Thursday, September 25, 2008

One Day At A Time

There was supposedly a mortgage securities bailout deal nearly in place today before the House Republicans threw a wrench in the gears. I'm glad the GOP is slowing this train down, but for now I'm even less enthused with the House Republicans' alternative deal than the original Paulson plan.

The Rep Reps want to insure the questionable-quality mortgage backed securities in lieu of buying them, but I like my idea better. Part of the problem is that these MBS's are too opaque to easiliy manage them in the first place. So to insure them adds yet another layer of obfuscation, and btw does anybody have any idea for how much premium the gov't is supposed to be charging for this insurance? No, these MBS's are working like cholesterol in the bloodstream of our major financial institutions, so to fix the problem we need to get rid of it by putting it on the government's books instead. On that score Secretary Paulson is correct.

My biggest quibble with the Paulson plan is that it overpays for the MBS's. In fact, if we can build a legitimate mechanism for determining market value, I'd give Secretary Paulson a check for $700Bn today and let him buy whatever he wants (with some minimal oversight), as long as he never pays higher than market value for whatever he buys. Why would the owners of these MBS's sell them to the Treasury under these conditions? Because we're the government and we're not going to give them a choice. We tell the banks, "If you're not in good shape and you have bad MBS's, you have to clear them out. If you don't want to sell them to us, find someone else to buy them."

When this plan is implemented, anyone loaning money to a bank knows that the bank has the resources to repay them independtly of whatever they might own in MBS's. Then the banks can get access to capital, and loan money out to whoever they deem is creditworthy.

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