"Even Hank Paulson’s bail-out plan cannot detox global banking"

Some readers would have a go at me whenever I’d post articles by the Telegraph’s Ambrose Evans-Pritchard. Although he has a tendency to hyperventilate and sometimes oversimplifies, he regularly points to data and research that I haven’t seen covered elsewhere.

More important, his major calls this year have been correct. He predicted the oil price decline, was vehement that deflation, not inflation was the risk to the global economy, and pointed to evidence of near zero money supply growth in major economies, an early warning that the credit crunch was intensifying.

Today, Evans-Pritchard and the Financial Times editorial page are in agreement on the the dangers of the debt crisis and the need for swift action, although Evans-Pritchard spends more time on the long-term outlook.

First, from the Financial Times (boldface ours):

Banks are not to be trusted. This is not just the view of the public and policymakers, but that of the banks themselves. Spreads on unsecured inter-bank lending have reached unprecedented levels, particularly in dollars and, to a lesser degree, sterling. Such stresses cannot continue for long, without serious damage to both the financial system and the economy….

This dire situation makes decisive action essential. Beyond doubt, failure by the US Congress to pass a rescue package would court catastrophe. But the plan proposed by Hank Paulson, US treasury secretary, is inadequate. This, too, is the banks’ view. They know his plan is likely to pass, in some form, yet seem increasingly nervous.

So what is to be done? The response must have three elements.

First, in the absence of private funding, central banks must do the intermediation among banks. Moreover, banks cannot fund ongoing operations overnight. So all central banks must shift liquidity provision away from overnight lending, towards much longer maturities.

Second, the US Congress must pass a version of the Paulson plan. This must promise to make the distressed securitised mortgage assets now on the books of the banks more liquid. While the initial plan needed improvement, a better version must be enacted extremely soon.

Yves here. With the need to placate House Republicans, we are sure to get a worse version, save the oversight provisions.

Finally, not only the US, but also other countries, and particularly the UK, need to put in place a credible plan for the forced recapitalisation, or closure, of weakened banks. Banks unable to borrow are zombies. They must be restored to health or allowed to perish quietly.

Some of these actions are going to be highly unpopular with powerful interests, including the banks themselves. So be it. With the banking system in dire distress, effective action is needed right now.

Now to the characteristically more colorful reading from Evans-Pritchard:

Even if Congress backs the Paulson bail-out, the $700 billion blast cannot save the US, Britain or the world from the deepest economic slump since the Thirties. If Congress balks, God help us. The credit system is suffering a heart attack…
Wherever you look – dollar, euro, sterling Libor (the rate at which banks lend to each other), or spreads on credit derivatives – the stress has reached breaking point. If borrowers cannot roll over the three-month loans that are the lifeblood of business, they will default en masse.

“Money markets are imploding. If no action is taken very soon, there is a significant risk that the global economy will collapse,” says BNP Paribas. Almost every trader says much the same thing….

Republican refuseniks – defying their president – have a grim responsibility if they now tip America over the edge, setting off the “adverse feedback loop” that so terrifies the US Federal Reserve. Like players in a Greek tragedy, they seem determined to repeat the “liquidation” policy that led to the Great Depression – and to Democrat ascendancy for years.

Lehman Brothers’ collapse showed the chain of inter-connections that can cause mayhem across a clutch of different markets. That was just one bank – albeit with $630 billion or so in liabilities.

Credit is the lubricant of a modern economy. A seizure now would probably lead to the bankruptcy of General Motors and Ford in short order, but it would not stop with the US car industry. Waves of job losses would set off a self-feeding spiral. Yet more people would default on their mortgages (and car loans), driving house prices down even further. That, in turn, would threaten the solvency of the best banks. That is the way to Armageddon.

As Mr Paulson says, US taxpayers are on the hook whether they like it or not. A $700 billion fund to soak up toxic debt and stabilise the credit market is the cheapest way out. It is certainly cheaper than Depression.

