PPIP Must Be Part of the Recovery Plan

With the equity market flying and consumer confidence rising, some people are suggesting that perhaps we can dispense with the Public Private Investment Program--the plan to lift toxic assets off banks' books. However, to drop the PPIP at this point will prove highly risky for the economy, not least because housing prices have yet to stop falling.

It has been pointed out that Alt-A and option ARM resets are expected to rise in the near term, and with housing prices still declining, there may well be another wave of defaults and foreclosures, potentially causing ruinous effects on banks' balance sheets.

For this reason, I have been arguing that PPIP is a necessary circuit breaker: it will prevent or at least greatly alleviate the slippage in the housing market to spill over to the wider economy through the credit channel, and I have since October last year been arguing that a better, "fail-safe" way to pull the economy out of the crisis is to actually provide a price floor to existing housing below the median price as of some "snapshot date" through a buy-back program funded by the Fed. Readers may refer to earlier articles of mine in Seeking Alpha and my letter in Economists' Voice commenting on Glaeser and Gyourko.

In the absence of PPIP and with housing prices continuing to slip, we may expect credit to tighten pushing up interest rates. Already there has been some pressure on long rates, and with the economic recovery still fragile we cannot afford to see mortgage interest rates rise.

The parameters under which PPIP actually operates may not be perfect, and some parties may well feel unfairly treated. But without an effective price floor to the housing market the PPIP will be the most reliable circuit breaker that promises to stop the damage of falling housing prices to spread to the rest of the economy.

Comments

[Jasper M:]

Nonsense! PPIP is an eminently gameable boondogle, with No justification whatsoever.
Any institution that 'needs' this sort of thing should be allowed to fail.
The "Recovery plan" should be a swift repeal of mark-to-Myth, and Liquidation for those that can't handle the real world.

Jun 01 03:30 AM

[ain't no fo...:]

And why, pray tell, SHOULDN'T falling house prices spread into the rest of the economy? Do house prices live in some strange magical twilight land where gravity doesn't exist and trees grow to the heavens? Is there some immutable law of nature I didn't learn about in school that exempts house prices and our economy from the laws of mass stupidity?

Our greed, our hubris, and our DENIAL got us into this fix - perhaps just for once we should learn that there are consequences to our actions, that when we screw up we must pay a price for our moronic behavior, and maybe, just maybe, we'll act more responsibly the next time.

I know that's a tough concept to handle, individual and societal RESPONSIBILITY, but maybe the NEXT empire will grasp it a little more quickly, and be better off from our magnificent lesson in stupidity.

Jun 01 03:00 PM

[Mr. Ed, Jr.:]

This is insane. Suggesting we need to get another taxpayer ripoff/scam going to take care of the Wall Street crowd is sheer lunacy.

What is needed is for the US Government to follow the law and do the same thing with all the TARP bailout banks as they are doing every week with other banks all over the country-- take them over, clean them up and get back into the free market system under new ownership (And I do not mean the government)

Enough already of the government deciding which businesses are to succeed and which are to fail. Incompetent and failed businesses and our incompetent and failed government are sucking the life out well-run businesses and taxpayers.

The author states, " PPIP will be the most reliable circuit breaker that promises to stop the damage of falling housing prices to spread to the rest of the economy."

PIPP will do no such thing. The falling housing market is beyond the control of the government. It is what it is. None of the programs throwing away billions of dollars to prop up the housing market has had any measureable effect. But now, we should embrace the biggest taxpayer ripoff/fraud program ever devised in the history of the world ?

Jun 01 07:43 PM

[ain't no fo...:]

And now the banks who are selling their rotten assets want to be able to BUY other banks' equally bad assets in PPIP with TARP funds.

C pays top dollar to artificially prop up BAC's rotten assets, and BAC pays top dollar to artificially prop up WFC's rotten assets, then WFC pays top dollar to prop up C's rotten assets... all with TARP funds of course.

Three card monty and as always the taxpayer loses.

And by the way? The homeowners who took out those mortgages in the MBS's that the banks now want to be able to sell to each other? Many are long gone and hard to find, their equity so far below their principal they'd never get even, many more are unemployed and unable to make their monthly nut even if they wanted to, and the rest are just waiting by their front door for some old guy to walk up and ring their door bell and say "Hi, I'm Ed McMahon from Publishers Clearinghouse! Congratulations, you're our new millionaire!"

So just how is PPIP going to help real estate and the economy from doing what it does best these days, which is collapse?


On Jun 01 07:43 PM Mr. Ed, Jr. wrote:

> This is insane. Suggesting we need to get another taxpayer ripoff/scam
> going to take care of the Wall Street crowd is sheer lunacy.
>
> What is needed is for the US Government to follow the law and do
> the same thing with all the TARP bailout banks as they are doing
> every week with other banks all over the country-- take them over,
> clean them up and get back into the free market system under new
> ownership (And I do not mean the government)
>
> Enough already of the government deciding which businesses are to
> succeed and which are to fail. Incompetent and failed businesses
> and our incompetent and failed government are sucking the life out
> well-run businesses and taxpayers.
>
> The author states, " PPIP will be the most reliable circuit breaker
> that promises to stop the damage of falling housing prices to spread
> to the rest of the economy."
>
> PIPP will do no such thing. The falling housing market is beyond
> the control of the government. It is what it is. None of the programs
> throwing away billions of dollars to prop up the housing market has
> had any measureable effect. But now, we should embrace the biggest
> taxpayer ripoff/fraud program ever devised in the history of the
> world ?
>
>
>
>
>
>

Jun 01 08:07 PM

[Lok Sang Ho:]

It is important to realize that we were very close to the point that would trigger a depression similar to that in the 1930s. You may not like it, but to the extent that the global economy has been saved from a repeat of the Great Depression means that many taxpayers actually end up better off than otherwise.

My point is that without a circuit breaker, the interest rate resets for Atl-A and Option ARM could trigger a second serious tsunami that could swallow many more industries and jobs, and the recovery could take much longer after all the damage is done.

Jun 03 09:25 AM