So, Secretary/Professor Reich,

With the problem as you describe it why is nobody talking about simply offering the American homeowner government backed, low-interest mortgages so people can, in fact, pay their mortgages, stay in their homes and keep the system functioning?

Feeding a trillion bucks to Wall Street is just throwing good money after bad and those guys would never lift a finger to help the common man or woman. Why on earth should we help them screw us once again?

You people need to stop making sense.

I agree. Contain the bloodletting by preventing more bloodletting. Our government should be protecting its citizens first, not corporations. Keep people in their homes and help them keep their mortgages paid to date. That is a win win.

Some years ago, my wife worked as a counselor in a mental health clinic. She told me the story of one desperate soul who, told that her recovery was going to take time, threw herself on the office floor and screamed "Now! Now! Help me now!" The Wall Street mavens strike me as precisely the same as that poor being: infantile, convinced of their entitlement despite their worst behavior, clueless as to their contribution to their own sickness. These are the same fellas who like to talk about "tough love" when dealing with the poor, who sneer at those taken advantage of in this crisis for not reading the fine print.

There is one thing the Congress must do here. Wait. Wait. Wait.
This bailout is the Financial Mishandlers Enablement Act.

TheraP

I am actually going to agree with you, 100%. The problem is is that I must be dreaming. Actually it's a nightmare that began on 9/11. I remember protesting here in NYC (candle light vigil at Union Square) against the planned military strike on Afghanistan. Not many people were there, most everyone said I was crazy to even go, "The terrorists were going to get what they deserved". I was thinking I hoped they would too but that we all needed to "relax, be patient" and think it through before we unleashing any (if any at all) violent aggression in retribution against any parties as it may in haste fall upon the wrong parties. And I was called crazy.

They must be right because this nightmare just keeps getting worse as my faith in anything diminishes. I wish it was about health care and being fair and not about wars in Afghanistan and Iraq, Enron, Katrina, off shore drilling (which dems just folded on btw!). It's crazy and it's about a nightmare that just won't end.

If Paulson and his Wall St. cronies think that it's a great idea for government to buy a bunch of bad debt, then he should form a new corporate entity, do an IPO, and keep all that debt and risk in private hands. It's the conservative way.

Sorry TheraP. To Ingiro...

Is it just me or does anyone else seem to think that our party leaders still haven't grown a pair and are more than willing to capitulate to these lame duck tards. Good show for trying to "dirty" up any "clean" bill. But where's the gravitas? The teeth? For crisake fight! Now, of all times, is the time! Someone please kick Pelosi in the arse.

I'm with the folks who keep asking why bailing out homeowners would NOT solve Wall Street's problem.

If that's a stupid idea, then Prof. Reich ought to be able to demolish it in a few short sentences. If he cannot, why isn't it on the table?

--TP

I found this in the Financial Times very illuminating along with a Note referenced in it
Both authors are of the view that no taxpayer funds should be used for a bailout, rather the government should force a recapitalization of the financial firms

I think I almost understand these guys Prof Reich!

Paulson’s plan was not a true solution to the crisis http://www.ft.com/cms/s/0/a09b317e-898d-11dd-8371-0000779fd18c.html?nclick_check=1

Note:Why Paulson is Wrong
Luigi Zingales - Robert C. Mc Cormack Professor of Entrepreneurship and Finance
University of Chicago -GSB
(pdf)http://faculty.chicagogsb.edu/luigi.zingales/Why_Paulson_is_wrong.pdf

As during the Great Depression and in many debt restructurings, it makes sense in the
current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the
financial sector. It has the benefit of being a well-tested strategy in the private sector and
it leaves the taxpayers out of the picture. But if it is so simple, why no expert has
mentioned it? The major players in the financial sector do not like it. It is much more appealing for the financial industry to be bailed out at taxpayers’ expense than to bear their share of pain.

I haven't heard anyone bring up what I think is the most obvious principle that has been overlooked. I write this as a former Wall Street Asset Manager...

The original proposal by Paulson grossly demanded zero oversight. 700 billion in taxpayer funds. Paulson has been elusive of what securities he intends to purchase wanting the freedom to buy anything he thinks is necessary.

Now this is what I haven't heard anyone mention... This would give Paulson the freedom of the largest market manipulation scam in history. What would stop him from buying securities on the open market to prop up prices to give a false sense of security and dump the reality on the next administration?

