Looks like Paulson has taken at least one stance with which the A-Train shouldn’t have too many problems (if any), and while in many ways I disagree with the Train about how to fix the problem, in this particular situation I think we’re probably both on the same page.
Nov. 18 (Bloomberg) — Treasury Secretary Henry Paulson rejected using the government’s financial-rescue program as a “panacea” for economic difficulties, clashing with lawmakers who want the funds to help beleaguered homeowners and automakers.
“The rescue package was not intended to be an economic stimulus or an economic recovery package,” Paulson said in testimony to the House Financial Services Committee in Washington. The $700 billion Troubled Asset Relief Program was designed to stabilize financial markets and the flow of credit and “is not a panacea for all our economic difficulties.”
Barney Frank, who heads the House panel, took issue with Paulson, urging the Bush administration to step up efforts to stem record foreclosures. Democrats are also pursuing legislation to deploy part of TARP to prevent General Motors Corp., Ford Motor Co. and Chrysler LLC from collapsing due to lack of cash.
The American auto industry has been weak for years, and there’s absolutely no evidence that throwing additional cash at the industry will resolve any problems; it will just delay their inevitable collapse. It may be best for the Big 3 to go through Chapter 11, just as the airlines have done time and time again.
If the government starts bailing out every large corporation that is going through economic ills, then the claims that we are moving towards socialism start to gain a little more credence. It’s one thing to shore up the backbone of the American economic system by injecting capital into banks. It’s quite another thing to start buying stakes in every company that starts to experience some financial problems.
As for mortgages and foreclosures: in my opinion, the best way to help stem the tide of foreclosures is for the banks who are carrying these toxic assets (now that Paulson has indicated that the Treasury won’t be buying them, opting for direct investment in the banks instead) is for the banks to work with the individual mortgagees to reset the terms, using various loan-modification programs.
The IndyMac plan developed by the FDIC has been getting a lot of praise:
Under the IndyMac Federal program, eligible mortgages would be modified into sustainable mortgages permanently capped at the current Freddie Mac survey rate for conforming mortgages (now about 6.5%). Modifications would be designed to achieve sustainable payments at a 38 percent debt-to-income (DTI) ratio of principal, interest, taxes and insurance. To reach this metric for affordable payments, modifications could adopt a combination of interest rate reductions, extended amortization, and principal forbearance.
If, consistent with maximizing the net present value of the mortgage, an interest rate reduction below the current Freddie Mac survey rate is necessary to achieve a 38% DTI, then IndyMac Federal could reduce the rate further for five years. After five years, the interest rate would increase by no more than 1% per year until it capped at the Freddie Mac survey rate where it would remain for the balance of the loan term. Other modification features could be combined with an interest rate reduction, as necessary and consistent with maximizing the value of the mortgage, to achieve sustainable payments.
A program like this should help out most people who either didn’t understand what kind of loan they were getting when they originally purchased their home, as well as some of those who bit off more than they could chew when they bought their homes, but it won’t benefit the most egregious acts of recklessness by home buyers (the $30K family who buys a $500K home).
More details (and in a more reader/listener friendly format) on Sheila Bair’s plan can be found in a great story broadcast on NPR’s Morning Edition this past Friday morning.
While Ms. Bair’s plan is meeting some resistance from Henry Paulson, it sounds like it’s a matter of working out some of the finer details, rather than a wholesale rejection of the plan by the Treasury; and hopefully Paulson’s successor in the Obama administration will be even more open to Ms. Bair’s plan.