Hopes that the world can cruise happily on as the US buckles have been dashed by the violent downturn across Europe and Asia over the summer. The Baltic Dry Index measuring freight rates for ships has plummeted by two thirds since May. Japan’s economy is already contracting. China’s may be close behind: a third of all textile factories in Guangdong have closed this year. House prices are tumbling in Shenzen, Beijing, Shanghai.

Albert Edwards, global strategist at Société Général, says Asia built its boom on shipping goods to the US: “The emerging market boom is going to collapse and this will shake investors to the core. The great unwinding has only just begun.”…

This is debt deflation – partly imported from America, partly home-grown. It is global. There is nowhere to hide. Even oil-rich Norway took emergency action this week to shore up its banks.

How will it all end? Europe assumed – wrongly – in the early Thirties that it could withstand the Atlantic gales after the collapse of the Bank of the United States in December 1930. However, Austria’s Credit-Anstalt failed in the early summer of 1931, setting off contagion across the central European banking system….

America’s serial bail-outs – nearing $1.6 trillion, or 12 per cent of GDP – are playing havoc with the US budget. The deficit is above 6.7 per cent, near a 60-year peak. But claims that the US is going bust are frivolous. The US Treasury is not taking on permanent debt: it is behaving like a giant wealth fund, hoovering up mortgage securities selling far below their real value for reasons of panic. Famed investor Warren Buffett expects it to make “a considerable amount of money”.

The system will recover, but it may take a slow purge for a decade or more to rid us of the debt toxins. There will be no quick rebound this time.

Unfortunately, Evans-Pritchard is wrong about the prices at which the Treasury will buy banks’ dodgy paper, but the sad fact is that the Treasury’s denial and its failure to recognize the knock-on effects of the Freddie/Fannie conservatorship and the Lehman failure have led it to put forward a half-baked plan. The time pressures plus the obstinancy that there were no other options leave us with choosing between bad and worse.

Update 2:40 AM: John Jansen posted some excerpts from a research report by HSBC that comes to the same conclusion, namely, the plan isn’t big enough:

We take a look at the top 20 US banks by assets and make a rough stab at how much of their assets will be eligible for the USD700bn Troubled Assets Relief Program (TARP), assuming it ultimately passes Congress in one form
or another. Although many of the assets should have only limited impairment over the long run, we suggest that approximately USD3trn in assets could feasibly meet the conditions required to be eligible to be sold to the government, assuming Treasury Secretary Henry Paulson gets wide leeway in deciding what assets to purchase. The bottom 80% of US
banks and the pure-play investment banks may have an additional USD1.5trn of eligible assets, for a total of roughly USD4.5trn. The USD700bn TARP, while helpful, would represent only 15% of this. We have our doubts about whether that would be enough to unclog the financial system.

But even if TARP did have better-than-expected results, it will not jump-start lending, as house prices appear likely to keep falling for some time, TARP will not completely rebuild trust between banks, risk reduction at money market funds still pose systemic problems despite recent government investor insurance, and mark-to-market rules will still increase capital needs even if TARP acts to reduce some strains. In other words, the forces of deleveraging are overwhelming, and so the credit crunch will remain over the next few quarters.

As a result, the economy would be virtually stalled over the next year, we forecast that the unemployment rate will rise to at least 7% in 2009, and therefore core inflation is likely to fall next year. On a “cash-deficit” basis, the budget deficit is likely to soar to USD1.2trn for 2009, we estimate.

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  1. Richard Kline

    The stated fact that the top 20 US banks have $3T worth of ‘assets’ to offload is exactly why buying these assets is an exceedingly stupid and unproductive way to deal with the capital erosion and in many cases insolvency of those firms. Which is better, $150B of public equity infusion and/or seizure for control with no purchase, or $3T of expense with zero (0) guarantee of the improvement of any significant vector in the US financial economy besides insider profits? The Paulson Bullrush is an attempt to roll the US Government, but it is not a credible engagement with our problems: that is perhaps its worst aspect, its copious delusion where cool heads and shrewd schemas are needed.

    Don’t bail ’em, fail ’em.

