts, and allows judges to “cram down” mortgages.   

These may be desperate times, but they do not call for ill thought out, desperate measures. Rather than merely criticize the $700 billion dollar unlimited finance Paulson plan, I would instead like to propose an alternative approach, one that costs much, much less, and is more likely to be effective: The 30/20/10 Proposal.

A MODEST PROPOSAL: A MORE REASONABLE WORKOUT FOR LENDERS AND BORROWERS THAN THE TAXPAYER FUNDED BAILOUT . . .

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To understand pricing of homes prices in a historical context, we need to consider several different metrics. Economists traditionally employ a variety of ratios to compare where housing prices are relative to traditional pricing and affordability measures. The most reliable of these look at the ability of a purchaser to service a mortgage via salary, forming a ratio of annual median income to median home prices. This can be analyzed nationally, or on a region by region basis.

Yet another methodology compares the cost of purchasing a house versus the cost of renting a similar house. Numerous other measures involve factors such as mortgage rates, inflation, housing supply, new home construction, etc. For our purposes, we will use the two metrics above, as they provide the greatest insight into price and value.

A simple comparison of the median US income versus the median home price nationally is quite insightful. As we have shown previously, as home prices rose in response to ultra-low rates, the median US income failed to keep up. As prices began to slide downwards – they are off 16% from the 2006 peak as of September 2008 – they still remain significantly higher than had been historically relative to income. 

Houses may be cheaper than they were two years ago, but they are by no means “cheap” on a historical basis.Indeed, prices remain quite elevated, which is one of the reasons sales are off 30-40% from the 2005-06 peak.

The current bailout proposal would have the FHA refinance mortgages at 85% of their present value, or would simply have Uncle Sam overpay for them, taking them off of the books of the lenders or speculators who currently own them. This effectively rewards lenders who made irresponsible loans, as well as rewarding the buyers of homes who could not afford them. It effectively punishes every taxpayer who was prudent, every American who tried to live within their means, and any homeowner who behaved in a fiscally responsible manner. It is the very definition of mortal hazard, and is very likely to have negative consequences for decades to come.

One of the problem that taxpayer-funded bailouts create is that it eliminates any incentive for industry to fashion solutions on their own. Far too many banks, brokers, insurers, and investment pools believe it is easier and cheaper to lobby Congress than suffer the consequences of their own poor decision-making.

Despite the lack of self-reliance on the part of the banking industry, it’s really not that complicated to develop potential solutions to the ongoing crisis. With a little creativity, we can craft an alternative solution. In doing so, let’s recognize several truths regarding the current housing situation:

• Home prices remain elevated;

• Artificially propping up home prices is counter-productive;   

• Home owers (No equity, 100%+ debt) who are in houses they cannot now, and never could afford, are going to have to move to homes or apartments they can afford;

• The banks that made these bad loans to unqualified borrowers should suffer writedowns;

• Taxpayers should not have to bailout borrowers who are in over their heads, or lenders that made these bad loans.

If we use these as our preliminary facts and assumptions, we can craft a response that is rational, effective, efficient and requires very little taxpayer money. This means, however, that there are still several million people that are in the process of moving from living in a mortgaged home to moving to a rental property or a purchased property they cannot afford.

This is what is required to help normalize prices and supply.

Instead of the massive Paulson bailout plan, let’s consider a different type of solution, one that can be effectuated by a combination of policies and actions via Congress, banks, and private equity, with the loan servicing industry participating.

I call it the "30/20/10" solution to the credit crisis:

30: Takes up to 30% of any current delinquent mortgage and separates it from the “main” mortgage; it goes into a 2nd, interest free-balloon mortgage, and stays on the books of the present mortgage holder;

20: The plan’s goal should be saving at least 20% or so of the current delinquent and potential foreclosure properties; Of the 5 million homes that may be late in making payments, (the first step along the road to delinquency, default and foreclosure) the process should make 20%, or 1 million homes eligible;

10: The Balloon payment comes due in 10 years, and will be treated as a 2nd mortgage, with interest charges only accruing as of October 1, 2018; it can be refinanced or paid off in full.

The 30/20/10 option allows the lending entity (or its equivalent) to pull aside up to 30% of the mortgage as a separate interest-free balloon payment. The remaining mortgage is refinanced at a fixed rate for 30 years. The balloon payment will "restart" fresh in 10 years. Between now and then, there will be no interest costs or penalties for this separate loan.

Consider the advantages of this plan: It would prevent a significant number of foreclosures from further roiling the markets; it takes bad loans and avoids the write down so long as thy are performing; and it allows many people to stay in homes they can afford. Moral Hazard poses no problem in this plan.   

Here are additional specifics: At least 70% of the existing mortgage becomes a new, refinanced, fixed rate, 30 year traditional mortgage. And, a loan payment for up to 30% of the original mortgage, not accruing interest, with repayment of principal and interest due beginning 10 years hence, makes the present house affordable. In other words, this would look like an ordinary mortgage plus a
balloon payment, one that would not begin accruing interest until year 10.

Congressional action is required to exempt the balloon payment from causing a tax issue, as this is essentially an interest free loan might be a taxable event.

The securitization of mortgages creates its own additional difficulties in attempting to resolve defaults and delinquencies. Residential mortgages get bundled into RMBS, which were then sold and resold to various Wall Street purchasers. One of the current problems in resolving the situation is identifying who is the actual owner of the mortgage in question. This can be resolved with a clever little act changing notification provisions, requiring further Congressional approval.

Any entity that identifies a potentially problematic mortgage, i.e., delinquent and in risk of default, can start the process by evaluating the property value and the borrower’s ability to repay the loan. If they believe a mortgage would be suitable for a 30/20/10 workout, they would then send notice to the current recipients of the mortgages interest and principal payment. This entity would have 30 days to reject the workout, and failing to do so in that time Is deemed to be an approval.

In our solution, it is the financing party – a private equity firm, a real estate fund, or even a US capital pool created for this purpose – that can make this request for a 30/20/10 solution. Notice is sent by to the current loan servicer, i.e., the firm processing the mortgage payments, and forwarding them to the mortgage owner. The servicer is in the best situation to send the 30 day notice, and if no written objection is received, from the whoever currently owns the mortgage – be it bank, mortgage pool, or other securitized owner – the refinancing process begins.

Instead of a foreclosed property, the former mortgage holder is left with an interest free, 10 year balloon on up to 30% of the mortgage. They also have a lien on the property, and no writedown on the delinquent mortgage for at least 10 years.

There are other details that need to be worked out — the priority in case of sales, what happens if there is an eventual default, how to avoid fraud, etc.

The end result of the 30/20/10 workout would be the following: Homeowners who can afford to make payments on the refinance home get to continue living in them. Neighborhoods are spared the negative impacts that Foreclosure has on property values and the blight of abandoned houses. Lenders get to avoid writing down up to 30% of suitable but problematic mortgages. The balloon payment stays on the books as a liability, but it is not written down until, if and when it defaults 10 years later.

