Bailout Bill #2: the fight begins

[Kwirk]

Most importantly, Fannie Mae and Freddy Mac were the number one purchasers of subprime and Alt-A mortgages for several years, and they purchased a huge number of mortgage-backed securities. They provided a market for these bad loans/loan products, and so private comapnies produced them. Investors bought these products from these "Government-Sponsored Enterprises" because the market viewed them as being backed by the USG.

I'm not sure about this. All that I read suggests that the GSEs were relatively late to the subprime party (though I certainly support keeping a much tighter rein on them). And, if most of this toxic debt were produced by the GSEs we wouldn't need to buy it because we would now already own it by having taken over the GSEs.

I tend to see the problem more in terms of the low capital requirements of investment banks, hedge funds, and probably others. The low capital requirements allowed a huge expansion of money: remember "raining liquidity?" The other primary factor may have been low central bank interest rates which gave impetus to borrowing at a low rate and seeking investments that paid a higher rate.

 

[samclem]

I'm not sure about this. All that I read suggests that the GSEs were relatively late to the subprime party (though I certainly support keeping a much tighter rein on them). And, if most of this toxic debt were produced by the GSEs we wouldn't need to buy it because we would now already own it by having taken over the GSEs.

I tend to see the problem more in terms of the low capital requirements of investment banks, hedge funds, and probably others. The low capital requirements allowed a huge expansion of money: remember "raining liquidity?" The other primary factor may have been low central bank interest rates which gave impetus to borrowing at a low rate and seeking investments that paid a higher rate.

I agree, these were other contributing factors.
And pumping $700 billion (or now up to over $800 billion with the pork) will only continue to keep the farce running (listen to the justifications for the bailout/pork package: "need to keep interest rates down" etc). Interest rates need to go >up< so that more money will become available and fix any problem with liquidity.

The musical chairs game continues. We know that there are no seats for those who owe $300K on a house truly worth $200K. But rather than face that fact and get on with the healing, Congress wants me to pay my portion of $800 billion to keep the music playing and all of us circling the chairs, singing and clapping.

 

[ChrisC]

I'm not sure about this. All that I read suggests that the GSEs were relatively late to the subprime party (though I certainly support keeping a much tighter rein on them). And, if most of this toxic debt were produced by the GSEs we wouldn't need to buy it because we would now already own it by having taken over the GSEs.

I tend to see the problem more in terms of the low capital requirements of investment banks, hedge funds, and probably others. The low capital requirements allowed a huge expansion of money: remember "raining liquidity?" The other primary factor may have been low central bank interest rates which gave impetus to borrowing at a low rate and seeking investments that paid a higher rate.

They were very late to the party. And I'd be surprised if the securities they purchased are at the lower end of the quality scale for subprime stuff, like option loans or negative amortization stuff. However, Fannie and Freddie are an easy target for those who believe the Government has no business in housing finance, unless the Government is providing tax subsidies to the middle class like the mortgage interest tax deduction, Starker exchange rules, and income tax exclusions for the sale of your primary residence, etc.

 

[socca]

Somehow the proposal went from around 700 billion to 810 billion. That's no way to be fiscally responsible.

I spent 20 years in industry. If I had ever proposed a solution to a problem even remotely similar to the Paulson approach, I would have been fired on the spot. The problem is not that the Paulson approach is necessarily wrong, it's just that the analysis to justify that it's the best approach doesn't seem to have been done. No competent senior manager in industry would ever authorize the release of funds for a proposal so utterly lacking justification. Instead, she would demand a detailed, high-quality trade study be performed, comparing the Paulson proposal with the numerous other plausible approaches that have been suggested by professionals just as knowledgeable as Paulson. I'm having trouble locating the taxpayers' competent senior manager in this whole Bailout Bill drafting/debate/approval process.

This whole Bailout Bill debate has been a real eye-opener for me. I had no idea that the decision-making processes in the U.S. government's legislative branch are so incredibly primitive, and that the standards for acceptable results are so incredibly low. It appears that we desperately need a 'government modernization program' along with all of the other systemic changes that may be required to get our society back on track.

OK, I admit that whining is easy. The hard part is actually getting anything done.