  2. tz

    Blame the Democrats – they have a majority in congress but won't vote for the plan unless the republicans do. And the American people who are bombarding them with a huge number of calls, faxes, and emails 10:1 or greater opposed to the bailout as structured.

    And how is another $700 billion going to restore confidence when they say "Fannie and Freddie are sound", and they are nationalized two weeks later? In whatever form it takes, we don't know what evils lurk in the depths of the big banks, other than it isn't just MBS and it is a lot bigger than 700 billion. Will the short term loans to companies you cannot sell short to hedge magically start when there is the same question of solvency or liquidity the day after?

    And if it is just liquidity, why not just provide the $700 billion to the CP market directly? How is buying a tiny fraction of one form of toxic paper (at free market or mythological values?) going to unfreeze things?

    It isn't enough of a crisis to clawback billions in bonuses? To demand that an insolvent (or are they insolvent?) bank give real guarantees or have some form of receivership so they don't just loot the taxpayer again? To ask for an investigation as to why everyone has been surprised although it started a year ago and already had two crises between (Bear Stearns and the July low).

    It is disingenuous to complain that someone is being denied treatment for a heart-attack when they refuse to start exercising, maintain their 5000 calorie per day intake, and smoke like a chimney.

    Wall street wants business as usual – privatized profits and socialized risk. The huge bonuses. The high risks.

    Hank Paulson and Ben Bernanke saying "this will fix everything this time" as they've been repeating for the last year at each "new" crisis. Then saying everything is fine.

    This is the age of the internet so I don't have to go through my old stack of papers to find the serial negligence, stupidity, lies, fraud, or whatever they have been doing.

    Then again there's the "we don't want the smoking gun to be a mushroom cloud". Illiana Mercer posted an eerie comparison between two Bush speeches – the immediate need to get Saddam Hussein, and this bailout. After enough lies, one tends not to believe what you say.

    How is John Merriweather doing these days? How many times do you have to attempt to blow up the financial system before either the government or your friends take away your detonator?

    And on that, if we are having the equivalent of an terrorist attack on Wall Street, someone should go to prison for a long time. Were all the financials filed under SarbOx lies ("we're solvent!, we're liquid!, we're making lots of money and paying dividends! we aren't a ponzi scheme!)? Including the AAA ratings from Moody's and S&P (and having an agency say something isn't poison doesn't make it any less toxic – if you don't belive that I have some chinese milk for you to drink).

    If it IS that much of a crisis, we need to nationalize the banking system (guaranteeing everything) and expose the books. If it isn't, then we need to find a way to make the bankruptcies easier.

    When thousands lost their jobs in other states to outsourcing, downsizing, etc., Wall Street applauded. The free market you know. And now that it is time to downsize and outsource Wall Street, they want the same kind of protection they denied to every other American, so I don't think they will get it.

    Ford and GM's costs are too high, they make too many cars, the wrong kinds, etc., so why not have a SUV-SIV that would buy up all those vehicles that no one wants any more than mortgage debt? Keep everyone working. Stave off bankruptcy.

    Didn't the administration and Greenspan say to go out and buy an SUV and get an ARM on a big house?

    Perhaps things will blow up, but it won't be as if half the country will be dead the next day. It might be a generalized receivership, but at least after that day we would know who was solvent and who was not and be able to reconstruct a sound financial system. Right now the rot is throughout the system.

  3. Anonymous

    Absolutely not. Ford and GM should die. Chrysler is a zombie waiting for a decent burial. US Toyota and Honda will do perfectly fine. GM emerges from Chapter 11 as a South American brand, so what?

  4. Jojo

    If no action is taken very soon, there is a significant risk that the global economy will collapse,” says BNP Paribas. Almost every trader says much the same thing….

    The sky is falling, Chicken Little keeps yelling. But is it really?

    Over the last year, we’ve had one pundit after another tell main street that the bottom was in and it was now safe to go back in the water. They have all been wrong.