The upside of this proposal is that it serves a variety of interests with a minimum of congressional market interference. Those homeowners that can afford to stay in their house with a little bit of help avoid foreclosure. Banks and mortgage holders get to avoid writing down delinquencies that could be avoided. Neighborhoods are spared the negative impacts that Foreclosure is known to have. Loan servicers can expand their business to process saying the 30/20/10 workout papers. I would expect a variety of private equity funds will leap into the void and begin looking for mortgages to rewrite as 30/20/10s.

Congressional action required would be to 1) Eliminate the tax issue for the interest-free portion of these loan; 2) Create a Legal standing and guidelines for this notification and waiver policy. The goal here is to insure that the complexities of determining who actually owns a a mortgage dozen not interfere in its work out; 3) Create any required exemption for banks and lending entities to avoid taking a write-down during the period of the 10 year in balloon forbearance.

Weaknesses and criticism: I would expect several objections to be raised to this proposal. From those representing homeowners who face potential foreclosure, the complaint will be that this plan fails to save more than 20-30% of those who might lose their homes. For the various funds and investors that own the underlying mortgages, there will be a complaint that notification provisions are insufficient. Lastly, given the enormous size of the Federal free lunch proferred by the Treasury Secretary, the banking industry will be reluctant to embrace any such workout that might be perceived as interfering with their ability to feast at the public trough to the tune of a trillion dollars.

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No matter – this is a much more workable plan than the Trillion dollar Paulson giveaway. And, it restore responsibility and consequences to both lenders and borrowers who engaged in reckless behavior. We should consider a private sector solution to the currently mess we find ourselves in.

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http://bigpicture.typepad.com/comments/2008/08/nar-housing-aff.html

Category: Bailouts, Real Estate, Taxes and Policy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

80 Responses to “Fixing Housing & Finance: 30/20/10 Proposal”

  1. gordon says:

    “Worst of all, it is not likely to work”. That is far from the worst. This is the greatest attempted power grab in history.

    Talk about turkeys voting for Christmas. If the Congress votes for this naked transfer of power then they fully deserve all that will come about. We might as well have horses in the Senate, as has been done once before.

    To yield almost infinite financial power to an unelected official, without any oversight or future review, is completely crazy and without precedent. What happens when this period of foreseen and avoidable emergency is over ? Will the appointed all-powerful tzar – the most powerful economic dictator in the history of the world – simply , quietly and passively, retire and let this power abate? Has such a thing ever happened before in the history of the world?

    Of course not. Another, entirely synthetic, emergency will be manufactured and passively promulgated by the docile compliant press as an event that really, really needs strong forceful action. But this time the position of financial czar will also have political power. The man that first grabs this power is dictator for life, and no doubt also for the lives of his children and grandchildren until the money is totally gone.

    This is much worse than the powers stealthily acquired by Hitler in the 1930s. At least he had a degree of popular support, and did stand in elections. More analogous is the power achieved by Stalin in the USSR, or , more so, the Democratic People’s Republic of Korea under Kim IL-sung. This is nothing less than asset stripping and a grab for power by the financial elite. God bless America.

  2. Jetlag says:

    This would be equivalent, no, worse than bailing out the Internet bubble equity and bondholders.

    It was a bubble, asset prices need to come down. Good companies (yahoo, amazon) will remain in business, bad ones will go under forever.

    Write it off, close it down, sell it to the highest bidder, the faster the better.

    Japan also tried the “hide the toxic salami” game and they’re still in the crap hole after more than 20 years. The US economy isn’t as dependent on a bunch of finaglers like Japan’s “economic groups” were. The US has a chance to play it different and get out of it ahead like in past crisis.

    This money is badly needed to STIMULATE THE REAL ECONOMY, NOT to to bail out some rich folk and finaglers like Hank and friends. If this goes through money will be much more expensive and it will be harder to stimulate the economy, build infrastructure, support the needy (remember GD’s soup lines?), spend on the economy to revert the vicious cycle create by the deflationary pressure from the debt collapse.

  3. The critic is well-founded. Besides the bailout does not help much to the necessary consolidation of the financial sector.
    It seems to me, that Mr. Paulson is again one step behind. He cannot keep all the financial companies alive in the end. With the bailout the financial sector is encouraged to continue in the old way without restructuring. This will just prolong the misery, but will not eventually save the sector.

  4. JustinTheSkeptic says:

    Just let me have the houses for 20 cents on the dollar and I’ll turn around and sell them for a nice profit and reinvest that profit back into the system creating more business, jobs, and income. Hey, we prudent ones need to be rewarded! Why doesn’t congress find out through the tax rolls ect., who has been prudent and reward them with a chance to pick up these properties on the cheap? Now that would be much more than fair. That would be poetic justice.

  5. D. says:

    Gordon:

    Unfortunately, that’s how power has always been taken: bit by bit, right under everyone’s eyes!

    (1938) Chamberlain appeasing the Brits with Hitler promising peace:
    http://www.youtube.com/watch?v=nZHpprf6HSM&feature=related

  6. Me says:

    This plan also encourages homeowners to go into default. Homeowner moral hazard.

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    BR: These are mortgages that are about to go into default anyway — AND, we can add some terms that make it undesirable for other, non defaulting homeowners.

    For example, it prevents future HELOCs and further refinancing w/o the permission of the lender. That’s a serious give up.

    And, in the event of any sale of the home, the balloon payment, plus all interest, is immediately due.

    There are other penalties that could be added.

  7. Spud says:

    Not a bad proposal, but have you tested it against any real pool of distressed homeowners. When I look at the local pool of properties here in the OC through realtytrac, I just don’t see that the homes that are in foreclosure or preforeclosure would qualify for this 30/20/10 program. The amount owed as compared to the current market value of the homes is just too high.

    There are investment pools willing to step in and buy foreclosed homes in bulk from lenders, investors, and local government agencies ready to buy and renovate these properties.

    Making a pool of money available for silent second mortgages could move a lot of moderate income homebuyers into these homes.

    It’s just not the same people who are in them now, whose total loans are too damn much above the current value of the property, and that value still makes this housing unaffordable.

    There’s a major revaluation of housing prices that needs to finish, and we need to provide liquidity to the financial system in a way that doesn’t attempt to prop up the ridiculous prices in many markets with more government money.

  8. patrick k. neid says:

    Here’s a solution, do nothing. Everyone talks “free market” and loves its attributes but no one wants to let it work when they don’t like the preconceived outcome they think it might produce.

    Here’s the latest hobgoblin trotted out before the cameras last week by Paulson and Bernanke:

    “If we don’t do this, we risk an uncertain fate,” Mr. Bernanke added. He said that if the problem wasn’t corrected, the U.S. economy could enter a deep, multi-year recession akin to Japan’s lost decade of the 1990s, or what Sweden endured in the early 1990s when a surge in bad loans plagued the economy and sent unemployment to 12%.”

    Yeah. So what.

