Saturday, October 4, 2008

Fingers crossed!

The MOAB (mother of all bailouts) passed the House yesterday on its second go around, by a vote of 263 to 171. The previous (original) version had failed by a vote of 228 to 205.

Fed Chairman Bernanke said "I applaud the action taken by the Congress. It demonstrates the government's commitment to do what it takes to support and strengthen our economy. The legislation is a critical step toward stabilizing our financial markets and ensuring an uninterrupted flow of credit to households and businesses. The Federal Reserve will continue to work closely with the Treasury as it undertakes these new initiatives. We will continue to use all of the powers at our disposal to mitigate credit market disruptions and to foster a strong, vibrant economy."

Treasury Secretary Paulson said "By acting this week, Congress has proven that our Nation’s leaders are capable of coming together at a time of crisis, even at a critical stage of the political calendar, to do what is necessary to stabilize our financial system and protect the economic security of all Americans. The American people will appreciate the leadership of their elected representatives and senators who took bold action to help stem a severe credit crunch that threatens to cost many jobs and undermine access to credit for working Americans. This bill contains a broad set of tools that can be deployed to strengthen financial institutions, large and small, that serve businesses and families. Our financial institutions are varied – from large banks headquartered in New York, to regional banks that serve multi-state areas, to community banks and credit unions that are vital to the lives of our citizens and their towns and communities. Each institution has its own unique benefits, and their collective strength makes our financial system more resilient, and more innovative. The challenges our institutions face are just as varied – from holding illiquid mortgage backed securities, to illiquid whole loans, to raising needed capital, to simply facing a crisis of confidence. This diversity of institutions and challenges requires that we deploy the tools in this rescue package, in combination with the tools the Fed, the Treasury, the FDIC and other bank regulators already have, in a variety of ways that addresses each of these needs and restores the ability of our financial system to fuel our broader economy. There is no one-size-fits-all solution to alleviating the stress in our financial system. Each situation will be different and we must implement these new programs with a strategy that allows us to adapt to changing circumstances and conditions, and attract private capital. The broad authorities in this legislation, when combined with existing regulatory authorities and resources, gives us the ability to protect and recapitalize our financial system as we work through the stresses in our credit markets. We will move rapidly to implement the new authorities, but we will also move methodically. In the coming days we will work with the Federal Reserve and the FDIC to develop strategies that deploy these tools in an expedited and methodical way to maximize effectiveness in strengthening the financial system, so it can continue to play its necessary and vital role supporting the U.S. economy and American jobs. Transparency throughout this process will be important, and I look forward to providing regular updates as we move ahead to implement this strategy."

Various politicians claimed victory...

OK, they've better get cracking, and the rest of the country can keep their fingers crossed! It doesn't seem to this blogger that they have done anything about the root cause of the problem i.e. falling home prices. But then again, this blogger isn't sure that anything really can be done about this - prices were too high and so should (and did) fall; the concern is that they go too far the other way. Some have suggested that the government help home owners directly. For example, Glenn Hubbard has suggested that "... the Bush administration and Congress allow all residential mortgages on primary residences to be refinanced into 30-year fixed-rate mortgages at 5.25% (matching the lowest mortgage rate in the past 30 years), and place those mortgages with Fannie Mae and Freddie Mac...." He estimates that price tag at much less than the MOAB's cost.

This blogger isn't all that sympathetic to those who bought houses they couldn't afford while gambling that higher home prices would save their skins, but could go along with something like this in the name of the greater good and to save the economy. Unfortunately, it is not at all clear that this would save house prices, given that this plan would be aimed (correctly!) only at homeowners' principal residences, while excluding vacation homes and homes bought for speculation.... Given that these represent a significant part of the problem (this blogger doesn't know exactly how big a piece, but saw somewhere that in recent years approximately 40% of house sales fell into these two categories!) even a 'Hubbard plan' might not stop the fall...

So, back to the crossed fingers :)