Excerpt from the Hussman Funds' Weekly Market Comment (2/23/09):
The key issue is that in the final years of the housing bubble, home prices advanced more than 30% above their normal relationship with incomes. Unless we want the government to redistribute about 30% of the value of the U.S. housing stock either directly to struggling homeowners or indirectly to financial institutions, this problem will simply not be solved by government money.
What is needed is not government money, but government coordination. Government has the capacity to take actions in a large, coordinated way that private individuals cannot. Importantly, these actions need not involve enormous deficits or costs to taxpayers.
For example, throwing government money at financial institutions that are insolvent simply gives taxpayers a loss that should be borne by the bondholders of that financial institution. I can't stress emphatically enough that the largest bank failure in U.S. history Washington Mutual (NYSE:WM) was arranged last year with absolutely NO cost to the government, and no loss to the bank's customers. What happened there was exactly what I've been advocating since the Bear Stearns crisis: the government took Wa-Mu into receivership, wiped out the stockholders and most of the bondholders, sold the bank's assets along with the customer liabilities to J.P. Morgan for $1.9 billion, and handed those proceeds over as partial recovery for the senior bondholders. For more details on this sort of transaction, see the March 31, 2008 comment What Congress should Understand About the Bear Stearns Deal, and the September 22, 2008 comment, An Open Letter to Congress Regarding the Current Financial Crisis.
Simply put, institutions that are insolvent and would only avoid continued insolvency by large and continued infusions of taxpayer funds should be allowed to fail through the process of government receivership. It is wrong to squander the taxes of ordinary citizens and put a burden of indebtedness on our children in order to protect the bondholders of careless and poorly-managed financial institutions.