Due to the persuasion of our friend, Doug Brown, we would like to take a moment to officially state our humble opinion on this matter. This topic was also difficult for us to write about, not so much for lack of opinion, but rather due to the fact that so many other inter-related events have been happening as of late (such as the buyouts of various companies, the ban on short-sales, the obligatory political rhetoric, media frenzy, etc.). Try as might; we simply couldn’t hold the fort of constancy.
For this entry, however, we will deal specifically with the $700 billion USD made available by the Treasury to buy mortgage-related assets (the Plan).
As a first point of contention, this is not, strictly speaking, a bailout, in that it is not an injection of short term liquidity (an emergency loan). What it is, is a law authorizing the United States Secretary of the Treasury to spend up to $700 billion to purchase distressed assets, especially in the arena of mortgage-backed securities from the nation’s banks [source]. With the current delinquent mortgages estimated to be around $500 billion, this should cover the current outstanding loan and still have some funds left over to fund the country’s other agendas.
There’s no doubt that there has been much opposition made against the Plan. Academics have proposed many ideas from nationalizations to recapitalizations and pretty much everything in between. Politicians too have been quick to denounce speculators and bankers and have tried tirelessly to stall the inevitable until after the presidential elections.
Ultimately, at this very tumultuous moment, doing something is better than doing nothing. Mind you, it took countless years before mechanisms were set in place to deal with the Japan Crisis in the 1990′s, as well as the Savings and Loans Crisis in the 1980′s. And, if there’s anything to be learned from these two crises, it is that timing is of the essence. As for what to do and which plan to undertake, we only know that this Plan is far from perfect, but with so many unknowns, it is nearly impossible to quantify with any degree of certainty what any of these measures’ returns would be.
For what we know, the current Plan had ironed out minor details before its passage, namely in terms of judicial review, but it is basically the same plan as before with $250 billion becoming immediately available to safeguard against an economic collapse, which then increases to $300 billion in the near future.
All this debate, however, has limited the scope of what we are dealing with.
We here at Dumbagent approve of this timely deal for one main reason, but with two big caveats:
Our main reason for approval is that this is not something that affects those of us just in the United States, but internationally as well. Ever since the Asian Financial crisis, contagion has become a major factor; from Thailand to Russia to Brazil and ultimately throughout the world and this demands more actions to be taken domestically. This time around, however, we are closer than ever to a global recession. A swift restoration of confidence (and credit) in the world’s biggest economy can help avert this issue, and give other governments some breathing room while we all try to mend the system.
Our first big caveat is that solutions such as this, as well as with the Fannie Mae, Freddie Mac and AIG scenarios, should be temporary. We Dumbagents still believe in a free market economy and in market forces. Unfortunately, matters have been taken too far this time around (as can be seen by Lehman expecting its buyout), so short-term government participation has to be relied upon to provide beneficial aid. The danger in this action is that this may misalign public opinion against deregulation and more towards nationalization and big government, while the opposite is in reality more beneficial to market economies. (We are happy if the police tell us to stay indoors when an axe-wielding psychopath is in the streets, as long as we can revert back to making our own plans once the danger is averted).
Our second caveat is this: nobody should forget. If we are lucky, this will serve as a wake up call to the interconnectedness of our economies and therefore to the fact that serving purely national interests is now more counterproductive than ever. There are obviously problems with mortgages in many countries, with derivatives (and off-balance-sheet vehicles) world-wide, and with rating methods (and agencies). These problems won’t have to disappear immediately, but they do need to be addressed. We can only stave off a worldwide crisis for so long and then who will be there to bail out the world?
