Plans, plans, plans

by on October 2, 2008 at 6:10 am in Economics | Permalink

There is the O’Neill plan:

His plan to deal with the crisis would start with a "discounted cash-flow analysis” of distressed instruments that are clogging the financial system. The government would guarantee the assets, paring back the support as principal and interest payments were made, he said. "That should take care of the liquidity problem because if they have a government guarantee at a specified level they should trade just like cash,” O’Neill said.

Or the Soros plan.  And here is a "SuperBond" plan to recapitalize the banking system. 

And then there is the Phelps plan for capital injection in return for warrants.  Not to mention the French plan.

Or how about the Wright plan:

…to let any American with a mortgage swap it out for a government one at 7% for up to 50 years (to get the monthly payment down to where the borrower can handle it). The Treasury will pay off the existing mortgage with bonds (which it can sell cheap right now). If a borrower wants to default instead s/he can do so, and then the lender can mortgage the property on the above terms.

So many plans!

Here are some solar greenhouse plans.  And here are Silly Billy’s World’s Elementary Lesson Plans.

Roger, FCD October 2, 2008 at 8:25 am

The Wright plan looks like a no-brainer. It would protect everybody involved without running into ‘moral hazard’ issues. Anyone care to explain why Wright’s plan isn’t exactly what this country needs?

Ninja Zombie October 2, 2008 at 9:10 am

Roger: perhaps you can explain why we need MORE transfers of wealth from renters to owners?

Roger, FCD October 2, 2008 at 10:25 am

My reasoning is based upon my understanding of the situation the financial sector, which goes something like this:
A. Consumer Banks in the 90′s were allowed to package the mortgages they sold into securities, relieving them of the ‘burden’ of making sure that they invest depositor’s money wisely. They could ‘turn and burn’ most mortgages into MBS’s.
B. Rating companies completely failed at their jobs of rating MBS’s, causing a significant portion of the financial sector to buy junk MBS’s at AAA prices.
C. Investment Banks, wanting to get in on the action, thought that it would be a great idea to sell insurance on these AAA rated MBS’s, and charged premiums on this based on the idea that MBS’s are low risk, not high risk.
D. Put all of that together and you have a bunch of crappy loans (that Consumer Banks didn’t care about) rated far to high (causing investors to over-expose) and ‘insurance claims’ far exceeding projected rates. The homeowners lose their homes when interest rates spike, causing investors to lose their shirts when their MBS’s hemmorage, causing them to call in the woefully underfunded insurance.

There’s plenty of blame to go around, almost nobody practiced any due dilligence. However, golden parachutes protect the people at the top, but who protects the homeowner who was told that a 5y ARM was a “great idea!” and that they could easily refinance later on? It’s the sheer number of defaults on mortgages that are causing the problem. If you stop the defaults, the MBS’s are suddenly worth their AAA ratings, the insurance payments that are bankrupting the Investment Banks suddenly stop being called in and the government makes a nice profit selling bonds @ 2-3% and sells mortgages to people for 7% all at the expense of the sector that caused this problem in the first place!

Win, win, win, win situation as far as I can see.

Wright Plan Author October 2, 2008 at 11:34 am

Anthony,

You are correct, but presumably many of the people in the situations you describe will be helped out by the $300 billion Hope for Homeowners program. The others will default but their creditors will re-fi and turn the house into less of a loser and perhaps even into a positive net income stream if the Treasuries are sold and re-invested in assets returning more than 7%. And of course the mortgages will be repaid as soon as possible.

Roger,

I appreciate your support! I fear, though, that the answer to your question “Anyone care to explain why Wright’s plan isn’t exactly what this country needs?” is that this problem is now much bigger than just bad MBSs and CMOs. The shocks of the past year, I fear, have set off a complex wave of broken promises, mostly in the form of derivatives like credit swaps and all the arcane stuff that folks like Henry Kaufman have warned about for years, that threaten the entire financial system. The government doesn’t want to publicize this for obvious reasons — it would increase the panic and opposition to its plan.

Anonymous October 2, 2008 at 3:00 pm

“To A Mouse, on Turning Her Up in Her Nest, With The Plough”[1] is a Scots poem written by Robert Burns in 1785, and was included in the Kilmarnock volume. As the legend goes, Burns wrote the poem after, as the poem suggests, turning up the winter nest of a mouse on his farm.

John Steinbeck took the title of his 1937 novel Of Mice and Men from a line contained in the second last stanza: ‘The best laid schemes o’ mice an’ men / Gang aft agley’ (often paraphrased in English as ‘The best-laid plans of mice and men / Go oft awry’).

From Wikipedia

J Thomas October 2, 2008 at 4:56 pm

It isn’t enough to guess what will happen by default. Somebody is going to take initiative.

I figure american politicians mostly can’t take initiative at this point because we don’t have the initiative. We have to respond to what the rest of the world does, and we lack the money to start something new.

Could china take initiative? Suppose that china offered to trade renminbi for dollars at a slightly higher rate than expected. Trade for international dollars mostly. The dollar is no longer an acceptable reserve currency. Could the renminbi become an acceptable reserve currency? They have a lot of production backing up the money. If the world community could trade their dollars for renminbi, would they?

So, say china prints up a whole lot of renminbi and trades them for the dollars we can’t redeem. They wind up with a tremendous number of dollars, and if we default nobody much is hurt but them.

At that point they are the superpower and we are just another defaulted nation that maybe deserves the Argentina treatment, though one with nukes. Would china pay that price to get that result?

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