ANGRY DAYS
It stimulus time, again!
I'd like to create a tally, a challenge.
Ben Bernanke has asserted that his way is cheaper, that his early action has avoided a cost.
THE BRADY BAR IS SET - BEAT IT IF YOU CAN
Here is the bar for the $250 billion initial bank injection; the $85 billion to AIG; the $35 billion back-stop for Bear, Stearns; the pass-on premium increase for Deposit insurance to $250,000; the circa $150 billion April tax-rebate stimulus; and, now, the cost of another circa $150 billion stimulus. (That's before we get to the private costs, the failure of firms, the loss of jobs, the wealth effect of needless stock market decline and volatility, etc.).
The entire subprime and alt-A market may range from, say $750 billion to $1,800 billion (estimates vary, and it is completely in flux, as people refinance - maybe up to 50% of them, at regular-way, fixed mortgage rates).
We do a Brady plan for residential mortgage-backed securities.
Two steps:
1. You stop nearly all defaults and keep people in their homes (the government offers terms to lenders, borrowers).
2. You share in price declines
These two steps either stop or mitigate the asset-quality problems at every financial institution in the country that owns them, instantly, by putting a floor valuation under them, making them tradeable and liquid. No ridiculously fancy TARP, no scatter-shot injections.
Yes, it's politically hard to do, but it is *certain* to work and to work quickly, to restore the financial system, without stopping the housing market from full and complete adjustments at a normal pace.
Cost?
Government's 50% share of a 30% home price decline on $1,800 billion, maybe, or $270 billion (plus $100 billion, for additional program expenses and estimation error).
I'm so for this plan, I'll even let it be done via "block grant", a format the Republican love to death.
If one just focuses on defaults, rather than the entire sub-prime and alt-a market, you can probably cut that figure, again, by 70%.
Wednesday, October 15, 2008
Cost of Wrong Policy Actions - Beat This
