Originally posted at YPP
I always thought the initial plan to buy toxic securities was second best to actually capitalizing banks.
The initial plan puts us in a dilemma:
1. If the government purchases bad mortgage securities at what they are worth—very little—not much new capital is provided to banks and thus a) their balance sheets don’t get better and b) they can not expand their lending.
2. If, on the other hand, the government purchases bad mortgage securities at much more than they are worth, the government is bailing out stockholders of financial institutions and, at the same time, making it less likely that the government recoups the initial bailout by selling mortgage securities at a profit.
By taking preferred stock for an investment in banks, this dilemma is resolved.
1. New capital is directly injected into banks which, as Krugman points out today, can lead to ten times as much new lending since banks generally maintain reserves of about 10% of lending.
2. When bank stocks recover, the government can sell the stock at a profit. In the meantime, the value of existing stock is diluted and the current owners of the bank don’t get as large a reward.
Neither of these program actually have a direct effect on the terms of current mortgages. Renegotiating the terms of current mortgages was, as far as I understand, never on the table in the plan to buy mortgage securities. Nor is it part of the new plan.
Both plans are meant to save the financial system from collapse which is in the interest of all of us. If we want to do something to directly help those who are going to lose homes—and we certainly should do that—we need some other plan.
You didn’t really think that the Bush administration was going to help the people PUP are concerned about, did you Brady? Some Democrats tried to add provisions to the bailout bill to give judges greater power to force the renegotiation of home mortgages. It was not part of the final bill.