Who Benefits from the Bailout: Banks or Homeowners?
If the folks in Congress who are rushing to pass their housing bill really believed that they were helping homeowners rather than banks, they would set up a mechanism to keep score.
In other words, Congress should be asking how much equity, net of selling costs and excess homeownership costs (the difference between monthly ownership costs and rent) homeowners walk away with under the program. (My guess is that this number will be negative.)
That can be compared with the amount of money that the banks make by having Congress issue guaranteed mortgages. I'm confident that any serious account will show the banks get more out of this one than the homeowners. Unfortunately, Congress will probably not appropriate the money to allow for this scorekeeping.
By the way, Senator John Ensign should be proclaimed a hero of moderate-income homeowners everywhere.
Senator Ensign has proposed an amendment to the housing bailout bill, for a renewable energy tax credit, that is given credit for delaying the passage of the bill until after the July 4th recess. Let's say that Senator Ensign's measure obstructs the implementation of the plan for a month.
In Los Angeles, San Diego and other bubble markets, prices of moderate-income homes are dropping at the rate of close to 4 percent a month. For a family living in a $400,000 house in Las Angeles that falls under the program, Senator Ensign's one month delay will have effectively saved this family $16,000. Now that is real asset building.
Too bad the housing wonks can't think this clearly.
This railing at the Congress's bank bailout hypocrisy is getting tiresome.
The principal purpose of the mortgage bailout bill is to improve the condition of the financial system. It functions similarly to the way the Fed's bailout measures -- the TAF, the TSLF, and the PDCF or for that matter, lowering the federal funds rate to a negative rate -- do.
The government is seeking to improve the balance sheets of financial institutions by raising the quality of the debt instruments they currently hold. The government is trading its good assets (Treasury paper) for the bad assets of financial institutions (and not just banks) and now, under the proposed bill it is improving the quality (that is, the market value) of their structured debt instruments by guarantying the mortgages which support those assets (RMBSs, principally).
If you don't think the government should be in the business of "saving" the financial system or you think the system can be saved in some other manner, say so and argue for it.
Enough with the demagoguery.
June 28, 2008 2:04 PM | Reply | Permalink
Ellen,
the demagoguery is in those that promote the "free market" but trip all over themselves in their rush to the TV cameras to make speeches supporting government bailouts....or is that hypocrisy?
Hey, maybe its a hybrid; hypoguery?
June 29, 2008 10:23 AM | Reply | Permalink
JohnW1141: Slam Dunk.
June 30, 2008 1:03 PM | Reply | Permalink
Ellen,
if you find it tiresome that I keep pointing out that the "housing" bailout is really a bailout of banks, then you must find it unbelievably tiresome that all the news media keep reporting it as a bailout of homeowners.
Of course, if we want to bail out the banks, then it would be appropriate to have a discussion of what the best terms are for such a bailout. Maybe you've seen that discussion somewhere, but I haven't.
June 28, 2008 2:14 PM | Reply | Permalink
Yes; I find the media's reporting extremely tiresome -- but then, I don't expect much from that quarter.
Nonetheless, I'd happily tell them what I think except that the likelihood of getting a letter to the editor published in the or the Washington Post is -- as you yourself well know -- slim to none.
Note: If you doubt that the principal function of the bill under consideration is "to bail out the banks," then, I guess I'm looking in the wrong direction for someone to answer the question of what a progressive response to the so-called financial crisis (not the silly, inconsequential "subprime borrowers mess") would be.
June 28, 2008 2:58 PM | Reply | Permalink
Ellen says:
"Yes; I find the media's reporting extremely tiresome -- but then, I don't expect much from that quarter."
Gee, Ellen, if you find media reporting extremely tiresome, and coming to TPM subjects you to demagoguery, where do you find what you're looking for? (humor)
June 29, 2008 10:28 AM | Reply | Permalink
Ellen,
obviously, i think the point of the bill is to bail out the banks -- that is what i keep saying. (Isn't that what you find tiresome?)
