Mr. B

The U.S. Shouldn't Pay Ransom to Wall Street

In principle, I am not in favor of government intervention in markets. I do not like the socialization of risk and losses by the government. However, the federal government has been a key part of the problem in this case.

The bill does not address the root causes of the problem. Government has fundamentally contributed to this mess with the Community Reinvestment Act and the GSEs (Fannie and Freddie). The CRA needs to be repealed or modified so that traditional lending standards can be applied to all extensions of credit, including low and moderate income borrowers. The GSEs need to be downsized and their function needs to be placed entirely in the private sector without a government guarantee.

What you miss is that the source of this problem is government.

What Wall Street did is try to efficiently allocate capital. Is Wall Street complicit? Yes! So was Greenspan and the Fed (e.g. keeping rates to low for too long, Greenspan encouraging people to use ARMs, etc.), mortgage brokers and hedge funds.

Turning the US Treasury into a distressed debt hedge fund is a bad idea. The US Treasury does not have the skills to manage these assets. Outside managers should be retained to manage the assets. PIMCO said it would do it for free, simply covering their costs. 100% of the profits, if any, must be returned to the US Treasury.

This plan does nothing to ensure that banks will resume lending. My view is that credit has permanently contracted in part because of tighter lending standards and in part because consolidation among banks reduces capacity. The cost of credit will be higher for the foreseeable future. This will impact valuations and demand for many assets across the entire spectrum.

The bailout will not save us from a recession. No economy has ever expanded during a period of contracting credit.

We can argue about more or better regulation. But this would not have happened at all, or if it did it would have been systemic, if government had not forced banks into the subprime market via CRA with the help of the GSEs.

You may not like it, but Bush, a number of Republicans (including McCain) and ultimately Greenspan warned and tried to address the risk posed by subprime loans and the GSEs. The effort was stopped by the Democrats. And, yes, Obama helped train folks at ACORN in Chicago on tactics to force banks to increase loans to unqualified borrowers. If Obama is elected, he will continue to take America down the path of socialism much to my chagrin.