Monday, September 22, 2008

Mortgage Bailout, part 3

I really liked Krugman's column this morning, but I wanted to highlight some of the developing Paulson bailout bill. Naturally my tendency is to be against any of it because it's clearly un-Constitutional (I don't recall the "bailout dumb lenders to save the market" clause), but then so was the Community Reinvestment Act that brought us here.

I'm going to start with that statement. The media has not convinced me that Phil Gramm getting through a bill that allowed banks to issue insurance or vice versa (the Gramm-Leach-Biliey Act) had anything to do with the current problem. AIG isn't going under because it owns assets and issues insurance. It's going under because a bunch of companies put out very dumb subprime loans, securitized them, and then AIG insured them so that people wouldn't lose their money just because nobody could pay off their mortgage. Then nobody could pay off their mortgage and suddenly AIG was paying out more than they could afford. Why were banks issuing loans to people who couldn't pay? The Federal Government told them to. The Community Reinvestment Act of 1977 required that banks issue loans across the income spectrum and not just issue them to people with high income and great credit ratings (despite banks arguing that this was a dangerous practice). It was updated in 1995 (again, over vocal objections from banks) to strengthen the requirements that mortgage lenders issue loans to low and middle income people and allowing them to securitize those loans, even of subprime mortgages. True, the banks discovered that they could make a killing at this so long as house prices kept going up and a combination of cheap money created by Greenspan and phantom security granted by Fannie and Freddie helped to push them to great excess. All of these, though, are government problems. And not problems of the government insufficiently regulating banks, problems of government getting too involved.

I'm aware enough of my limitations that I'm not going to go against every economist I've read and say that not bailing out these companies would not cause the next Great Depression (and in fact it is argued that not bailing out companies caused the last one). If we have to bail out companies, I think Krugman is exactly right that in doing so we should take the companies in payment and I also think the passage of a bill giving the Secretary of the Treasury the ability to do this at any time without consulting Congress is a bit much power to give away. And I'm radically pro-Executive.

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