It is not hard to think of schemes to right the banking system, but what is the point if we can't even get an acknowledgment that this is what is going on.
June 28, 2008 4:16 PM | Reply | Permalink
What I find "tiresome" is the continuous carping at the politically correct language legislators always employ to grease the skids. It's standard; it's expected; it only fools children; it's irrelevant. See, The Shock Doctrine.
Again, the issues are --
1. whether the financial system is in such dire straights that a government bailout is called for; and
2. if so, what form that bailout should take; and
3. who* should be responsible for the bailout.
So, what's your answer?
* An unelected bunch of bureaucratic technicians in thrall to dead economists (Samuelson père, for example) or a bunch of democratically(?) elected representatives in thrall to their campaign funders?
June 28, 2008 8:33 PM | Reply | Permalink
Ellen,
as i said -- it's really touching that you know that this about bailing out banks, but since no one else seems to, it really doesn't matter what my ideas are in this regard.
If we can't establish that this bailout is about banks, then there is no basis for a policy discussion. So, if this really bores you, then you should read other things.
June 28, 2008 11:10 PM | Reply | Permalink
LaRouche's three-point plan is our only hope at this late hour. That plan begins with the passage of the Homeowners and Bank Protection Act (HBPA) to put up firewalls to protect the citizenry, while the financial system is put through bankruptcy, which is a prerequisite for point two—the introduction of the two-tiered credit system. Then, having corrected our own mistakes, we can begin working with other nations—Russia, China, India, and others—to rebuild the world under American System principles, as we did in the beginning, and again, in the post-Civil War era. We must abandon the British imperial methods we have adopted in recent decades, and return to the most powerful economic system the world has ever seen: the American System.
http://www.larouchepub.com/other/2008/3525banks_damned.html
June 28, 2008:
EIR Economics Editor John Hoefle, and a LaRouche Youth Movement activist, on "Will Your Bank Make It to the End of the Quarter?" Hosted by Marcia Merry Baker.
http://www.larouchepub.com/radio/archive_2008.html
Good Luck!
June 29, 2008 3:40 AM | Reply | Permalink
Well; this posting -- which presumably, is intended to engage TPM readers -- has now been up for 46+ hours and, aside from me and my personal style critic, has managed to intrigue one LaRouchite and one Henry IV, Part II admirer ("First, we'll kill all the lawyers").
Perhaps, had you chosen to deal with the substance of the proposed bill and/or its effects on the "financial crisis" rather than impotently waving your hands at political speech, the post would have pulled in a few more commenters.
June 30, 2008 10:27 AM | Reply | Permalink
Might have gotten a few more comments had it been posted sometime other than mid-day on a summer Saturday. I find this topic interesting, but I wasn't sitting at my computer this weekend.
Here in Chicago, you have to enjoy the few nice days when they come. Most of the time the weather here sucks.
For the record, I agree with Dean's argument that the bailout is for the banks (not the homeowners), and I accept Ellen's description that "the government is trading its good assets (Treasury paper) for the bad assets of financial institutions..." I'd only add that this action further dilutes the value of the government assets. And at some point, the rest of the world won't want our junk paper any more. What then?
-- ARG
June 30, 2008 6:17 PM | Reply | Permalink
I know who is making money on the the housing mess--LAWYERS!!!
I've yet to see a case where the attorney fees generated through a foreclosure action were LESS than the arrearage--if fact--they were generally equal. For example--owe $5320 in back mortgage payments to the bank? Attorney fees owed--$5633. Owe $2976 in back mortgage payments? Attorney fees owed are $2996. Hmmm. Every time. I have 15 separate numbers for one bank's loss mitigation department. Every time I call, attorney fees are racked up. A foreclosure negotiation could all be done in one phone call--but I've never been able to close a deal with less than 5 calls--and additional attorney fees the borrower is responsible for.
June 29, 2008 9:18 PM | Reply | Permalink