By Robert J. Samuelson and [Pointer]
Thursday, September 25, 2008;
[The loss of Black Monday cost the USA 1.2 trillion dollar in a couple of hours.]
Love it or hate it, the true cost of Treasury Secretary Hank Paulson's proposed rescue of the financial system is not the sticker price of $700 billion. Conceivably, the government could make money; with glum assumptions, the losses would probably be less than $250 billion. No one knows the correct answer -- not Paulson, not Federal Reserve Chairman Ben Bernanke nor anyone else -- but here's how to think about the problem.
Under Paulson's proposal, the Treasury could buy distressed mortgage-backed securities. Consider a batch of hypothetical securities originally worth $100 million and paying an interest rate of 6 percent. They're no longer worth $100 million because half of the homeowners have stopped making their monthly payments. Suppose, then, that the government buys the mortgages for $50 million. It earns 6 percent on its $50 million, and if it borrowed money at 4 percent to buy the securities, it would make a tidy profit. If the government holds the securities until maturity and all the remaining homeowners repay their mortgages, the government would come out ahead.
Would something like this happen?
It could, and Pimco's Bill Gross argued in today's Post that it might, but there are several reasons it might not.
First, we don't know what price the government would pay for the mortgage-backed securities. There are conflicting goals. On the one hand, the government wants to minimize the bailout's costs to taxpayers; that would favor paying the lowest possible price. In my example, the profit would be greater if the government paid only $40 million. On the other hand, the whole idea of the bailout is to help banks and other financial institutions get rid of risky assets and replace them with cash that would encourage a resumption of normal lending and investing. That favors a higher price. If the government paid $80 million instead of $40 million, say, it would lose money.
[Paulson was not willing to accept any oversight and control, without responsibility and accountability in front of Congress nor court, what should make him the most powerful and untouchable man on earth.]
Second, we don't know how a weakening economy will affect future mortgage repayments.
[You surely know, but you don’t want to know.]
The worse the economy gets, the more homeowners will default. At the end of June, about 2.75 percent of home mortgages were in foreclosure, and an additional 6.4 percent were at least 30 days behind in their payments. The unemployment rate was 6.1 percent in August. If it rose to 7 percent or higher, defaults and delinquencies would climb. In my example, if only 25 percent of borrowers repaid their mortgages, the government would lose money.
[And without bailout a rising unemployment to 20%? Do you have an answer on that?]
No wonder members of Congress -- and the public -- are confused. My simple example captures the main unknowns, but in practice there are many more. What bonds and securities would Treasury buy? Would the government hold them to maturity or later try to resell them to private investors?
To all questions, Paulson has said in effect: Trust us.
[Well that’s a big problem. The Bush Administration did never show up to be trustworthy.]
Mark Zandi of Moody's Economy.com has crudely estimated that the ultimate cost of Paulson's plan and all the other rescues (of the mortgage giants Fannie Mae and Freddie Mac, the investment bank Bear Stearns, and the insurer AIG) won't exceed $250 billion. That's a lot, but consider that the annual federal budget runs at about $3 trillion. Compounding the confusion is this: For budget purposes, the Paulson rescue would probably be "scored" under the Federal Credit Reform Act. This law sets budget spending at the proposal's ultimate cost -- not the annual cash flows. For now, the Congressional Budget Office says there are so many unknowns that it can't make an estimate.
[That makes the check in fact a blank check and if it can be more, it shall be more. The reasoning for more will be: If we don’t spent another 700billion the first 700billion is lost for nothing. Such a reasoning can ever be repeated. So, openness, oversight and control is absolutely first necessarily.]
But the biggest unknown lies elsewhere. What happens if Congress doesn't approve the plan, or something like it? Zandi, a supporter, argues that the economy will get much weaker, that many more banks and financial institutions will fail, and that the rise of joblessness will be greater, as will the fall in tax revenue and the increase in unemployment insurance and other government payments. Is this scare talk or a realistic threat?
[You bet. Why is the Party of Fear now at once afraid of “scare talk”? History showed how it works in the 19-twenties with the same politics. Europe has showed in more recent years how to manage such a crisis. Japan has showed how it works when you are late. The Republican Party has in 20 years (Reagan 8, Bush41 4 and Bush43 8 years) Reaganomics prepared and is deliberating arranging a new Great Depression to fight an ideological war against liberalism.]
The true cost of Paulson's plan hangs on the answer, and if the danger is real and imminent, then the cost of doing nothing would be far greater.
[No, there is no Paulson’s plan anymore, thus the true costs depends on speed of the governments answer and the Republican Party anyway will not favor a bailout. They can’t sell there base a principle of the Democratic Party that government’s regulation, control and interference are necessarily and good for the economy.
The free market has to be protected against the exclusive Army of Greed to serve the broader Army of Need.]
