Garbage pail

Looks as if the Treasury is ready to bite the bullet and propose some sort of massive bailout for the mortgage-backed securities mess. “Buying assets, not institutions.”
Not clear how this works, and how to avoid making a massive transfer from the prudent to the imprudent.

Looks as if the Treasury has decided the federal government is going to have to be the buyer of last resort for bad mortgage paper

One pretty clearly good idea: a federal guarantee for money market funds. But then of course those funds are going to have to be regulated as banks are, and pay their fair share toward the deposit-insurance systeem. And of course it’s not fair to protect those funds that tried to goose their returns a few basis points by buying not-quite-safe paper. If the investors are to be held harmless, then the management companies ought to take the hit.

Details to follow. Soon. They’re talking about getting a bill through by the end of next week. Barney Frank is on board, which suggests that the underlying crisis is really scary and that the proposed deal won’t be too much of a rip-off. I hope.

What worries me is the idea of buying “assets, not institutions.” We want to protect the financial system, not the executives and shareholders of the banks and quasi-banks and asset managers and hedge funds. And although it’s essential to prevent (and reverse) physical abandonment of housing, it would be wrong to reward those who bought houses they couldn’t afford (or bought SUV’s by borrowing against the appreciation of the houses they were in) at the expense of those more prudent and thrifty.

Offhand, I don’t have a clue about how the mortgage-backed-securities bailout is supposed to work. If no one knows what the paper is worth, how do you buy it? And how do you keep the pressure on to permit “short sales” so the encumbered properties don’t wind up sitting idle?

There’s mention of “steep discounts,” which means that the financial companies take (some of) the bath they deserve, and also of an “auction mechanism,” which sounds intriguing. Is the idea to auction off a small share of each asset and have the auction price determine how much the feds would pay for the rest? I suppose that could work, though I also suppose lots of investment bankers will earn their next round of excessive bonuses figuring out how to game the system.

It looks as if the Democrats want to make this the occasion for a second stimulus package. Not obviously a bad idea, but they may want to concentrate their bargaining power on preventing a huge giveaway. My proposal, if a stimulus is part of the package: a FICA payroll tax holiday. Quick, and reasonably targeted.

Legitimate questions have been raised about the legal authority for the AIG deal. Even those of us usually most insistent on compliance with legal forms aren’t inclined to be too captious with respect to a one-time action taken in the face of a genuine emergency happening too fast to even ask for legislation. And it seems that the Fed and the Treasury think they’ve gone as far as they ought to go without explicit legislative license.

What is &#8212 or ought to be &#8212 deeply shocking is the obvious irrelevance of the White House. No one is even pretending that the Decider is making any of the actual decisions. Evidently Bernanke and Paulson think they have more credibility both on the Hill and in the markets than does the President.

Personally, I’m reasonably happy to let the experts and the legislators work this one out. They can invite the Beloved Leader in for the signing ceremony. But we shouldn’t soon forgive the Republican Party for sticking us with a leader who has to be pushed aside when the real money is on the table.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact: