Critics' ideas beyond bailout are unlikely to be a cure-all
by Steven Pearlstein - Oct. 3, 2008 12:00 AM
Washington Post
WASHINGTON - To hear it from critics on the left and right, the Bush administration and legislative leaders were in such a rush to pass a $700 billion bailout for Wall Street that they failed to consider much simpler, cheaper, common-sense approaches.
In fact, all of their ideas were considered as part of a contingency planning process over the past year at the Treasury and the Federal Reserve. Some of the ideas were incorporated in various forms in the bill voted down by the House on Monday, while none is likely to be the silver bullet that proponents suggest.
• Raise the limit on deposit insurance. One idea, supported by the two presidential candidates and the Federal Deposit Insurance Corp., is to raise the limit on deposits covered by the government's insurance program from $100,000 per individual account to $250,000.
Here's the problem: Increasing the insurance limit will encourage the weakest banks to lure "hot money" with high interest rates. They would then use the deposits to take big lending risks in the hope of returning to financial health.
• Suspend mark-to-market accounting. This idea has a big following among conservatives.
"Fair value" accounting rules require banks to value certain loans and securities on their books - those that they don't intend to hold forever - at the price that they are currently trading at on secondary loan markets. That's generally a sound idea when those markets are working well. But now that those markets have virtually collapsed because there aren't enough buyers, prices have plummeted well below what their economic value would be if held until maturity.
There is an easy compromise here: Require banks to disclose market prices right alongside their own estimates of "fair value." Let the investors decide which to rely on.
• Provide relief to homeowners, not Wall Street. This is the favored approach of liberals.
Congress earlier this year appropriated $300 billion to authorize the Federal Housing Administration to refinance troubled mortgages if lenders agree to reduce the amount of outstanding principal and homeowners agree to share some of their future home-price appreciation with the government.
Some have suggested that the government go further by providing direct subsides to homeowners facing foreclosure. While that may sound like a "trickle-up" strategy, it would be every bit as much a bailout for lenders as it is for homeowners. (Who do you think would end up with the money?)
• Recapitalize the banks, don't buy their lousy loans. In fact, the much-maligned House bill would have given the Treasury secretary wide latitude to use any portion of the $700 billion to recapitalize financial institutions before they failed, in exchange for stock or stock warrants, just as the government did when it took control of Fannie Mae, Freddie Mac and AIG.
But recapitalizing the entire banking system would require an initial outlay of much more than $700 billion, and involve the government in the ownership of hundreds of institutions. Given the widespread fear of lending to or investing in banks until the full extent of their lousy lending becomes clear, there's a good chance that injecting large amounts of government capital wouldn't do much to attract additional private capital, or even get banks to begin lending again.
What we've got on our hands is a big, hairy, complicated mess. Beware of smooth-talking salesmen with hidden agendas peddling magic potions.
No comments:
Post a Comment