Poor Coverage of the Republican Plan

Hoisted from Comments:

Grasping Reality with Both Hands: You gotta comment on the current House Republican insurance plan. Time Magazine seems to think it's a real plan, not a Potemkin plan. I have no idea, but I think the people at Time are morons, so you MUST let us know if this is real or more nonsense from the guys who brought you "get rid of the capital gains tax! That'll fix everything!" -anonymiss

Anonymiss is citing Karen Tumulty:

Politically at least, the [Republican Deputy Whip Eric] Cantor plan has a lot of appeal. By insuring these junky mortgage-backed securities, rather than buying them, the government presumably wouldn't be spending nearly as much money. In fact, it would be getting money from Wall Street, in the form of premiums for this insurance. This scheme would function sort of like GNMA. The very process of insuring these assets would help solve one of the biggest problems: Nobody knows what they are worth.

The problem, at least in the eyes of Treasury Secretary Henry Paulson and Fed Chairman Ben Bernanke, is that, while it would help the situation, it wouldn't work to stabilize the markets as well as their plan would.

Here's how it has been explained to me: Last winter and spring, when Treasury and the Fed analyzed a lot of options out there for what to do, they considered this insurance option. They decided that because the insurance option would leave the bad stuff on the bank balance sheets, it wouldn't give the banks the additional liquidity they need. They also believe it wouldn't create a market price that can stimulate trading, the way a purchase program would.

I'm not any kind of an expert on this stuff, so I don't know who is right here...

Let us see. On the one hand, the Treasury Secretary, the Federal Reserve Chair, and their staffs. On the other hand, an unstaffed Republican Chief Deputy Whip Eric Cantor who has not a plan but a plan to have a plan to ask the Treasury to design a different plan than the plan the Treasury thinks is best.

Cantor calls for "the Treasury to design a system to charge premiums to [mortgage-backed security] holders to finance [government-provided] insurance" against defaults.

The Fed and the Treasury have been looking at these issues since at least last winter. I suspect that the Treasury and Federal Reserve staff have decided that such federal government-provided insurance is indeed something we want to try to work toward as part of our financial system after the crisis is over -- the "commitment fee" due in 2010 in the Fannie/Freddie nationalization makes no sense otherwise, for it is such a fee, for the insurance on mortgages and mortgage-backed securities that Fannie/Freddie have gotten for free in the past but that Treasury wants to charge them for, and also offer to others, starting in 2010.

But my belief is that Treasury and Federal Reserve staff have also judged that it won't work well enough to be a useful tool in handling the current crisis for speed-of-implementation reasons: We need to move to asset purchases --  banks need liquidity now, and we need functioning markets where securities are priced now, and you can buy assets a lot faster than you can set up insurance schemes.

Confronted with these two sets of opinions -- from a single unstaffed guy who is an expert in rounding up and feeding Republican House members on the one hand, and the Treasury Secretary, Federal Reserve Chair, and their staffs on the other, Karen Tumulty says "I don't know who is right here" because "I'm not any kind of an expert on this stuff."

So why doesn't she give her space at Time to somebody who is an expert, and does know who is right here? This is he said-she said journalism as self-parody.

Why oh why can't we have a better press corps?

Comments

[Karen Tumulty:]

Brad: We do indeed have an expert, Justin Fox. I have been linking to his work. You might want to take a look.

2008 Sep 26 05:28 PM

[Joyful Alte...:]

When Karen's blogging at Time, she's entitled to say I dunno. She's honest when she doesn't know, unlike nearly all the other pundits, and she responds to comments. So back off.

That said, I agree with you that any plan coming off the cuff from the Republican House caucus must be a political plan, not a financial plan.

2008 Sep 27 09:34 AM

[williambanzai7:]

They need to go to AIG for their infinite wisdom on insuring the senior tranche of this garbage.

2008 Sep 27 10:49 AM

[John Lounsbury:]

I wish more bloggers and commenters were as realistic as Karen Tumulty about what they know, what they understand and how they express their opinions.

On a different note, I have a couple of analogies that have some applicability to the current crisis.