    I’m not trying to be cavalier about a major recession or a lost decade but that in fact may be what we need after 30 years of continuing intervention by the government in preventing the free market from cleansing itself after extended periods of excess. Each intervention in turn leads and encourages further excess. Much has already been written of the infamous “Greenspan put”. You can google it for more detail.

    http://en.wikipedia.org/wiki/Greenspan_put

    If you want, we all pretend to, the benefits of capitalism you have to accept the creative destruction that comes with it. The markets were crashing because the previously cheered on housing bubble had burst. Banks, brokerage firms, Fannie and Freddie, AIG et al were disappearing because they were meant to. Morgan Stanley and Goldman should have been next. They had all readily participated in the false economics of the bubble. Who forgets the 100’s of tech companies that disappeared when that bubble burst bringing down the NASDAQ 85%. No one intervened for them and rightfully so. Trillions were lost in shareholder equity. We survived and Tech is healthier for it. Now IPO’s have to come to the market bearing profits not promises.

    Yes people were/are losing their homes and rightly so in most cases. They were not qualified to own them in the first place and they knew it. This whole madness was an attempt to take home ownership from the then 65% to the current 69% starting during Clinton’s first year in office. Hello to Fannie Mae’s new mandate–hit the ask on everything. Now once again the government has stepped into the breach to prevent the market from straightening out the mess.

    I find it interesting that the man waving the wand just happened to be the ex-CEO of a major instigator in this whole mess–Goldman Sachs. A firm I might add he only left in 2006 to become Treasury secretary. Of course he knows about the problem, he personally made 100’s of millions in salary and bonuses in benefiting/causing it in the first place.

    As we stand by and witness/cheer–talk about Stockholm syndrome–we also take as gospel Paulson/Bernanke and others description about what the outcome of “no action” would be, as the quote I used to start this comment indicates. How do they know that? If they could not foresee the problem how do they know where the market solution was leading? They didn’t and they don’t. All they are certain is they did not want a free market solution. By controlling the solution at potentially trillions of dollars in cost they get to design the future. I’d gladly settle for a market solution. Perhaps a miracle will take place in DC and this package will go no where.

    I trust the “secret hand”. With a little luck this market will rally and then roll over to new lows washing out all the firms and practices that caused all these problems to begin with. Otherwise welcome to the next, ever bigger, bubble. These new trillions are going somewhere barring the aforementioned miracle!

  9. craig in georgia says:

    As for solutions, here’s my idea:

    Instead of bailing out Wall Street—which won’t do anything to help taxpayers—why not extend the $700 billion credit line directly to individual homeowner-taxpayers who are in trouble.

    Here’s how it would work.

    Troubled taxpayer (T) applies to Federal government through his/her local IRS office for a pin number that is tied to his Social Security number.

    T uses pin number to apply for a loan directly from the government to pay off his mortgage. The government reviews his tax returns (they already have them) to see if his income is sufficient to qualify, using a 4x ratio, i.e. loan can be no more than 4 times income.

    Government transmits monies to bank, paying off troubled mortgage and the principal plus 2% interest (could be anything minimal) is added to taxpayer’s T’s tax balance and is be paid off through increased withholdings. IRS now owns mortgage on property and can enforce liens, etc. The bank is now out of the picture

    This is just the general outline, but why wouldn’t it work?

  10. uncool says:

    Barry, Thanks for posting an alternative plan. Many of the blogs I visit just rail against the bailout without offering something else. With absolute knowledge that some kind of bailout is going to happen, their best shot is to say ‘it shouldn’t happen”.

    Our best alternative thinkers need to suggest plans, just as you have. Thank you.

  11. Is it just me or does this plan sound a whole lot like the Super SIV from 2007 ?

  12. Francois says:

    “Another, entirely synthetic, emergency will be manufactured and passively promulgated by the docile compliant press as an event that really, really needs strong forceful action.”

    Docile and compliant press;man! that is a very generous description. Try completely clueless and uninformative.

    Case in point: I’ve spent several hours during the weekend reading relevant blogs and foreign publications, archives of newspapers etc.

    The most important proviso of this bailout is the unlimited power it would grant to the Treasury. Power that would be outside the purview of the Courts AND Congressional oversight…the famous “trust us” so typical of the Bush Administration in times of crises, perceived or real.

    Well! Wouldn’t you know it, I grabed my Philadelphia Inquirer early this morning, and read exactly what I expected: NOT A FREAKING WORD on this proviso, nor any relevant detail about the limit of money to be spent. And, OR COURSE, nary a mention of the hundreds of millions of dollars in fees for outsourced services going to assets management specialists that would “help” (as in “Help themselves”) the Treasury assess the bad debt. Reading the Inquirer’s account of the Paulson plan, you would never ever know it is bad to the core.

    Long story short, the extraordinary incompetence of the US press, so in evidence since 9/11, is one big reason we are in this pickle. So is the fact that regardless of what this deleterious Administration has done in the last 8 years, there are STILL around 30% of the voters who consider Bush has done a good job. When 1/3 of the adult population refuses to think, to observe and to assess what’s really going on, the country has a significant problem to deal with: the rise of the ditto-monkeys.

    As for Barry’s proposal, it has one fundamental merit: it address the very source of the problem, housing prices and all its intertwined problems.

    The biggest fault is that the solutions proposed are not sexy, do not make for attention-grabbing headlines, and forces some people to think and work extra for their money. In other words, it tries to go against 2 very entrenched syndromes in America: the “American Idol” syndrome and the Pigs at the Trough” syndrome.

    I estimate the probabilities of this proposal ever being read in Congress to 1,000,000 to 1. It is too down to earth and sensible for serious consideration.

  13. Actual Money says:

    This isn’t a bailout, its the perfection of the long con.

    The majority of that money will walk out the back door in the form of overvalued assets or loans to banks that should and will go bankrupt.

    Welcome to the Great Treasury Robbery of 2008!
    http://i37.tinypic.com/2evarex.jpg

  14. Francois says:

    “Is it just me or does this plan sound a whole lot like the Super SIV from 2007 ?”

    We’d be so lucky!

    What this proposal amounts to is a carte blanche worth 700B (Not as a limit mind you, just the max amount at any time during 2 years) to one unelected official who couldn’t be prosecuted for any action taken with this money. We are supposed to give him absolute discretion and power to distribute this cashola as he see fit.

    Paulson: “Hmm! I see here that you contributed 10% of your pre tax profits to the Republican Party. Very thoughtful of you Sires!”

  15. wally says:

    Plain and simple: an administration that requests a $700 billion ‘fix’ brings its resignations in the same package. Any banks that get toxic crap taken off their hands become government property and exec salaries get reset to government employee levels. Any past bonuses paid by these companies to those people get deducted from current pay.

  16. Mattie says:

    All those smart people with huge incomes in congress and the senate are protecting their own assets. The foxes are guarding the hen house… The only reason Paulson stepped in was that a lot of rich people in the United States were about to be hit with some financial tsunami that would have completely changed the nature of the world. Those of us poor middle class educated folks have the skills to survive. The rich folk wouldn’t be able to survive a minute in the real world without all their paper money.

  17. DownSouth says:

    This exchange from this morning’s NY Times just about says it all. It gives a sense of just how devoid of reason, how internally contradictory the administration’s argument in favor of the $700 billion bailout is:

    Representative Barney Frank, the chairman of the House Financial Services Committee, put forward the Democrats’ proposed changes to the administration’s plan. They would give the Treasury secretary the authority to set “appropriate standards” for compensation of senior executives whose companies sell troubled assets to the government.