Bottom line: what we are seeing now is the inevitable result of a grossly inequal distribution of wealth. We have passed the tipping point. Wages have remained static as costs for the basic necessities have gone up anywhere from 35% (food) to 300% (gasoline). And this at a time when productivity grew by 20% - not that any of the rewards for that "trickled down" to the people responsible.

Think about what you were hearing in the news from 2002 - 2007. "The housing boom is the engine driving the economy, making up for weakness in other sectors." Now think: does that even make sense? No. No, it does not. Because what that means is: people who were stretched so thin that they couldn't buy, or borrow to buy, any more cheap consumer crap at Wal-Mart were somehow managing to buy houses - and that in a market where values were inflating beyond all reason. People who were too tapped out on their credit cards to buy anything else were buying houses? That's insane. But that's exactly what has been going on. Having strip-mined all other areas of the economy and having killed the goose that laid the golden egg, the haves reached into the pockets of the have-nots yet again, under the premise that people who weren't worthy of more unsecured credit were an ok risk if the borrowing was backed up with a tangible asset - in this case, a house. The only problem is, at some point the bill comes due and where it might be managable if only a minute fraction of the people borrowing to buy homes were unqualified and go into default, if a third or more of your market for the past five years fits that profile (and they did - the mortgage lenders pretty much ran through all the good credit risks sometime around 2002 - 2003), there's a really big and easy to see problem coming around the bend.

This was not unforseen. This was a policy. No one did anything to stop it because, as I noted previously, housing was the only thing keeping the economy from slipping into recession years ago.

Throwing money at Wall Street isn't going to fix things. The only thing that will really get things moving again is getting money into the hands of the 90% of the people in this country who collectively own only 30% of the wealth. That's the problem, right there. You can't have an economy if 10% of the people are sitting on 70% of the wealth. There isn't enough money flowing around to keep things healthy.

http://tpmcafe.talkingpointsmemo.com/talk/2008/09/precondition-for-signing-any-k.php

HT Andrew Sullivan

"We do not support government bailouts of private institutions. Government interference in the markets exacerbates problems in the marketplace and causes the free market to take longer to correct itself," - Republican Party Platform, 2008.

Hmmm...

1. National Health Care first.
2. Raise taxes on folks making more than $250K (threshold upwardly negotiable, but the *entire* cost of the bailout must come from the taxes on rich folks).
3. CEO (and everyone else) salary ceilings, no greater than Congress.
4. Don't blink.

As Dr. Allan Meltzer said on the News Hour this evening, there's no crisis ("they always yell 'crisis' when they're making a power grab" -- or words to that effect); we should leave it to the markets to sort it out; and if we must act we should loan the money to the banks -- with interest.

Sounds about right to me.

Professor Reich,

The situation with money market funds has recent scant attention even though it was the beginning of a massive run on those institutions that really seemed to scare the pants off of everyone. While the panic was related to the mortgage crises, e.g., some of these institutions held paper from Lehman, everyone has known about the mortgage crisis for quite a long time.

The problem where the money market funds are concerned are that they hold commercial paper and must sell it if they need to redeem shares. If they all are trying to sell their holdings, the price--but necessarily the real value--of those holdings plummets. The holdings may be perfectly sound and it is just a timing problem.

Money market funds have been de facto banks from the beginning but were never regulated. In fact, it was these institutions that lured ordinary savers from savings and loans. That was used as one of the excuses for deregulation of the S&L's. The S&L failure seems to be the paradigm for what we are seeing now, i.e., demand deregulation, induce a bubble, then demand a bail out at the tax payer's expense.

Something needs to be done about the real economic problems you describe. However, I wonder if this bail out program primarily needs to address the money market fund situation by putting them under regulation post haste and instituting FDIC type of insurance. That's just a sketch. My point has to do with preventing runs that, in effect, just shuffle money around and create big risks for ordinary savers and borrowers in the interim. The big boys can figure out how to value these flaky mortgage-backed securities and take their losses. The financial system needs commercial paper.

This is stupid. All you have to do is pass a law forcing the renegotiation of all mortgage debt -- principle is now adjusted downward to the present value of the homes and interest rates are capped at something over the fed funds rate. The banks lose the profit they anticipated but they still profit and the vast majority of people get to keep their homes and will likely see some upside as the market recovers. It's easy. Just pass the law and do it.

It's been said that this $700 billion dollar
Golden Parachute for Wall Street will equal roughly $2300, for every man woman and child in the country.
Here's an idea. Give every man woman and child,childs payment goes to legal guardian, a check for $2300.
This will allow people to catch up on some house,car and credit card payments. This will give them a month or two to renegotiate those loans and/or look for employment.
Meanwhile Congress will have some time to enact new laws of oversight and regulation,conduct hearings and investigations,freeze assests,assign punitive damages.
Paulson said himself today that the American taxpayer is already on the hook,so lets give the money directly to them and let it trickle up!

