So, the most deliberative body in the world is now ... deliberating.
How odd.
My initial take is that the two proposals are not in opposition. My guess is that they *both* could be needed.
To start, I'd like to understand Paulson's and Bernanke's opposition to a backstop scheme.
My hunch is that they would like to buy up stuff other than residential sub-prime and alt-a mortgages, like commercial mortgages and maybe even some prime. They may also want to help unwind some of the derivatives books, such as AIG's. Whatever the case, they could talk in some more detail, I think, without harming the prospects of their plan.
There is no reason not to seed their idea for reverse auctions. It might be a useful tool to have on hand. God knows, the constant appeal (over two administrations now) to the Exchange Stabilization Authority is ... wearing kinda thin, yes?
An insurance scheme could get out of control in risk to the taxpayer, quickly, if they aren't careful. Therefore, limiting it in important ways seems smart, if not simply a must-do (like to 90% of loan value, or by type of loan or borrower, etc.). Limits, of course, could leave gaps. Targeted assistance might be available in the form of a Paulson slush fund to fill those gaps (or even the Fed's own programs), especially if it comes with the kind of strings on exec comp and taxpayer protections that an insurance / guarantee scheme alone would not provide. The two approaches, done right, could complement each other.
An insurance scheme doesn't improve "regulatory leverage" or the regulatory picture. It's hard to craft in a way that helps taxpayers to participate in any "upside".
THE BEST APPROACH FOR TAXPAYERS
If taxpayers were your sole concern, the thing to do would be to do the Paulson plan first, then pass an insurance scheme to enhance the value of the assets and make them highly liquid. That would give the taxpayer a very handsome return... It would certainly be fast and easy to do, as well.
Friday, September 26, 2008
GOP Fiddles While Rome Burns
