What Devilstower said in an earlier post can’t be repeated enough. The $700 billion figure isn’t an explainable one, given the purported problem at hand of “bad mortgages”.
And that’s where we get that math problem. 1% of all mortgages — the amount now in default — comes out to $111 billion. Triple that, and you’ve got $333 billion. Let’s round that up to $350 billion. So even if we reach the point where three percent of all mortgages are in foreclosure, the total dollars to flat out buy all those mortgages would be half of what the Bush-Paulson-McCain plan calls for.
Then we need to factor in that a purchased mortgage isn’t worth zero. After all, these documents come with property attached. Even with home prices falling and some of the homes lying around unsold, it’s safe to assume that some portion of these values could be recovered. In the S&L crisis, about 70% of asset value was recovered, but let’s say we don’t do that well. Let’s say we hit 50%. Then the real outlay for taxpayers would be around $175 billion.
Which, frankly, is a number that Wall Street should be able to handle without our help. After all, the top firms on Wall Steet payed out $120 billion in bonuses alone between 2000 and 2006. If they’ve got that kind of mad money, why do they need us to step in now? And why do they need twice as much as all the mortgages that are even likely to implode?
Indeed. And despite what we’ve been told, then, we can only presume that the problem is in fact not all the bad, scary subprime mortgages. And it’s not. Yes, a lot of people are finding themselves upside-down on their houses right now, but Paulson isn’t proposing we do squat to solve that — and even the “controversial” Democratic counterproposal, that we actually do at least a little something to help those people, after they’ve already gone bankrupt, is pathetically weak.
Instead, we’re getting a Wall Street bailout not of the mortgages, but of the absurd, speculative, economy-wrecking derivatives based on those mortgages, derivatives that investors and banks ravenously sold each other at unsupportable and quite-probably-crooked prices. Those derivatives, generally speaking, are “bets” on the state of the underlying mortgages. And they didn’t just bet wrong — they bet irrationally, based on presumptions of near-zero risks to those underlying mortgages. And worse, the big banks even — bafflingly — got special permission to overleverage themselves 40 to 1, all but assuring collapse if those derivatives went south. Which they did.
Fine, then, but how is that self-induced bubble an unweatherable economic crisis for the rest of us? Yes, those banks may fail — as they should. It’d be a crime if they didn’t, given their mismanagement of their accounts. But the real problem is that those banks are, literally, too big to be allowed to fail. Their failure would present a liquidity problem for the rest of the market. They can do anything — they could even burn money on the street — and the strong preference of government would be to bail them out for it, because the alternative is financial chaos.
The subprime mortgages aren’t the problem. And the overleveraged firms shouldn’t be a problem. The problem is keeping the rest of the economy afloat no matter what happens to the firms in trouble.
The problem is that there’s a lot of different ways to do that, and it’s not at all clear that Paulson’s way is the best. … We taxpayers will buy, from banks both in trouble and not in trouble, up to $700 billion dollars worth of the overpriced, now-worth-much-much-less derivatives in question. That will provide a real (inflated) price for the derivatives, and lo and behold — the firms will be saved, because we’ve now created a market for their unmarketable, worthless products.
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Not being talked about as much, though, is that we must allow overextended companies to fail. It is an essential part of our economy that economy-threatening recklessness on the part of speculators not be rewarded, and especially not be rewarded by the government. Any actions to stabilize the economy should indeed inject liquidity — but it’s not clear that injecting liquidity through the very companies most in trouble is sustainable or even rational.
McCain’s requested bipartisan meeting, in which he spoke very very little, in which Obama ended up taking the lead (asking the House GOP to actually detail their “more of the same” tax-cut-deregulation alternative proposal, and eliciting Paulson’s reaction - a resounding “that won’t work”), may…nay, did…lead to the dissolution of said bipartisan deal, which as of midday yesterday looked to be near completion, and which fell apart after said bipartisan meeting requested by McCain.
