Posts filed under “Taxes and Policy”
Some ugly details emerge about the cost of the Paulson/Bernanke plan in terms of cost. It will be hugely expensive:
Treasury Secretary Henry Paulson’s $700 billion proposal to stabilize the banking system may push the national debt to the highest level since 1954, threatening an erosion of foreign appetite for U.S. bonds.
The plan, which asks Congress for funds to buy devalued securities from financial institutions, would drive the debt above 70 percent of gross domestic product and the annual budget gap to an all-time high, possibly exceeding $1 trillion next year, economists estimated.
":This is sobering, absolutely sobering, even to someone who doesn’t drink,” said Stan Collender, a former analyst for the House and Senate budget committees, now at Qorvis Communications in Washington.
At risk for the world’s largest economy: a jump in interest rates prompted by the glut of additional Treasuries needed to finance the plan, and a diminished desire among international investors to add to their holdings. The dollar yesterday slid the most against the euro since the European currency’s 1999 introduction.
During a five-hour hearing of the Senate Banking Committee today, Paulson said it is "difficult to determine” what the ultimate cost of the plan would be, though he said the objective is to minimize the cost to taxpayers. He’s asking lawmakers to lift the legal ceiling on the federal debt to a record $11.3 trillion from the current $10.6 trillion.
Wow . . .
Paulson Plan May Push National Debt to Post-World War II Levels
Bloomberg, Sept. 23 2008
All of the bad loans made by various banks and mortgage underwriters are now being accepted by the Fed, or are potentially going to be bought by the Treasury Department. Why not us? We can’t we all turn in our crappy paper, stock in Exodus Communications or Pets.Com, and even old lawn furniture to the…Read More
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 . . .
Paul Krugman, an economics professor at Princeton University, talks about the U.S. government’s move to cleanse banks of troubled assets and halt an exodus of investors from money markets and the outlook for the U.S. financial-services industry and economy
00:00 "Socialization" of U.S. financial system
01:51 Bailout’s justification; "inevitable" rescue
04:13 The outlook for U.S. banks is "not clear."
05:02 "Weakening" economy into next year
Running time 05:57
Krugman Sees `Socialization’ of U.S. Financial System: Video
Bloomberg, September 19, 2008 17:53 EDT