The Plan Keeps Coming Up Again
Posted: October 6th, 2008 | Author: saldarji | Filed under: business | 3 Comments »The bailout plan, which was passed by Congress, is unlikely to fix the banking system or the economy. The plan calls for the purchase of “bad” mortgage securities out of the market and from banks. The purchase is really meant to shore up bank balance sheets by exchanging cash for (worthless) mortgage-backed securities.
The problem is really that most MBSs and ABSs are not worthless. A portion of those securities continue to earn a return. What is really needed is the removal of bad securities, sort of like the removal of cancer cells through surgery, and the re-introduction of the remaining good mortgages. To put the problem in perspective, the residential mortgage market in 2006 was about 10 trillion dollars, of which about 1.5 trillion was in sub-prime.
Even if 700 billion dollars of mortgages was purchased off of the open market, the MBS market will freeze up again. What is needed is for the government to step in and act as a market maker in these securities. By providing necessary liquidity and providing assurance that there will be a buyer and seller of last resort, the government would allow the markets to work out the bad mortgages.
This course of action would give the banks a lot of time to find ways to strengthen their own balance sheets. It would allow for enterprising individuals/companies to buy mortgages and possibly separate the good stuff from the bad stuff with less risk. It would also unfreeze the credit markets. Most importantly, the startup capital would be a lot less than 700 Billion dollars.
I think you meant “billion” in the phrase “of which about 1.5 million was in sub-prime.”
Oops, it was actually “Trillion”.
The sad thing is that, while there are a lot of very bright folks out there with great ideas that would actually work, like yours, the government for one reason or another always thinks it’s better/ smarter/ faster.
The problem with that is that very bright people don’t work for the government as the pay is shite. This means that folks who could actually fix the problem aren’t anywhere near where they would have to be to get it fixed.
Instead we get haphazzard, half arsed, half baked ideas that are grandiose and look spectacular. The market reacts favorably until the plan actually comes to light, where upon further inspection it is proven to be light weight and worthless and the market reacts like it did yesterday with a 800 point dip.
The moral is that folks that should be in power, never are and the ones that seek the power are morons.
In the end it doesn’t matter who you vote for, the government always gets in.
Ramble complete.