    Lately, the call has changed to the imminent collapse of the financial system if the taxpayer doesn’t help bail the principle perps out of their poor decisions. But what guarantee do we have that this supposed financial collapse isn’t just more smoke being blown by people unwilling to swallow their punishment and take their medicine? If you can’t run your business on normal cash flow, if your company is built on debt and borrowing to the degree that it can’t run without credit, then perhaps you SHOULD collapse and your assets (if any) should be acquired by better run companies.

    This bailout is poorly structured and is being shoved down the throats of America using pressure, scare and fear techniques worthy of the best time-share condo salesman. I am particularly disappointed in the Democrats, who desperate to get elected, have seemingly embraced the Paulson/Bernanke plan – as long as they can add some more dollars to it for their own pet causes. When this bill passes (and not that I didn’t say IF), it will not solve our problems and Paulson/Bernanke will surely be back with palms outstretched yet again in the not distant future. I promise to vote against any Congressional incumbents up for reelection in my district who votes yes on any semblance of this plan.

    Few politicians or those in MSM seem to be asking this question – might it not be better to let the system fail and build a new and better system on the ruins of what failed, hopefully learning from the past mistakes?

    Money has been loaned since time immortal. If there is money to be made, then others with capital will surely step-up and resume the business of lending under the new rules. The world WILL NOT end, it will just change. But no one likes change except a wet baby.

    Here’s a good article by Louis Gerstner, former CEO of IBM, in Businessweek calling for a reengineering of government. While it only obliquely references the current financial mess, it at least shows that there are some people with vision who recognize that we are on the wrong track and that change is desperately needed. Unfortunately, we don’t seem to have any politician with similar wide-ranging and specific vision, including “Mr. Change” himself (Obama).

    Full article – It’s Time to Reengineer U.S. Government

  5. esb

    Let me ask two simple questions.

    Question one: is there any con game in history that did not end?

    Question two: Is fractional reserve banking and lending a con (or “confidence”) game?

    Actually, there is a third question: Is Henry Paulson a con man?

  6. Amnon Portugaly

    There’s one glaring weakness in Paulson’s Bailout Plan to save the U.S. financial system: It most probably won’t work as intended. It also could make things worse. By removing these troubled assets from the balance sheets of the financial institutions, it will enable the banks to lend again without lingering doubts about their solvency and viability. However, the Paulsen Plan does not ensure that those banks and financial institutions that receive bailout aid will increase lending.

    Banks must have BOTH the capability to lend and the willingness to lend. The Paulson plan is aimed at restoring the banks ability to lend, at a huge cost to the American taxpayers. However, even with a healthy balance sheet the banks will not lend because of lingering doubts about the solvency of their customers, their ability of paying the loan and the viability of the economy. In short the banks’ potential customers – enterprises and individuals – also have broken balance sheets.

    The Paulson plan does not address the root cause of the problem. The American consumer has no more purchasing power. For most middle class and workers, earnings since the mid-1970s have not kept up with the cost of living, while their real expenses for healthcare, education, housing, has grown much faster than the CPI, consequently their discretionary spending has decreased. Households in the US have too much debt, the price of their houses is plummeting, and they are getting buried under rising debt servicing burdens, unemployment is growing, and their savings are evaporating.

    Currently, there are several millions Americans without jobs, and several millions of American who lost their home or are going to lose their home. It seems that the government and congress do not care about these people and at the same time are going to inject $700 billion into the financial system.

  7. David Hannaford

    The Big Boss, whom you have never met and know only as Mr RedShield, likes your youth and muscle and uncomplicated mind.

    He gives you a job as an Enforcer. Your role is to take weekly payments from all the local businessmen and deliver to the
    boss’s local bank. The work is easy … the businessmen see the
    muscles; they pay. The bank likes you, and you have limitless credit. Sometimes a businessman is late with his payment or reluctant to pay. You give him a quick biff, and payments are restored. The bank likes you. They give you credit based not only on the money you have accumulated, but on the wealth of all the payers you keep in line. They give you even more credit when you bring in new regular payments from new businesses in town.
    For years and years things are great. You’ve acquired mansions
    and cars. You are greeted with smiles and freebies everywhere
    in town.
    Then you start to get old. One of the businessmen gets brave
    and doesn’t pay. You give him the biff, he goes down, but
    remains defiant and doesn’t pay. You decide to run the shop
    yourself to keep up the payment but it costs more than it’s worth. Worse, the bigger, stronger neighbor says he’s not paying… and his bigger still neighbor says he’s weighing up his options.
    When you get to the bank, they tell you that your credit is
    exhausted. You plead, and offer your mansions and cars as collateral. As you sign, you notice your biggest remaining
    client, the shopping mall proprietor, together with a young,
    muscled enforcer, stepping into a rear office. Your aged, dimming eyes can just make out the sign on the door… Mr RedShield.