    Under a so-called claw-back provision, the secretary would have the power to force companies to recoup previous payments to executives of companies involved in the program. And Mr. Frank’s plan would give broad authority for the Government Accountability Office, an investigative arm of Congress, to audit and oversee the program.

    But Mr. Paulson said that he was concerned that imposing limits on the compensation of executives could discourage companies from participating in the program.

    “If we design it so it’s punitive and so institutions aren’t going to participate, this won’t work the way we need it to work,” Mr. Paulson said on “Fox News Sunday.” “Let’s talk about executive salaries. There have been excesses there. I agree with the American people. Pay should be for performance, not for failure.”

    But he quickly added: “But we need this system to work, and so we — the reforms need to come afterwards.”

    http://www.nytimes.com/2008/09/22/business/22paulson.html?pagewanted=2&_r=1&hp&adxnnl=1&adxnnlx=1222084842-P1mQZfRnxsgvwULjD5OCIg

    So let me get this straight. The only way the bankers will participate is if the US taxpayers give them a blank check with absolutely no strings attached. Otherwise, as Paulson says, they “aren’t going to participate.”

    But, almost in the same breath, if the taxpayers don’t give the bankers everything they want, exactly on their terms, then there will be “economic calamity,” “meltdown,” and “cataclysm”.

    Actually, this type of “reasoning” has a name. It’s called “Divine Right:”

    Divine sanction thus made the monarch right in reason, and not merely by might, his power was in every way legitimate.

    At the same time, the theory imposed terms: the king must feel the deepest awe in the face of his responsibilities. If he governs badly, he will suffer. On the other hand, if he does govern badly, and the people suffer, it is because they have sinned and are being punished.

    Jacques Barzun, From Dawn to Decadence

    It was with good reason that FDR dubbed the nation’s economic elite “royalists.”

  18. Tom C says:

    There is a reverse auction mechanism here. A market is being created for these illiquid assets. The mark to market reforms have helped to extend this turmoil since ther are no liquid markets available for price discovery. The vast majority of these laons are generating cash flow. No one is getting away with anything. All this plan does is speed up the process of discovering what value still exists. Over time and if properly managed, some of these assets may turn out to be profitable to the ultimate holders. If the markets are facing a snowballing liquidity crisis, there is no better solution. The one question still to be addressed without trying to make political hay is ‘How did we get here?’

  19. Robert M says:

    STOP MAKING SENSE!
    I have been thinking about this by making changes in the bankruptcy laws and writing down the value of the mortgages to reflect current pricing so both sides take the hit and reissuing a new 30 yr mortgage.. How would you work changes in the bankruptcy laws? Two, in your proposal would you keep the no recourse to courts portion? This is the most aggregious part ot me and made worse by the fact the current plan wouldn’t work

  20. Carmen says:

    Barry,

    If the industry lobbyists agree with you then you have a winner. Any chance?

  21. Mark W says:

    http://www.nysun.com/business/ex-sec-official-blames-agency-for-blow-up/86130/

    Does this new proposed legislation repudiate the SEC asset leverage exemption made in 2004 for the 5 major IB’s? Or more to the point, will Merrill, GS, and MS still be able to keep themselves leveraged over a 12-1 ratio while still selling bad debt to you and me as the primary assumer of their debt risk?

    If the answer is yes, then molotov cocktails lobbed through the foyer glass at all their local offices is the only right and proper response to this ‘legislation’.

  22. Portland Refugee says:

    I think you may have an issue taking the 30% portion of your plan and placing it in second position, seeing as many of the homes already have second liens.

    Furthermore, I’m not sure 30% and 0% interest is enough given this environment.

    Lastly, why not add to the plan a penalty to the defaulted homeowner. i.e. If and when the homeowner sells, for the ‘honor’ of being bailed out, you will forgo capital gains exemption on the sale of this property (no ands ifs or buts)with no expiration of this clause.

  23. Beret (from Germany) says:

    I definitely agree that instead of the government buying the “bad credit” and postponing the problem (plus taking risks of further costs for the U.S. than the initial 700 billion at stake), the problem that initiated the credit crisis has to be addressed:

    inflated mortgages that the home owners can’t pay back and the inevitable, long correction of the housing bubble

    Now, I’m not sure if I quite understand this 30-20-10 plan …

    But isn’t one of the problems, that in several states of the U.S. homeowners are protected, so that they needn’t pay back the mortgage but are eligible only for the house, so that foreclosure is actually attractive for many families?

    At least I heard that on a german/french documentary about the deficit spending of Americans and the housing bubble.

    In the same documentay, they also showed, that the average uninhabited house in the U.S. quickly becomes uninhabitABLE, because it is raided, damaged, etc.

    So in addition to the correction of market prices, there is a real depletion of value.

    How can one address this?

    Shouldn’t the financial institutions and especially Fannie Mae and Freddie Mac avoid foreclosures by suspending mortgages for a while and renting the houses back to the owners?

    The plan of restructuring mortgages that you present here goes in the right direction, but if the information from that documentary I saw is accurate, it would be hard especially for Freddie and Fanny to get people stay in a house they can’t afford for 10 more years and eventually pay back what they owe, when the homeowners can choose foreclosure and restart somewhrere else with one of the now “cheap” houses.

    It would be great to find out, whether the U.S. legislation really protects homebuyers that way. If yes, I don’t see any way out of a meltdown of the U.S. economy.

  24. patrick k. neid says:

    Leave the market alone is the only solution. No plan of any kind is the only solution that is guaranteed to work. All this other is wasted ink.

    Most of the folks that trade the markets, talk the markets etc are clueless. They are afraid of it, have no clue how it works and they definitely don’t want to find out.

    Lets get down to the nub. Tell me something all you great seers, were you going to cut me check from your house profits when you sold it? I didn’t think so. But boy do you cry like stuck pigs looking for a handout, suggesting solutions, blaming this party or that. The housing bubble was just that a BUBBLE. Get over it.

    Your cheap dreams of being millionaires without doing anything for it are gone.

    Man up and let the market wipe the slate clean. Learn your lessons the way the “Techies” did in 2000. If we lose a decade so be it. I’d rather that than lose generations as we slip lockstep into some green curtain demigod pulling strings to supposedly massage our way into the future.

  25. Rich Shinnick says:

    Barry,

    Do you think that you can get Sarah Palin behind this plan?

    If you get her and lets say, Oprah, it will be a winner!

    Otherwise, its hard to stop a Congress that is set to spend a Trillion dollars to show American how much they care and the world what big spenders we are….

    Common sense left the building long ago and I doubt the bouncers will let it back in. But, you have my vote.

  26. odograph says:

    We need a big stigma associated with your 30% interest free loan. I’d suggest we say the home is going into “conservatorship” … and probably put some restrictions on what a “homeowner” can do with such a property.

  27. constantnormal says:

    BR — You have a better plan than Paulson’s (how could it be worse?), but I like mine better — simply decree that all outstanding ARMs will be converted to fixed rate mortgages, via a formula that extends the term for whatever fixed rate is selected such that the total amount of interest collected by the lender remains the same. This could be implemented by a simple spreadsheet, requires NO infusion of capital, and immediately stops most of the homeowner mortgage implosions, allowing a floor to develop under house prices.

