The House Republicans
By Arnold Kling
They propose that all holders of private mortgage securities get together and form an insurance fund to guarantee their values.
Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance.
As I say in my AP stats class, “I appreciate that you raised your hand and tried to answer, but no. Anyone else?”
I am to the right of the House Republicans. I think that everybody is focused on the wrong thing–the mortgage securities. Mortgage securities are a rent-seeking issue, not a public-benefit issue. What puzzles me the most about Ben Bernanke’s behavior is that he doesn’t see through this.
If I were a member of Congress, I would sit down with Ben, privately, to get his candid view. If he thinks this is the right thing to do, I would put my qualms aside and follow his advice.
I agree, and I would love to be a fly on the wall at such a meeting. I really would like to see Ben lay his cards on the table, and not just issue vague threats of doom and destruction. A lot of people, not just from the far left or libertarian fringe, are drawing the analogy between the push for the bailout and the run-up to the Iraq war. Personally, I think that this is being unfair to the Iraq war, which by comparison was debated longer with more information provided to Congress and to the public.
I see the bailout as the latest grab from of the GSE-Wall Street industrial complex.The whole history of Freddie Mac and Fannie Mae (the GSE’s) is that Wall Street loved them because they generated humongous trading profits in their securities, and Congress loved them because they could be manipulated to steer mortgage funds toward favored constituents. Any regulator who dared tried to stand in their way got crushed by one of the best lobbying machines in Washington.
Barney Frank is one of the last people on earth who thinks that the GSE model is ideal. He loves the basic idea of the Paulson plan. Moreover, with Paulson literally going on bended knee to Nancy Pelosi to get this passed, the Democrats are in a position to “fix” the plan any way they want without fear of Presidential veto.
The bailout idea is really nothing new for the GSE-Wall Street complex. It’s the same old rent-seeking–the folks who make a living in mortgage securities are just going for a lot more than usual in terms of tax dollars.
To the extent that the banking system (as opposed to the nonbank sector of financial services) is clogged by bad mortgage securities, taxpayers already face risk. The FDIC insures deposits at banks, which means that taxpayers could end up owning the mortgage securities, anyway. But better to own a few from failed banks than own a lot from both banks and non-banks.
If a bank has lost so much in mortgage securities that it is insolvent, it will have to closed by the FDIC. At that point, the mortgage securities transfer from the bank to the FDIC. The FDIC can then hold the mortgage securities (if we’re in the mode of thinking that the market undervalues them) or sell them right away. If the FDIC insurance fund runs out, then you tap the Treasury.
It’s ugly, but it’s not Armageddon.
My advice is to focus on the banks, and forget trying to revive mortgage securities markets. Let those limp along as best they can without government help.
The benefits of the bailout will be almost entirely private. They will go to the shareholders and executives of institutions that made unwise decisions. On the other hand, the financial system, in the sense of banks that can make loans to qualified borrowers, can be saved using other tools. Again, I recommend lowering capital requirements for new bank loans going forward.
The problem with lowering capital requirements is that the benefits are broad-based. There is little or no rent-seeking traction to be gained in lobbying for them.