Wednesday, September 24, 2008

The US Needs a New Deal

The Paulson bailout is a Cheneyesque power grab. It won't work and it will allow the Bush government to rob the country blind.

The Paulson bailout is the bluntest of blunt instruments. The only way it can work, according to Paul Krugman, is if the government wildly overpays for the toxic assets. And that means that the money, or at least most of it, will never be recouped. It's a $700 billion handout to Wall Street, and a handout that's totally at the discretion of the crooks in Washington - who still haven't accounted for billions that went missing in Iraq or the billions more that were given to friends in untendered war-related contracts.

In addition, the bailout addresses the symptom - the credit crunch - instead of the cause: defaulting mortgages. Even if they could fix the crisis of the moment, the defaulting mortgages are predicted to cause a series of additional crises over the next two years.

So what if, instead, the government put together a bundle of remedies that address the cause. For example:

* Purchase some perecentage of mortgages that are in danger of defaulting, and guarantee a low interest rate.
* Address the credit crunch directly, by making money available for loans.
* Instead of handing free money to financial firms, get stock in return (this is the "Dodd plan").
* Enact temporary emergency regulation to stabilize Wall Street. The problem appears to be that all the investment banks are trying to dump toxic assets at the same time. Stop that.
* Provide a big incentive package to help the middle class. Like the New Deal, this could hire workers to improve infrastructure. Or other, newer initiatives... think of it this way: we're thinking of spending hundreds of billions of dollars to fix this mess. With that kind of money we can do something more beneficial than making rich guys richer.


The Mound of Sound said...

I think, YDD, that the core problem precedes mortgage default. It's housing speculation and, to a lesser degree, it's caused widespread dislocation - economic and social - whenever it's been allowed to get out of control.
Housing should never, capital N Never, be permitted to become a speculative commodity. It always leaves too many broken, little people in its wake when that happens.

Yappa said...

Hi MOS - I don't see how you can prevent it though. I remember back in 1990, just before the crash, all kinds of people were buying up houses in Toronto because the prices were rising so fast. I had a bunch of colleagues who lost their shirts. But my friends in Manhattan who got into the housing market have made out like bandits.

But buying hosues in the housing bubble was about survival as well as speculation. If I rent in an unregulated market and housing prices are rising rapidly, my rent will probably rise. If I buy a house I can stabilize my housing costs. My mortgage might be large, but if the value of my house continues to rise my debt-to-asset ratio declines. People got hit with falling house prices as well as two-tier interest rates.