  8. Anonymous

    Considering how bad the situation appears to be, why were there no urgent sessions with a panel of experts? Why the secrecy and a 3-page plan asking for $700 billion? They just wanted a big number (but not too big to pass). Will it work? Paulson and Bernanke only say something has to be tried, and this is that something.

    This is an ill-thought plan. The only assured outcome is cash-for-trash for banksters. Everything else is haphazard guesswork.

  9. david hannaford

    Sorry for being so metaphorical in my earlier post. Here’s the plain text:
    The Rothschild-owned Fed gave the US unlimited credit because all the dollars printed which went overseas for oil or Asian manufactures were promptly returned to the Fed.
    This is no longer true, and so you have no credit.
    Not to worry … the Fed created those dollars out of thin air, or more exactly, they created those dollars out of the sense that their secretive backers were an all-powerful banking dynasty with a large but undisclosed treasury of gold. In other words, the dollars are based on the unsubstantiated reputation of the Rothschilds. Realising this opens many options: you could do as the Chinese have just done … track the Rothschilds down and tell them that you now own 30% of their European operation. Or, you could just print your own dollars. Any of the hundreds of economists who recently canvassed Congress could tell you how many to print and the consequences of printing too many.
    Or, recognising that if you can print your own dollars responsibly, then other countries can too, you could enter into an international, mathematical, transparent and voluntary arrangement for rates of currency exchange. All that would require is the honest exchange of economic data.

  10. Anonymous

    And now the “conservatives” want to insure, not buy, the garbage debt. That will only “insure” that all the upside goes to the banks, and all the downside goes to the taxpayers.

  11. joe

    I think David Hannaford’s less allegorical post has a lot going for it.

    I may be wrong, but I believe I see a call to put the foreign exchange market out of business with a cooperative inter-national currency-indexing system.

    Removing forex speculation can only have a long-term calming effects on international finance.

    It’s again time to run the money traders out of the temple of our national sovereignty.

  12. Caleb Mardini

    Why do so few discuss the core issue?

    Leverage at say 20x was hugely profitable on the way up, but is disasterous now. Banks must turn that to something closer to 11x. That means contraction must take place. Credit must collapse. Anything else is untenable.

    This is why banks aren’t lending. It hurts but it’s necessary.

  13. Matt Dubuque

    Matt Dubuque-

    Thanks Yves for a good summary.

    Evan-Pritchard typically gets the main concepts right, which I appreciate, and he writes in a style more comprehensible to the general public than most. There is something to be said for that.

    And he is not fighting the wrong war, to his credit. He understands there are a myriad of factors lining up for a deflationary burst.

    Even the FT editorial page (Lionel Barber) is beginning to understand as well. In their defense, they have kept an open mind on the subject and published my first short piece on the concept of HYPERDEFLATION a few years ago when we had our first little prodrome.

    For the sake of clarity, the “adverse feedback loop” Evans-Pritchard refers to here describes how reduced consumer spending and increased consumer loan defaults further strains corporate earnings and banking capital, who in turn reduce investment and cut back on lending and so on.

    Matthew Dubuque

  14. David

    I’ve given you a hard time in the past about Evan-Pritchard’s sort of yellow journalism from the early Clinton years. Then he was ‘over-the-top’ but then I never liked Clinton either. e-p’s readable and like Kevin Phillips seems to be calling this one. (BAD MONEY) I have to also give that Crammer guy credit on Mad Money….don’t watch much tv..but he’s in the same league as the Brit you mention..entertaining and with insight. Hey let’s give Suzy Ormond a hand too….she’s momentarily pessimistic too. That must be a huge burden for her.

