... is halfway between Greg Mankiw and Hillary Clinton and Arnold Kling Kling *Kling* Kling. (Kling is on fire! "It's small business, stupid ... Lower capital requirements for bank lending to small business.")
As for me:
The Paulson plan just does not square with my philosophical principles. It would if I believed the financial system were about to collapse if not for the $700 billion. But I do not believe that. Nor can I imagine a scenario where banks will suffer a run next week, month, or year. Just not plausible.
The FDIC is in place to secure main street banks, and yes, main street banks can get all the liquidity they need directly from the Fed to head off a run. Worst case scenario is an inflationary spike, not a Great Depression 2.0.
Moreover, if the bill were subject to pay-go rules (which the Democrats promised to adhere to a long, long time ago in a galaxy far, far away ... the election of 2006), there is no way it would pass. In a nation with 300 million people, the price tag on that $700 billion bailout is $2,300 per person. For our family (one spouse, four kids) that means $13,800. Does anyone think this would pass a national referendum if we actually had to pay for it? HT Kling, again.
And yet, like Mankiw, I have great faith in the wisdom of Ben Bernanke. I trust Bernanke. I would give him the benefit of the doubt, but only after I had a bill with transparency and oversight.
Greg structures his advice in terms of if he "were a member of Congress." Let me just say that if I were a Secretary of the Treasury, my approach would look a lot more like what Hillary Clinton is proposing: Relief via Main Street mortgages, not Wall Street mortgage-backed securities:
I've proposed a new Home Owners' Loan Corporation (HOLC), to launch a national effort to help homeowners refinance their mortgages. The original HOLC, launched in 1933, bought mortgages from failed banks and modified the terms so families could make affordable payments while keeping their homes. The original HOLC returned a profit to the Treasury and saved one million homes. We can save roughly three times that many today. We should also put in place a temporary moratorium on foreclosures and freeze rate hikes in adjustable-rate mortgages. We've got to stem the tide of failing mortgages and give the markets time to recover.
I would, as you might suspect, structure the HOLC differently than Hillary. It would be unwise to suspend the fundamental rules of contract law (see underlines above), and it would be doubly unwise to reward people in homes they cannot afford, which is deeply unfair to Americans who lived within their means. A smart policy would enable people continue to reside in place by converting them from home borrowers to renters. A smart own-to-rent HOLC would even subsidize rents for a period of 2-5 years (depending on the level of subsidy they opt for).
Lenders take a bath, but get liquid. Risky borrowers get out of their ARM debts, lose ownership rights to property they never really owned and cannot afford, but keep a roof overhead during the coming recession. Taxpayers benefit from stabilized housing prices and re-activated credit markets.
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Posted by: Steve | September 26, 2008 at 03:46 PM