What about a “trickle-up” mortgage bailout?

The Washington Post has a column today by two Yale professors with an interesting alternative baliout proposal. Instead of bailing out mortgage-backed securities to stablize the markets, what if we paid off the actual mortgages? Effectively, the government would be buying and renegotiating the mortgages. This would immediately re-value the mortgage-backet securities, healing the market from the bottom up instead of the top down, while also providing relief for homeowners. The government could take an ownership interest in the actual real estate instead of in securities.

I’m not sure if I buy this, but it is an interesting proposal and worth taking a moment to read:

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/30/AR2008093002316.html

Bailout redux: From bad to worse?

In the wake of the failure of the bailout legislation, Congress is back with a new attempt. The strategy this time is to pass a revised bill in the Senate first, putting pressure on the House to go along.

This legislation is the same as the last bill except with “goodies” added to it to try to entice more legislators to vote for it. The biggest change is that the bill would raise the limit of bank deposits insured by the FDIC from $100,000 to $250,000. This is supposed to improve confidence in banks and supposedly enjoys widespread bipartisan support. But if that’s true, why wasn’t it in the original bill?

Answer: Because it’s a total red herring. Individual investors rarely keep more than $100,000 in depository accounts (nor would it help the economy if they did), so it would be mostly small businesses affected by the change. The real problem, though, is that the FDIC doesn’t have enough money to cover all its potential obligations now, yet this proposal would more than double them. It’s a shell game because the money to bail out the FDIC would ultimately have to come from Treasury, which would require additional authorization.

The legislation also contains a package of tax incentives – one for the left (alternative energy), a couple for the right (AMT relief, business R&D), and a couple of random ones (child tax credit, tax relief for flood victims.) I don’t have any real objection to these – the AMT provision is actually something I strongly support – but none of it has anything to do with the point of the bill! None of these tax provisions will do anything to stabilize the financial sector in the short term – they are political bones being thrown to legislators in order to gain votes for the bill.

The overall effect is that the bill has become more intellectually dishonest than it was before, and the price tag goes up by about $100 billion. Any Congressman who switches to a Yes vote on this bill should be ashamed of themselves for selling their principles down the road in exchange for candy. Still, I shudder to think what will happen if this second attempt fails, as whatever comes next is almost certain to be even worse.

More on the FDIC provision here: http://politicallydrunk.blogspot.com/2008/09/is-now-really-time-to-increase-fdic.html