    Obama will get my vote for sure…but I’d like to see him dump Larry Johnson, and that other Fannie Mae guy, and plus give the boot to Larry Summers and Sec. Rubin… and tell Bill to stuff his mouth.

    Bipartisan blame! You bet. But Republicans from Reagan on deserve 95 percent of it. Just like McCain’s voting with Bush that much of the time.

  15. donna

    I haven’t trusted a bank in over 20 years now, all my actual money is in credit unions. My investments, of course, I rarely expect to get back anyways since they are all tied up in 401Ks. The bailout is most likely inevitable at this point, the collapse will come anyway, but hopefully more slowly and manageably. The great game of the U.S. “deficits don’t matter” mindset is over. The kids are ready for the hit; for years I’ve called my own kids “the anticonsumers” because there is little they want in material wealth. Their interests are in their friends, their education, and entertainments that take little money but are engaging with friends in interesting passtimes. That generation is ready for what is to come. We are not, so we panic. Well, I am, but not most people my age, that’s for sure. The eldest will be reminded of the times of their youth, and smile knowingly.

    It’s going to be an interesting time, indeed.

  16. VoiceFromTheWilderness

    Any investor with a couple of hundred billion dollars in assets at his disposal, say Bill Gross, or Warren Buffet, who claims this bailout is such a great investment is welcome to invest directly in this fabulous opportunity.

    Any reporter who quotes their pithy whisperings but doesn’t ask them why they aren’t investing in this grand plan themselves is an accomplice in defrauding the american government.

    I do believe that’s a crime. Or was back when the law applied to Republicans

  17. LJR

    “Amnon Portugaly said…” 6:33am

    Excellent points. There’s a good reason most Americans think this primarily an FOH bailout. Because it is. The banks get made whole but remain unwilling to lend. CEO’s get their bonuses but the average American only gets the bill.

    When a building has half burnt to the ground it’s often wiser to let fire finish the job.

  18. spare some change?

    Selling mortgage insurance to the bankers behind this mess is like selling fire insurance to arsonists.

    It’s obvious that the ‘insurance’ proposal is a way to give the banksters what they want (a write off of all the bad debts) without the negative headlines associated with government give-aways. Their constituents must’ve given ’em an earful, but the only lesson they’re taking away from the angry phone calls is that they must be more discreet in their thievery.

  19. Anonymous

    I said I was in favor of the bailout in the beginning, there is no other choice, it has to be.

    You wanted to see what happens when you let banks go under, now maybe you are getting the idea what happens when the first domino falls in a row of dominoes. It’s happening so fast it is like dancing while Rome burns around you.

    Debt will have to carried and paid off in a time frame of decades starting with inflation. You’ll either have inflation or liquidation and be skipping the deflation this time around.

    You can screw the little people but the likes of China, Middle East, etc. will want to be paid in full, principle and interest or else….

  20. joe

    Yes, it will work !
    No, it won’t work !

    Yes it will.
    No it won’t.

    Help me out here.
    Is the problem that there is too much debt out there that can not be repaid?

    Or, is the problem that there is too much debt out there that can not be repaid?

    I am having a hard time figuring this out.

    Because if there is TOO MUCH DEBT out there that can’t be repaid, regardless of its innovative, creative, non-traditional format, then……. ummmmm…..
    how does creating $700 BILLION in more new DEBT, ostensibly to pass along liquidity to the “invisible-hand” of the free market, actually help the situation??

    I want to be clear on this.
    BORROWING $700 BILLION results in debt obligations for repayment of about $2 TRILLION by the American taxpayer.

    And, even if this outlandish banker handout were successful, and these IB’s leveraged that paltry $700 BILLION at a paltry 10 to 1 ratio, then THEY will create $7 TRILLION in additional debt.

    And, again, that $7 TRILLIION would create repayment obligations – this is what I call debts – of about $20 TRILLION.

