LA Times: Robert Kuttner and J.D. Foster debate the Economy and the Bailout Bill

Posted by Kendall Harmon

What should Congress do now?

First, rescue the money markets and the toxic securities by refinancing the underlying mortgages -- rather than bailing out the banks. In the Great Depression, Franklin Roosevelt's Home Owners Loan Corp., a branch of the government, refinanced one out of every five mortgages. Roosevelt's administration saved about 1 million Americans from foreclosure. No middlemen got rich.

If we can stop the wave of foreclosures, we brake the collapse in housing prices. The bondholders would get bought out at so many cents on the dollar, just as they would have in the Paulson plan. But with the Kuttner plan, homeowners are the primary beneficiaries. Under Paulson's approach, the bondholders get bailed out but many homeowners still lose their home or keep paying Mafia mortgage rates. It's just what you'd expect from a guy who still operates as if he were the chief executive of Goldman Sachs -- which Paulson once was.

Second difference: The government should take over failing banks directly and get rid of toxic executives as well as the toxic investments they made.

Read both pieces carefully.

Filed under: * Economics, PoliticsEconomyHousing/Real Estate MarketThe September 2008 Proposed Henry Paulson 700 Billion Bailout Package

Posted September 30, 2008 at 7:59 am [Printer Friendly] [Print w/ comments]

1. Jeffersonian wrote:

If we can stop the wave of foreclosures, we brake the collapse in housing prices.

No you don’t, you just postpone it.

September 30, 12:49 pm | [comment link]
2. Clueless wrote:

The big question is WHY did they need so much money in such a hurry? What was it for?  After all they don’t want to renegotiate mortgages, which is the best way to put real value in troubled paper, and the way that is most likely to be palatable to US homeowners.  It is the way that was chosen in Japan.  Instead of a interest only loan at 5% about to balloon to 15%, homeowners got a 40 year fixed at 6%.  This sets the value of the paper, and more than adequately punishes the borrower.

And the answer for the haste lies in a small footnote in Financial Times:

“The Fed also suspended rules that prohibit banks from using deposits to fund their investment banking subsidiaries.”

As explained in:

“This rule change, allowing 100% of FDIC-insured deposits to be used to back investment banking transactions, effectively extends the coverage of FDIC insurance to all of these transactions, AND DOES SO WITHOUT REQUIRING ANY ADDITIONAL PREMIUMS TO BE PAID into the FDIC reserve fund. These investment transactions will now be covered by government insurance FOR FREE. We’d better not have too many of them fail.

Imagine this scenario. You have $80,000 in Bank of America when it collapses. (This is just a what-if; I’m not predicting this bank’s failure.) You go in to get your money. After all, it is covered by FDIC insurance, isn’t it? Sure enough, the clerk is about to hand you your $80,000 when a man steps up and grabs it from the clerk, claiming it is his. You protest, showing him your account. He’s says he doesn’t care; he’s got an investment transaction at the bank and that makes him the first lien holder on the money that used to be in your account.”

September 30, 1:34 pm | [comment link]
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