Bail Out the Homeowners!
Why Paulson's Plan
is a Fraud
By Paul Craig Roberts
03/10/08 "ICH
" -- - Is the Paulson bailout itself as big a fraud as
the leveraged subprime mortgages?
Yesterday, here on
CounterPunch, I discussed the bailout as proposed and
noted that the proposal cannot succeed if it impairs the US
Treasury’s credit standing and/or the combination of
mark-to-market and short-selling permits short-sellers to
prosper by driving more financial institutions into
bankruptcy.
A reader’s comment and an
article by Yale professors
Jonathan Kopell and William Goetzmann raise precisely
this question of the fraudulence of the Paulson package.
As one reader put it,“We
have debt at three different levels: personal household
debt, financial sector debt and public debt. The first has
swamped the second and now the second is being made to swamp
the third. The attitude of our leaders is to do nothing
about the first level of debt and to pretend that the third
level of debt doesn't matter at all.”
The argument for the bailout
is that the banks will be free of the troubled instruments
and can resume lending and that the US Treasury will recover
most of the bailout costs, because only a small percentage
of the underlying mortgages are bad. Let’s examine this
argument.
In actual fact, the Paulson
bailout does not address the core problem. It only
addresses the problem for the financial institutions that
hold the troubled assets. Under the bailout plan, the
troubled assets move from the banks’ books to the
Treasury’s. But the underlying problem--the continuing
diminishment of mortgage and home values--remains and
continues to worsen.
The origin of the crisis is
at the homeowner level. Homeowners are defaulting on
mortgages. Moving the financial instruments onto the
Treasury’s books does not stop the rising default rate.
The bailout is focused on
the wrong end of the problem. The bailout should be focused
on the origin of the problem, the defaulting homeowners.
The bailout should indemnify defaulting homeowners and pay
off the delinquent mortgages. As Koppell and Goetzmann
point out, the financial instruments are troubled because
of mortgage defaults. Stopping the problem at its origin
would restore the value of the mortgage-based derivatives
and put an end to the crisis.
This approach has the
further advantage of stopping the slide in housing prices
and ending the erosion of local tax bases that result from
foreclosures and houses being dumped on the market. What
about the moral hazard of bailing out homeowners who
over-leveraged themselves? Ask yourself: How does it differ
from the moral hazard of bailing out the financial
institutions that securitized questionable loans, insured
them, and sold them as investment grade securities? Congress
should focus the bailout on refinancing the troubled
mortgages as the Home Owners’ Loan Corp. did in the 1930s,
not on the troubled institutions holding the troubled
instruments linked to the mortgages. Congress needs to back
off, hold hearings, and talk with Koppell and
Goetzmann.Congress must know the facts prior to taking
action. The last thing Congress needs to do is to be
panicked again into agreeing to a disastrous course.
Paul Craig Roberts
was Assistant Secretary of the Treasury in the Reagan
administration. He was Associate Editor of the Wall Street
Journal editorial page and Contributing Editor of National
Review. He is coauthor of
The Tyranny of Good Intentions. He can be reached at:
PaulCraigRoberts@yahoo.com