  28. TooLateToWakeUpAmerica says:

    IT IS NOT 700 BILLION IT IS MUCH MORE: would people please stop talking about the 700 billion, read the proposal:

    “The Secretary’s authority to purchase mortgage-related assets under this Act shall be limited to $700,000,000,000 outstanding at any one time”

    OUTSTANDING AT ANY ONE TIME is the crucial thing…meaning they buy…sell it…buy again…this can add up to much more than 700 billion

    I am speechless…fascism in my age from “the land of the free…home of the brave”. Bye bye America.

  29. Darkness says:

    But, almost in the same breath, if the taxpayers don’t give the bankers everything they want, exactly on their terms, then there will be “economic calamity,” “meltdown,” and “cataclysm”.

    Actually, this type of “reasoning” has a name. It’s called “Divine Right:”

    I was thinking “blackmail” and “thuggery”, myself.

  30. Rob P says:

    Saddling every working taxpayer (157 million) with an additional tax of $11,500 is much easier and will be the end result! Because the majority doesn’t care long as “they” don’t have to deal with it… that’s why they elected officials.

  31. Reno Dino says:

    Spend the trillion dollars on infrastructure thereby creating jobs and higher incomes. Forget trying to save housing. That egg already broke. Prices will come down, people will move on, and banks will go broke. That’s the only way to pick up the pieces and not burden the innocent. Everyone benefits from better tracks, bridges and roads. Low pay and higher unemployment are now the real enemy.

  32. wallstreet wizzard says:

    Greetings from Germany.

    This German-speaking blogger

    http://www.weissgarnix.de/?p=514

    (weissgarnix literally means “know nothing”) presents a different twist to the story: he thinks that by establishing a renewed “market price” in these reverse auctions for RMBS, ideally at a higher level than at which they are currently in the banks’ books, all banks with such paper would benefit from their outcome, regardless of whether they actually participate in these auctions or not. He even paints a picture where banks could conspire to achieve maximum benefits, i.e. valuation gains as well as liquidity inflows, by 1) agreeing floors for their bids and by 2) letting everyone win the auction at least once, so that both valuation as well as liquidity gains are distributed equally.

    He writes in German, unfortunately, but what he says seems to make sense. What you think?

  33. vladimir says:

    Hear, hear. Don’t know if your plan will work, but it adds to the dialogue which is sorely needed. We should be talking about many possible solutions.
    Or you could do it my way:
    Just nationalize ALL the banks. Problems solved.

  34. Beret (from Germany) says:

    Reno Dino:

    Why not invest the money in education and healthcare?

    less sick days, healthier poeple, higher education will be the key factors to higher productivity in the future as technological innovations for optimizing services and other processes become so commonplace that they no longer provide businesses in industrialized nations an advantage

  35. CPJ says:

    This proposal needs to hit the ears of those on capitol hill, not just the regulars of this blog. Take a few minutes out of your day and e-mail this permalink – or the text above with Barry’s byline – to your senator, any senator. Pick the ones on the senate finance committee, or the house’s financial services crowd. Make a difference, who knows: maybe that 1 in 10,000,000 chance will get through:

    http://www.senate.gov/general/contact_information/senators_cfm.cfm

  36. Alfred says:

    The Paulson plan is as much about recapitalization of the banks as it is about stabilizing the housing market. It is about somebody buying assets to stop the credit deflation that is going on. I am not sure how your plan would address that. I can’t see how your plan would end the capital squeeze that financial institutions are currently experiencing.

    If it is true that we are in the biggest financial crisis since the Great Depression then we need more bold action to avoid it.

    The next step is a bail out of global derivative markets by reducing the notional value of outstanding derivative contracts. The third step is a solution for the US dollar, by ending the dollar’s hegemony and pricing commodities against a basket of currencies.

  37. km4 says:

    $1,800,000: Amount Sen. John McCain’s (R-AZ) campaign manager Rick Davis was paid as president of a lobbying company founded to defend Fannie Mae and Freddie Mac from stricter regulations, over five years.

  38. D. says:

    Is it just me or does this plan sound a whole lot like the Super SIV from 2007 ?”
    ——————

    So how is it going to work? Government’s going to buy 700B of toxic waste at a premium and sell it back to GS at a discount? Then buy another 700B at a premium and then sell it at a discount to GS again.

    Then when everything is transfered, does Paulson go back to GS?

  39. Winston Munn says:

    The problem is solvency. Recapitalizing banks to make more bad loans to those who cannot repay is not a solution – it is insanity*.

    *Insanity: doing the same thing again and again while expecting different results.

  40. Clinton says:

    MBS.

    Is there any problem created at the banks who hold the derivatives, CDOs, MBS, etc?

    Meaning, if IBank holds a few billion in questionable MBS, will taking away the old mortgage, and refinancing it with a new, low rate mortgage — will that destroy the value of the MBS?

    If the MBS was counting on cash flow from interest payments and the gov comes in and facilitates massive prepayment and refis, won’t that be a very large unintended consequence? ((Not that I really care, but putting another nail into the IBs is not what they need)).

    I had heard that banks are having problems with the gov guaranteeing money market funds. Now that the MMs are backed, why would anyone keep their money in an FDIC insured bank? At the lower interest rate. Again, the stodgy safe bank that did nothing wrong now must compete with a subsidized higher risk money market. Goes with the whole theme of why must the innocent suffer? The bank with a solid safe asset sheet now has to compete with reckless funds in the interest rate market.

    Anyway, unintended consequences of intervention usually appear, and should be predicted/evaluated in advance.

    I think your plan may mess up the capital ratios for those that held MBS.

    Clinton

  41. roger says:

    Good proposal. It has the advantage of actually addressing the problem. I think of the current mess as a ladder problem – if a ladder becomes unstable, you can’t stabilize it from the top – but this is exactly the policy that has been followed by the Fed and the Treasury since last august. You must secure it from the bottom – and the problem on the bottom is that the majority of Americans, the producer/consumer set, have too little money to afford the prices of the current housing market. Hence, the market has to keep falling, and as it keeps falling, provokes a downward spiral of wealth at the grassroots.

    There is no way housing prices are going to stop falling – the conditions of the market are such that the fall is necessary. Given that fact, your plan admirably attempts to ameliorate the conditions of that fall by making housing ‘affordable’ in the short run. And that is a temporary solution. The longer solution is redistributive – the bottom eighty percent simply has to make more money out of American capitalism. That means that the pattern in the Bush years, where all the productivity gains are engrossed by the top 5 percent, has to be broken. Otherwise, American capitalism, with its dependence on a vital consumer segment, will collapse. That is all there is to it.

  42. Sean says:

    Dear Mr. Ritholtz,

    I respect your consistency in advocating free-market solutions to the problems which a free, unregulated market has brought. Your proposal is sensible, and certain to be ignored. The sensibility with which you approach the problem is in fact the best evidence possible of the value of intelligent, long-term planning and oversight, which the extreme proponents of free markets who rule your country refuse to accept as a matter to principle.