1. In triage, first you stop the bleeding and then apply the sutures.

2. If a person with clogged arteries is having a heart attack, you first clear the arteries. Only then is it productive to address the causes, such as diet and lifestyle.

I am not in a position to provide the best road map for the current finacial crisis, but I will examine what is proposed by "experts" in the sense of the two analogies. If what is proposed can stabilize the patient, it should be evaluated. If what is proposed is aimed at the underlying causes, it should be postponed until actions are taken to be sure the patient doesn't die on the table before surgery starts.

2008 Sep 27 11:19 AM

[txgram:]

it has only been one year since barney frank was trying to induce a new bill to drop basic down payments on house from three percent to zero percent... no what do you think about this jerk being looked up to for the great fix ??? fire him and then put him in jail.

2008 Sep 27 12:02 PM

[JCC:]

jlounsbury59 got it right. My take is similar:

It is obvious to most that when you arteries are clogged, the blood doesn't flow. When you have blocked arteries it is an emergency, and to avoid a heart attack it is critical to get the blood flowing, which implies the use of a stent or open heart surgery. A complete blockage will result in a heart attack or worse. Time is critical, and the required correction is an emergency.

Analogous to your vascular system, the financial markets are the arteries of the economy. Analogous to your arteries, when the financial markets are frozen, the monetary supply does not flow. This creates an emergency situation where it is imperative that we restore the monetary flow.

In today's environment it is critical that we on an emergency basis thaw the financial markets thereby enabling the required monetary flow. There is not a lot of time to react. Waiting too long will create a severe recession or a depression.

2008 Sep 27 12:49 PM

[jbde:]

Some say the Treasury will offer artificial high prices and hurt the taxpayer. No, it's the other way around. Treasury does not determine a price somewhere above the non-existent fire sale market prices, the sellers at auction determine the prices and here is how it works:

Treasury announces an auction of say $100B and break it into 4 categories - subprime, option-arm, other prime and home equity. Each category is broken into classes that give granularity to the underlying markets of pools that make up each MBS. Could be many per category, but lets say there are 5 per category for a total of 20 'bidding' traunches.

But it is a reverse auction, so they are 'offer' traunches. Each holder offers a price they will take for $X face value of MBS's to derive a pennies on the dollar price. For each traunch, the Treasury takes the lowest price and works upward until the total dollars allotted to the traunch have been reached. Thus 'we the people' get the best and lowest price and thus the best upside potential as the Treasury can hold the MBS's to maturity.

The prices will be higher than where institutions have been dumping and thus marks to market will be higher. So the holders of all similar MBS's will recover asset value and the credit markets open up.

But here is what will happen after the first auction - hedge funds and vultures will offer to buy the MBS's the Treasury just bought! Why, because the auction established floor prices. Thus the Treasury makes a quick profit and recovers part of its $700B in purchasing power - yes it revolves!

When the next auction is held, there could be lower prices in some traunches [but not likely] as some whose offers were not accepted the first time will make sure they get accepted the second time as they MUST get cash.

The taxpayers will make out like bandits - but the Treasury cannot say this publicly.
[note: JP Morgan gave some insight as to values of the 4 categories each in aggregate as part of their evaluation of WaMu. In a sense, they set a floor price.]

Paulson pulled out the bazooka because of the seizing of commercial paper and not because of GS losing value, that was an effect of the collapsing credit markets. They had the bazooka all the time as simply an outline and had considered many other alternatives including, briefly, the non-workable insurance plan. The plan offered was purposely an outline as only Congress can add the flesh - as they are doing.

There is no need for punitive actions against the institutions holding the MBS's - they are selling at the lowest price - that's punitive enough. Remember, the institutions include pension plans, insurance companies - not just banks! They thought they were buying the best rated traunches and still found out the value has dropped. They acted prudently with the information given to them by the rating agencies. So some would want these institutions that hold the people's retirement and annuity money to give a piece to the Treasury?

This will liquify the banking system, but will not prevent recession.

2008 Sep 27 03:25 PM