A familiar (but important) refrain: Why not help the borrowers instead of the banks?
Jed Graham, who covers economic policy for Investor's Business Daily, has been writing occasional how-to-fix-the-mortgage-market essays for RGE Monitor since last fall. His most recent (it's about 10 days old, but who's counting?) begins:
Treasury Secretary Timothy Geithner's toxic asset plan is a brilliant, highly complex and very expensive answer to the wrong question: How we can raise the value of bank portfolios without improving the quality of the underlying loans?
It is truly remarkable that an administration that preaches progressive economics intends to deploy $1 trillion – including hard-to-value but nevertheless very pricey subsidies – to help banks in a way that avoids helping their existing borrowers. ...
The biggest cost of the Geithner plan may be the missed opportunity to deploy these resources in a way that gets at the heart of one of our economy's central problems – an excess of mortgage debt based on now-fanciful home values.
What's needed, Graham argues, is "a broad and proactive restructuring of the excess of private debt that continues to drag down the economy." There's some of that going on, in the form of bankruptcy proceedings and the Obama administration's newish mortgage plan. But not nearly enough, in Graham's view.
I think he's right about this. What we're confronting, as the Economist's Free Exchange blogger puts it, is more a balance sheet crisis (as in everybody's balance sheets) than a banking crisis. So why aren't we spending more time (and money) on the balance sheets than on the banks?
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So why aren't we spending more time (and money) on the balance sheets than on the banks?
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The only (non-sarcastic) explanation I've heard for that is that it would perpetuate bubble prices on real estate. Unfortunately, I'm just a layman, so I don't know if that argument carries water. I'd sure as hell rather see money poured into keeping low- and middle-class people in their homes than into keeping the rich rich. -
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Excellent post. Excellent question. Don't expect Geithner or Summers to be able to answer it, though. It would require viewing the situation from a larger prism than that of the financial community.
I have a brother who's a lawyer for privare credit folks. He's a pretty decent guy, but he suffers the same afflication. It kind of goes with the territory.
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I have a hypothesis. It's because the properties will never (and I mean never) be worth the mortgages on them. McMansions were a bubble in and of themselves. It will remain in many homeowners' best interest to walk away, no matter how much aid they get. And if they get too much, it encourages risk-taking on the next (or on secondary) properties. It remains easier to rein in the risk-taking of a relatively small number of regulated banks than on a much larger number of unregulated homebuyers.
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what happens if we deal with consumer debt directly? it might be unpopular and is the ultimate bailout for undeserving people...but is there any merit to it?
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Taleb makes the points about restructuring the financial system here, in "Ten principles for a Black Swan-proof world":
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I was going to delete this and put up a less antagonistic comment now that some of the anger's dissipated, but it doesn't seem to give you the option? Whatever.
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I have wondered since early in this crisis if the logical conclusion (or at least progression) is simply to forgive people's debt. It struck me (bear in mind I have very little financial knowledge here - I'm speaking as an interested but pretty clueless observer) as a comparable situation to a decade ago when there was a push for wealthy nations to forgive developing nations' debt. Until I read this I didn't want to say anything, but maybe others are thinking along similar lines afterall.
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