    But I submit to you that your country is not moving in the direction of socialism. Socialism is a doctrine that would actively mediate and regulate public and private interests, so that they can effectively cooperate. What your government is attempting is obviously not socialist, since as you’ve said the taxpayer is being completely screwed. Your country is moving in the direction of hyper-inflation, isolationism, militarism, nationalism, and nationalization. Your legal system fails to restrain executive power. Your international trade is about to fall dramatically as the dollar drops. This is a story which you might not recognize as your own, but it is the road to fascism. And you are very much advanced along it. As the economy declines let the scapegoating begin.

    I write this to you now because you clearly believe in what your country once took seriously (a private sector subject to wonderosly, violently free markets), but in its internal contradictions can no longer sustain. So now that the foundation is shifting… let’s move beyond polemics against socialism, and worry about where your country is headed….?

    Yours,
    Sean Crutcher

  43. toady says:

    “Is it just me or does this plan sound a whole lot like the Super SIV from 2007?”

    One Trick Pony Paulson has been a huge disappointment.

    He’s had a year to create a new plan and instead we get a vastly bigger old plan with Orweillian threats to oppositional leaders.

  44. wally says:

    “Why not spend it on infrastructure and education?”

    A fair quetion. Why not? Let the banks tumble and then announce a reconstruction plan. WPA, CCC, those might be good acronymns to use under the plan.

    I’m not joking: the $700 billion would go farther that way than it would in a bank bail-out.

  45. Frankie Gamwell says:

    GDP: 11.5 trillion
    National Debt: Soon to be 11.315 trillion
    Consumer Debt (unsecured): 2.6 trillion

    This economy is screwed.

  46. Trigby Perea says:

    I was watching Dodd and Shelby on Sunday morning TV when they were asked, “So, what exactly is the calamity that Paulson told you would happen if we don’t pass this bill’. It was like they had been asked to describe their sex lives. Suddenly they clammed up, and it became something that they literally described as talk that isn’t appropriate for Sunday morning television.

    They did seem genuinely scared. So, what I want to know is: What did Paulson say was going to happen?

    Was it that the credit card system would lock up, and people wouldn’t be able to use their credit cards? (Which seems like that could cause a real state of panic int the US, and possibly even a run on banks for cash)

    Was it that there was some threat of foreign action?

    Did Paulson tell them that the boogie man was going to get them? (Or some other unnamed scary Voldermort scenario. “It’s just so bad Senators, that I can’t say what wold happen out loud.”)

    They did seem genuinely panicky and I can’t help but notice that the end of the quarter is just up ahead. Any guesses on what it was?

  47. Paul says:

    Not a bad plan. However, delaying or doing nothing would be disaster.

    One issue economists are neglecting is the high cost of constructing new housing in our big cities like my hometown, LA.

    Construction costs, regulatory costs, risk, land cost, and the time to complete a project have in our big cities skyrocketed over the last couple of decades due to local socialist and wacko environmental policies. As a result there is somewhat of a huge disconnect between what people can afford and what can be built.

    In a growing market with a high housing demand, housing prices will approach replacement cost plus land cost. The marginal cost of one new house (minus some depreciation) has to become the price for housing when the population is growing and the economy reasonably good otherwise. In places like LA and similar cities, where supply has been purposely suppressed to the point where supply of new housing is way less than half of demand , housing prices will rise in a big way and stay that way unless demand for housing absolutely collapses.

    To give you an example in dollars terms, I am involved in an industrial building project in a tiny midwest town. The cost start to finish of the building is $32 a square foot. In LA, the cost would be $ 150 – 200 sf for construction costs alone. Time to completion, from concept to completion: 10 weeks. In LA , if you’re lucky 12-18 months, if not, years or never. Risk: minimal in small town, like playing russian roulette in LA. Land cost is 1% of what it would be in LA.

    LA, thirty five years ago, used to be a low cost city. Disastrous and short sighted city policies, often defended to help the poor or the environment, have destroyed the housing market for the lower middle and middle classes, and along the way created an almost unlivable environment. Judging from housing prices in other big cities, this process has often been repeated elsewhere.

    So the point is using historical measures for housing prices adjusted for growth in the economy or inflation, however logical on the surface, won’t work. Housing prices won’t return to their former affordable levels unless the regulatory environment is changed in a big way. That can’t happen unless the mindset of the electorate, bureaucrats and politicians is radically changed and better informed.

  48. bdg123 says:

    I’d take any plan over Paulson’s fear-based plan. Whip’em up in Congress. Scare them shitless and they’ll sign anything. Sound familiar?

  49. jj says:

    These are excellent ideas Barry. Your consideration for the common man is commendable. Your thoughts should really be taken into considertaion.

    The only thing I fear is that complexity often breeds complexity (especially at the federal level). The incentives in the plan may not be shared by all institutions. And I also have a strong feeling that you cannot save this one in a top-down approach. Perhaps it must be left to fall apart on its own, because any intervention from above will only delay the agony and period of suffering, while continuing to stretch the tax implications to such catastrophic extremes. And you know any federal solutions will involve benefits for the few that need them least to the detriment of the majority – well you know how the gov’t works. I like to believe in a better federal gov’t that doesn’t exist right now.

    We should focus on broader real forms of support. If the problem is broken down into many pieces perhaps it would be more successful. If that were the case, local communities need to localize support networks: food, shelter, medical, aid, etc. Self-sufficiency will be the best hope for the individuals that make up communities and therefore that will add up to be best for the majority. When you think local – everyone has a name, everyone counts. I know this all seems premature and “cataclysmic”.

    Perhaps at the community level they can incorporate your excellent ideas to build their stronger bases.
    The government should concern itself with facilitating this model and then focus on developing long term competitive advantages with trading partners to reduce their debts and rebuild America from the ground up. That’s probably a good thing.

  50. Mitchn says:

    DownSouth wrote:

    So let me get this straight. The only way the bankers will participate is if the US taxpayers give them a blank check with absolutely no strings attached. Otherwise, as Paulson says, they “aren’t going to participate.”

    To which the U.S. taxpayer should, and must, say: “F*ck you, Mr. Banker.” Let’s just let the market do what it’s supposed to. Oh, and by the way, I know of a nice two-bedroom you and your family can sublet for less than $2,000 a month.

  51. Your proposal might be a good side kick to an overall solution. However, the trouble with the Paulson plan (although, I agree with you that it does imply unlimited commitment, and thus is a major gamble) is not necessarily its size, but rather what it does to the stability of the overall framework.

  52. Mark says:

    Bloomberg News U.S.:

    Treasuries Irresistible as Deflation Trumps Paulson (Update2)

    By Daniel Kruger and Sandra Hernandez

    Sept. 22 (Bloomberg) — As details of Treasury Secretary Henry Paulson’s plan to revive the U.S. financial system by pumping as much as $700 billion into the markets emerged Sept. 19, bond investor Michael Cheah was reminded of Japan.

    When that country’s real estate bubble burst, leaving a trail of bad real estate loans, officials flooded the economy with cash only to see banks hoard the money instead of lending it out. The result has been a series of recessions and persistent deflation for more than a decade.

    “Although the government tried to debase the yen by printing a lot of government bonds, the economy went into a standstill,” said Cheah, an official at the Monetary Authority of Singapore from 1991 to 1999 who manages $2 billion at AIG SunAmerica Asset Management in Jersey City, New Jersey. “The banks used the money to buy safety. I see a repeat happening here. The banks will use it to buy Treasuries.”