    Soooooo, do I have this right?
    I mean, please folks, help me out here.
    If the stupid Dems and Repubs buy into Phase I of the Goldman-Sachs bailout, will we all owe another $20 TRILLION to somebody?

    And, phase II ??

  21. mxq

    “it will not jump-start lending, as house prices appear likely to keep falling for some time”

    imo, the two most important(by far) points of the tarp plan that hsbc doesn’t mention are:

    a. Maximize and coordinate efforts to modify mortgages for homeowners at risk of foreclosure

    b. Requires loan modifications for mortgages owned or controlled by the Federal Government

    I’m sure CR has covered this ad nauseum, but consider that a bank’s/investor’s willingness to work out a bad mortgage is a cost/benefit matter — if there is a robust loss mitigation dept. at a bank that holds bad paper, it can be beneficial for them to work out (cure) a mortgage…thus keeping the borrower in their home (and keeping that house out of the bloated supply that is causing this rapid price depreciation).

    Now, that said, I know someone that works for NACA – they are a non-profit that basically re-analyzes a struggling homeowner’s ability to pay vs. their current mortgage terms and then workout an affordible solution that would allow them to stay in their home. NACA has a proprietary network set up that was basically set up by ex-loan officers, and effectively draw up the terms of the mortgage as they should’ve been done in the first place.

    Now, NACA does all the front end work, but the problem is, they have to get the approval of the debt/paper owner to accept the new, worked out terms of the mortgage. Aside, he said, specifically, GMAC never works out mortgages, mainly b/c they just don’t have a loss mitigation dept and for that reason deem foreclosure to be more beneficial than modification. Indymac was supposedly the same way (until FDIC seizure).

    So, this is where it makes sense for the gov’t, via the tarp plan, to take these rotting mortgages off the books of GMAC or any other lender that has no loss-miti dept. Merely recapitalizing these institutions will not solve the fundamental problem of falling house prices, because, while the banks are recapitalized, they will still not funnel resources towards a loss miti. dept — they won’t do this b/c its a prisoners dillemma…a workout is only good if housing prices stop going down…housing prices only stop going down if enough people stay in their homes…every bank needs to devote resources to this effort, otherwise it fails — but it takes just a handful of banks to cause this effort to fail — and that is where the tarp comes in. The tarp assumes the responsibility and actually has incentive to work out all of the loans (as the gov’t wants to stop house price depreciation). They source the workout duties to the naca’s of the US and get people to stay in their homes on a sweeping basis…thus halting price depriciation.

    If there is any silver bullet to this mess, its halting the depreciation process, as foreclosures will surely cause prices to overshoot on the downside. Merely recapitalizing banks does not address this problem…but the TARP plan will.

  22. Anonymous

    The US Treasury needs to open its own bank with its own monetary system and leave the existing banks to carry the debt involved. Both will have to pay down the old outstanding debt for decades, coming from any possible profits and the rest from taxes. There is talk of segregating the debt, just do it.

    Housing is necessary but owning will not be the panacea it once was thought to be.

    Taxing Corporation (they are an extension of government by law) should be in vogue but hands off the mom and pop store small businesses (any non-incorporated entity).

    These private and localized businesses will help the most in hard times. Gouging will be prevented by competition if we have any free markets left at all.


  23. tk6910

    Yves, I admire your work tremendously. However, regarding the two British articles, you are too generous and have not pointed out their inherent contradiction. They berate those of us who oppose Paulson’s plan, yet they also say Paulson’s plan to spend 700 billion dollars is grossly insufficient to be effective.

    The Brits you quote could not care less about the cost to US citizens of Paulson’s plan, because it is not their money. Meanwhile, why don’t they bitch at their own government for not offering any similar solution? Because they do care about how their own money is spent.

  24. Anonymous

    It’s easy to berate the taxpayer if you are not one of them. Hey, Brits, you bail out the banks! You can skip your tea and reduce your vacation to US levels to work some more hours – oh yeah, lose your health care too, you won’t be able to afford it anymore.

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