Our country needs a day of Jubilee. We need to repudiate all debt. Yes, it would work. All the 3d generation wealth would lose their hordes of bonds. So what? Yes, this would take a massive restructuring of our financial system, and a massive infusion of new money to replace the eliminated debt (most money in the system today is simply the backside of debt, and that money disappears when the debt disappears.) Nobody treats this suggestion seriously, because it sounds so radical. Yet, consider that all historical cases of massive debt have eventually ended the same way - the natural way - the debt, one way or another is not paid, it is eliminated.

A fundamental point is that our failing economy has no systemic cause. We have ample resources, ample labor, an in-place superstructure, and all other elements necessary for a vibrant economy. The problem is that the bottom 90% owe the top 1/10th of 1% too much money. The top 10% are the movers and shakers of our society (all you bright people on TPM) and they would lose small amounts if all debt is repudiated. The movers and shakers, therefore, side with the very wealthy on this issue, and do not even consider debt repudiation. Eliminate the massive debt (mostly bonds) that has been accumulated by the top 1/10 of 1%. Start this Monopoly game over.

Why not wait until January?

Buffett has plenty of reason to help turn this tide. If the Stock Market declines, the value of his holdings decline. In addition, Buffett's core business is insurance. If the Investment Houses and Banks fail, the insurance industry will be close behind.

Thank you, thank you for finally talking about this. I have also not heard one economist mentioned that there are plenty of people who bought houses at unbelievably inflated prices, who took out interest-only loans, loans with balloon payments, etc. If wages continue to go down and we have even more drastic layoffs, those people will be in the same leaky boat as the subprime borrowers. I have long wondered how someone could plunk down $600,000 for a house that was going for $250,000 less than 10 years ago. (That is common in the New York Metro area.) That's insane. My guess is that they can't. Even if they could cover the high payments early on, they won't be able to if one earner loses a job, if taxes go up, if medical costs go up, if other general inflation means that the cost of living continues to spike.

If investors haven't already lost confidence in this market, they will never lose confidence in the market. Congress needs to make sure that the right bailout plan is implemented, not be be rush by a lame duck administration and their own rush to campaign. So, Congress needs the time to get the bailout plan right for the taxpayer.

I'll use "foreclosure" below, but figure the same question should be asked of distressed properties in general.

I'd like to know:

1. How much of the real estate that has entered foreclosure is investment property?

- I bet this is a pretty high percentage. Who buys high hoping to sell higher with no money down? And if you had a good track record before getting caught in the bust, you probably walk away from not one, but multiple properties.

2. (related) How many of the foreclosed properties were not the sole house (or condo, or whatever) owned?

3. How many of these properites were jumbo loans? (let's use $417,000 as the benchmark, disregarding the 2008 stimulus deal that raised the ceiling.)

4. What percentage are minority-owned, and how does that compare to home ownership in general?

- I'd guess that the minority-owned homes are going to be less likely, not more, to be in bankruptcy, but even if there's some correlation, having the data should still easily prove the fallacy of the "it's all the minorities' fault!" argument.

5. What percentage of distressed houses are first-time homebuyers?

6. What percentage are refinanced mortgages?

7. What percentage are ARMs that have had their initial locked-in rate expire?

- I suspect this is a lot less of a problem than most assume (though clearly it can be an issue). Mortgage rates remain pretty low, and the properties most likely to be in trouble are the ones purchased or refinanced within the past 5 years, when the market was peaking.

8. How much of the bad debt relates to 2nd or 3rd (or higher) leins on a house, instead of the initial primary mortgage? (related to the refi question above)

9. How many of the loans are "conforming"?

- If conforming loans aren't an issue now, and the economy deteriorates, well, just wait.

10. How many are FHA loans (if any)?

11. How many have PMI? And does this have any positive effect? And, if not, can we abolish it?

The whole thing is a huge con, the Bush cronies' last ditch effort to shake down the public for a huge windfall in the finacial services sector as they've done in oil/gas and war equipment and services, to name but two others.

Do you know any one or any business whose credit line has been pulled w/o explanation? Why are they still advertising mortgages/refi's? If Goldman Sachs is still healthy, why do they, too want in on the deal?

Please contact your congresspersons and let them know they're being suckered. They've swallowed the premise and are only asking questions around the edges.