  53. Sharon says:

    Barry,

    It’s an interesting plan, but what happens to the other ABS that are floating out there? There are a lot of car loans, credit cards, and other consumer borrowing that’s about to go paws up in the next few months.

    ~~~

    BR: One crisis at a time!

  54. stormrunner says:

    Winston:

    Any idea what happened to Eclectic, even though he had issues with my conspiritorial leanings as regarding the direction this was taking, now that the direction is somewhat clearer, more accurate projections incorperating his perceived liquidity hypothesis should be possible.

    I am hoping he is well haven’t seen a post from him in quite some time.

  55. Will says:

    Thanks for this post. I’m not that economically literate, and this seems to be a great explanation…

    I’m not sure about the 30/20/10 plan, but it’s always nice to see people focus on solutions instead of problems.

  56. Winston Munn says:

    Stormrunner,

    Eclectic posted just last Thursday or Friday. You may wish to use the search tool for “Eclectic” and find the most recent post.

  57. DL says:

    The “30/20/10” proposal is certainly worth considering.

    But whatever we do, we shouldn’t just hand $700 B over to a group of people to throw around.

    I think that we could get by with a “band-aid” approach until the next president takes office. Let the next president then take responsibility for any taxpayer bailouts.

    Or else create an authority to buy up bad mortgage-backed securities, but limit them to $30 B per month for eight months. Then review the success/failure of the program.

  58. desi dude says:

    instead of all this meddling with the rotten assets, Fed can create 10 regional banks to lend to whomever needs moeny and qualifies

    THat will keep the business going, in the mean time wind down the insolvent companies

  59. Jay Walker says:

    I like your plan for several reasons, as I think it’ll slow neighbourhood destruction and keep people utilizing the housing stock in a rationale fashion. However, I don’t know how you’d limit it to just 20%.

    Given that there’s 5 million homes currently delinquent or behind, I assume that each and every one of these would like to apply to your plan.

    According to The Economist, some 2.4 million more ARMs are due to reset, with the peak being in 2011. They also state that their payments will go up on average 60-80%. I think its fair to say that most of those will fall behind, rather quickly upon the re-set.

    That’s likely ~7 million mortgages that the government would end up sponsoring. I’m not sure I think that would be any cheaper than the existing plans.

  60. babycondor says:

    The spectre of a Japan-like multi-year economic doldrum has been raised. I think this fear is unfounded. Isn’t a key difference between us and them the matter of population growth? More people, more developable land, more natural resources to exploit? US is culturally and historically more financial risk-takers than Japanese, it seems. Just not the same set of circumstances here, if you think about it calmly.

  61. good going BR, you’ve provided a fine example of how non-complex quality answers are.

    part of the charade being used to pass Paulson’s initiative, beyond the Fear (Fear!) Uncertainty Doubt routine, is that “this” is too(x Two) ‘complex’ for mere Mortals/ Only WE, the FedInsuranceGovernment, who created this, can handle it, or it will go Off.

    That FIG-Leaf, at once, covers too much, and not enough.

    Maybe we should go a little further, and explain the Mechanics of the Mortgage itself(?).

  62. MT says:

    I suggest a simpler idea and one that I think is fairerto those who took out mortgages they could actually afford.

    For every RMBS the government buys in at a discount (e.g., 50%), it must offer each of the underlying mortgage debtors the option to restructure their individual mortgages as a fixed rate mortgage for a modest premium over that discount (e.g., if the govt bought the RMBS at 50% of the principal balance, then each debtor can restructure their mortgage into 55% of its principal balance). The interest rate would be fixed at that rate that enables the govt to resell the mortgage at a price that recovers its cost of purchase. The slight premium is to offest the fact that some mortgages will default regardless of the restructuring. In this way, the discount would flow back into the general economy and every borrower would be treated equally as opposed to bailing out the worst risk-seekers. Need tax exemption for the cancelled debt.

  63. Robert Muncy says:

    Hell why not buy all the mortage loans as Financial Stimulus. Plus buy all the Consumer credit debt. just charge it to the kids. Please stop the madness now.

    If you have not read this please do so now!
    http://faculty.chicagogsb.edu/luigi.zingales/Why_Paulson_is_wrong.pdf

  64. DL says:

    I’m not sure I fully understand the politics of this (the $700 B package). Is this all about trying to help John McCain get elected? If that’s all that it is, then this is all a huge mistake. With that much money on the line, I don’t see what the rush is.

    Furthermore, John Hussman is right. The stockholders and bondholders (of the financial companies) should get taken to the cleaners before any taxpayer money is used.

  65. Fred S. says:

    Barry, Send the proposal to Paul Volker, Shiller and any other economist who has been ahead of the curve. The execution of such a proposal may be asking too much.

  66. Screen Age says:

    I stumbled across this and thought I’d read just enough of it to allow me to dismiss it as quackery. To my surprise, I didn’t.

    Although I’m not as confident that your plan may right as I am that Paulson’s may be wrong.

    It was a GREAT read, though, and it has me thinking more deeply about this matter than before. Thanks.

  67. Beret (from Germany) says:

    ”US is culturally and historically more financial risk-takers than Japanese, it seems”

    Well babycondor, that’s exactly what keeps getting the U.S. into messes like this one. In my opinion the mentality of Americans, from John and Jane Doe to Politicians, regarding deficit spending hasn’t changed since the begin of the Great Depression.

    George Soros for instance believes that U.S. government interventions to financial crisis has lead to a 60 year build up this financial bubble.

    Moral hazard is extreme, the policy is always let the bubble prosper, it doesn’t hurt anybody, and when it bursts intervene even though it doesn’t work out with free markets, so that the correction isn’t allowed to take place properly and the next bubble, which supposedly does no harm, comes sooner than it would …

    Actually this theory makes sense, because Fannie Mae was founded in the aftermath of the Great Depression, so that Americans could afford homes again … and these government garanteed mortgage companies helped fuel at least two housing bubbles

    Credit spending led to the Great Depression and it continues to be a huge problem to this day. If you spend money that isn’t yours – guess what – some day you’ll have to pay it back …

    There is no nation with such huge personal debt … and the national debt is huge as well … the structural problem, that the U.S. consumes more than it produces remains … there will have to be a correction .. government intervention and provision of liquidity won’t change the fact that it’s time to payback

  68. Jim D says:

    To the idiot (Tom C) who thinks that a reverse Dutch auction will net a good deal for the taxpayer:

    Do you know how reverse Dutch auctions work with disparate properties? A little bit of reading and thinking will show you that it’s designed to get the *worst* possible properties (in this case, bonds) onto your books. That makes return of capital almost impossible.

    Reverse dutch auctions work well for homogenous properties, not hetrogeneous ones. If any of these words confuse you, look ‘em up – you apparently aren’t familiar with the concepts.

  69. Retrogrouch says:

    This is the economic version of the Patriot Act.

    Read this from the proposal:
    Sec. 8. Review.

    Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.

    http://blogs.wsj.com/economics/2008/09/20/treasurys-financial-bailout-proposal-to-congress/

    The biggest economic bailout in history and the bill is only 3 pages long. Give us the power to do what we want. Then, trust us.

  70. wunsacon says:

    >> by establishing a renewed “market price” in these reverse auctions for RMBS, ideally at a higher level than at which they are currently in the banks’ books, all banks with such paper would benefit from their outcome

    wallstreet wizzard, proper valuation depends on the borrowers’ likelihood to repay (plus prevailing interest rates and other market conditions). If some irrational buyer (er, Paulson) decides to pay “above market” for a bunch of bonds, other market potential buyers will merely chuckle. They will dismiss the one-off sale as “not probative of fair value”.

    And devaluing the dollar will make potential buyers want higher interest rates and, thus, lower initial purchase prices.

    I can’t see how this proposal helps anyone but bankers with existing bad debt.

  71. emailcraigs says:

    A friend of mine had a good idea. Why doesn’t the government simply label the activity of the “investment banks” over the last 10 years as Financial terrorism and then give them the option of either playing nicely or being prosecuted under the wonderful new Patriot Act. This BS about the banks not wanting to play ball unless they are given a free pass is paramount to blackmail of the American Taxpayer. The fact that it threatens their way of life, like terrorism, is a singular reason to treat them just like terrorists.

  72. Whammer says:

    So, what exactly is stopping you or me or anyone else from starting up a few banks with clean balance sheets and solving the “liquidity” problem that way?

    I’m being only a little facetious — if the problem is that a whole bunch of financial institutions can no longer provide the necessary credit in order to allow for a fully functioning economy, then why doesn’t the Federal Govt. allow for the fast-track creation of a bunch of new banks?

    For everyone who owns a piece of the shitpile, too bad for them…..

    For that matter, this is making me think that maybe WFC, and other banks that don’t own a lot of the shitpile, ought to be good long-run plays.

  73. this: I write this to you now because you clearly believe in what your country once took seriously (a private sector subject to wonderosly, violently free markets), but in its internal contradictions can no longer sustain. So now that the foundation is shifting… let’s move beyond polemics against socialism, and worry about where your country is headed….?

    Yours,
    Sean Crutcher

    Posted by: Sean | Sep 22, 2008 10:33:02 AM

    past the fact that this is signed by Crutch-er, and is extolling the virtues of Socialism..this should be a good example of the type of ‘help’ we can expect to receive from our foreign ‘friends’..

    Lafayette ain’t comin’ to Help this time.

    Look, we’ve chewed a lot of Fat on these threads.

    ol’ boy’s point, above, about Fascism, is no grade-school hyberpole, rather, it’s closer to the Fact of the Matter than, believe me, even I care to countenance.

    towit: “Men occasionally stumble on the truth, but most of them pick themselves up and hurry off as if nothing had happened.” — Winston Churchill

    Cincinnatus ain’t coming back, either.

    If we don’t know what’s afoot, lend a hand in finding out. Our continued Dalliance, and Disbelief, will land us, like Dilly here, yon Crutcher, singing the praises of his Captors.

    It is about Human Action, We must act to create the World we want to leave behind.

    We need, not, a lever long enough to move the World, but a thorough understanding of the paths Man has taken, and the will, again, to choose that path less traveled by.

    Our American Experiment, the Ideal of Freedom and the Sovereign Individual, was brief, breifer yet v. the whole History of Civilization.

    Civilization that began with the mere thought of Human Action, and flowered, through our Actions, thereby inspired.

    It was a Radical clique, our Forefathers and their Strong Women, that up and told, the supposed King and his Claque, to FBM.

    The Torch of Liberty, that they fueled with the Freedom they fought for, illuminated a path that they hewed, for others follow.

    Few did. Now, beset again by a supposed Master (yon’ wizard of FBM(board-feet) and his minions, it is up to us to find hint of that now overgrown trail, that one less traveled by. If we act, and are Hale, if we hack, not pale, and re-clear the trail, We will, see again, that, to which many fail. That of our History, that, our road to prevail.

  74. and, this (thanks Yahoo!)

    Today’s Top Searches
    Britney Spears
    Demi Lovato
    Jane Krakowski
    Dancing With the Stars
    Heroes
    2009 Audi A5
    David Blaine
    Rock and Roll Hall of…
    Blink 182
    Fall Foliage

    isn’t what I’m referring to..

  75. Eric says:

    Nice to hear a proposed solution for once. Perhaps there is also an intervention window for helping millions of *oft forgotten* responsible renters scraping downpayments together. Corrected housing prices and potentially some kind of incentive may help them help this situation too.

  76. Francis says:

    First – (slightly sucky yet true) I have learned more about finance from your blog than any other source
    Second – I have a good education in an unrelated field
    Third – I (hope and trust I) am one of the prudent and diligent people which you use to discuss those who will be most immediately/materially affected by this fuck up
    Finally – I wish you would explain your 30:20:10 rule in a manner similar to your NPR interview on shorts. My father is a great man (as many fathers are) of 78. I use your articles so that we can debate humanity.
    Cheers Barry

  77. Jojo says:

    Another “bailout” proposal here:

    =======================
    September 22, 2008
    An Open Letter to the U.S. Congress Regarding the Current Financial Crisis
    John P. Hussman, Ph.D.

    In 2006, the president of the Federal Reserve Bank of St. Louis noted “Everyone knows that a policy of bailouts will increase their number.” This week, Congress is being asked to hastily consider a monstrous bailout plan on a scale nearly equivalent to the existing balance sheet of the Federal Reserve.

    As an economist and investment manager, I am concerned that the plan advocated by Treasury is essentially a plan to bail out the bondholders of financial institutions that made bad lending decisions, with little help to homeowners that are actually in financial distress. It is difficult to believe that the U.S. government is contemplating taking on the bad assets of these institutions at probable taxpayer loss and effectively immunizing the bondholders (and shareholders) of these companies.

    While it is certainly in the public interest to avoid the dislocations that would result from a disorderly failure of highly interconnected financial institutions, there are better ways for public funds to accomplish this, other than by protecting corporate bondholders while homeowners remain in distress.

    Consider a simplified balance sheet of a typical investment bank:

    Again, everyone knows that a policy of bailouts will increase their number. By choosing who bears the losses for irresponsible decisions at these companies, Congress will also choose the scope of the bailouts that follow.

    Sincerely,

    John P. Hussman, Ph.D.
    President, Hussman Investment Trust

    Full article

  78. D. Hurford says:

    Dr. Hussman-

    Thank you for the most comprehensive assessment of the situation we face, and the most thorough approach to resolving it, that I have seen.

    Here’s hoping Congress reads your letter!

  79. Jay says:

    You totally skip over the human cost of the housing crisis.

    1. People who get kicked out of their houses typically lose their credit rating. People who lose their credit rating typically are not attractive tenants. People, especially families, will be left in tent cities.
    2. Children living on the street will be abused, infirm, unschooled, and possibly die.
    3. Eventually the federal government will have to step in to remedy this, which will mean expanded welfare and affordable housing/developments. This will cost significantly more than any bailout now.

    I find it interesting that the party who argued so strongly about saving Iraqi children would side with their American counterparts…for once.