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The
government’s $700-billion plan to bail out the banking
system might calm panicked financial markets, but its
real value could be in buying time to address the root
problem: the continuing slide in housing values.
The
Treasury Department’s rescue plan is far from a done
deal, with Democrats saying Sunday that they would push
for more relief measures aimed at homeowners facing
foreclosure and for stricter oversight of the program
that would allow the government to buy billions of
dollars of securities tied to troubled mortgages.
“I won’t
support a program that signs a $700-billion check and
says, ‘Come back someday when you’ve resolved the
issue,”‘ Sen. Christopher Dodd, chairman of the Senate
Banking Committee, told reporters Sunday. “We all want
to get this job done, but we want to get it done right.”
But
there was broad agreement that the government must move
quickly, decisively and comprehensively to get the
global financial system moving again.
“What’s
been lacking is strategic oversight, as opposed to
swatting one fly and finding 10 others,” said William R.
Gruver, a professor of management at Bucknell University
and a former partner at Goldman Sachs & Co., after the
broad outlines of the plan were released late last week.
“We have to get to the underlying housing issue: If
people were still making their mortgage payments, we
wouldn’t be here talking about these other problems.”
The
rescue plan does nothing in itself to shore up the
housing market. Rising defaults and foreclosures on home
loans, spurred partially by declines in home values, are
the cause of the collapse in price and tradeability of
the mortgage-backed securities on the books of banks and
investors.
But
without government action to aid battered banks,
financial experts say, mortgages would remain difficult
to obtain and the housing market’s recovery would be
further delayed.
“The nub
of the problem is mortgage-backed securities that people
have a hard time valuing, and [the rescue plan] doesn’t
address that,” said James R. Lothian, a professor of
finance at Fordham University and a former executive at
Citicorp. “But the basic thing that needs to be done is
to provide liquidity to the banking system and markets
so we don’t have bank runs going on.”
The need
for a federal rescue was underscored after private
solutions to the crisis fell by the wayside—notably last
week, when Wall Street banks failed to assemble a rescue
plan for the failing insurance giant American
International Group and Lehman Bros.
“You
need the ultimate sheriff to come into town to cool
things down, and that’s a role only the government can
play,” said Eugene A. Ludwig, a former US comptroller of
the currency.
The
bailout plan, laid out in a two-and-a-half-page document
delivered to congressional leaders Saturday, would
effectively allow the government to act as an investment
bank, buying debt from troubled banks and other
financial institutions stuck with securities tied to
distressed mortgage loans.
Democrats say a plan of this magnitude and price tag
should include direct relief to ordinary Americans. But
Treasury Secretary Henry Paulson, making the rounds of
the Sunday morning talk shows, said that the plan would
benefit everyone because of the significant ripple
effects that occur when companies cannot borrow money.
“It pains me tremendously to have the American taxpayer
be put in this position, but it’s better than the
alternative,” he told NBC’s Meet the Press.
The plan
has put a number of fiscal conservatives in a tough
political position. But nonetheless it has gained the
support of a number of influential lawmakers from both
parties.
“I’m a
free-market noninterventionist,” House Minority Leader
John Boehner said on ABC’s This Week. “But we face a
crisis, and if we don’t act and we don’t act quickly,
we’re going to jeopardize our economy, Americans’ jobs
and their savings.”
Some
believe that the securities to be purchased by the
government are so undervalued now that they eventually
might turn a profit.
University of California, Berkeley economist Thomas Davidoff said
that, if executed properly, the plan could net a profit
for the government—though he cautioned that this was a
big “if.”
“The
total value of these mortgages has fallen so much that
the fall in value [of mortgage-backed securities] may be
in excess of what can reasonably happen even in a really
bad foreclosure situation.”
Paulson
and others pushed for the plan after months of turmoil
stemming from the mortgage meltdown, which included the
collapse of mortgage lenders such as Countrywide
Financial Corp. and investment banks such as Lehman
Bros. and Bear Stearns. The crisis of confidence
accelerated last week after a money- market fund “broke
the buck”—allowed its share value to drop below
$1—because of its exposure to Lehman Bros. That was
significant, because while these funds are not insured
like bank deposits, they have been marketed to the
public as rock-solid investments that would keep their
value.
Industry
and government leaders feared that the loss of
confidence would drive investors to withdraw money from
the popular funds in quantities they could not meet.
Still,
bringing the money funds under the umbrella of
government bank regulation could create its own
problems.
“If you
extend insurance, you must extend control,” said
Lawrence E. Harris, professor of finance at the
University of Southern California’s Marshall School of
Business and a former chief economist of the Securities
and Exchange Commission. “If they don’t regulate them,
there will be huge problems. But I’m not sure they have
the resources in place to regulate them.”
The
housing market’s path to recovery remains the chief
imponderable in the financial crisis. Economists
generally agree that a housing recovery is essential to
an overall financial recovery, although there is a
difference of opinion over how aggressively the
government should intervene to prop up home prices.
The
rescue plan “is not going to keep a bubble inflated,”
says economist Dean Baker, codirector of the Center for
Economic and Policy Research in Washington. “There’s
nothing you can do to prevent the future meltdown of the
housing bubble and nothing you can or should do to keep
home prices from falling further.”
Despite
its huge costs, however, there appeared to be widespread
agreement that a government initiative on a large scale
is needed.
“Main
Street is as much at risk as Wall Street,” said Ludwig,
the former federal regulator. “If we failed to act, the
resulting loss of jobs, malaise in growth, damage to the
engines of our economy, and harm to the American
taxpayer would be far more costly.” |
