El Punto Final

By David Arthur Walters

Last edited: Wednesday, February 18, 2009
Posted: Thursday, November 20, 2008
Bailout Economics: Are we facing a dead end?
Treasury Secretary Henry Paulson is being
castigated for the purported failure of his discretionary
financial bailout plan. Some critics claim that he is the
figurehead for one of the greatest rip-offs in world history. We do not
subscribe to that conspiracy theory; a man who loves birds and wants to
close the income inequality gap cannot be all that bad. Of course he
may with all good intentions be simply doing the bidding of the
President, as if the President, who himself failed dismally as a
businessman, knew from experience exactly what not to do or to do if
anything to fix the seriously damaged financial and economic system.
Loyalty is the President’s chief virtue; loyalty in his tribe is
virtually synonymous with its integrity. And one thing the President is
very fond of doing is staying the course. Wherefore Mr. Paulson’s
supporters claim that he is obviously not the President’s loyal stooge,
for the Secretary has changed course along with the changing facts, as
if there were no certain course except to avoid further collisions and to
keep the Titanic afloat.
Au contraire, say the cynics: they claim the secretarial deeds
dovetail nicely with the presidential will. Where the markets are
concerned, the President, a Master of Business Administration, has the
market fundamentalist’s faith in the deity who built and wound up the
clock to fix itself with a bare minimum of human intervention, guided,
ever so lightly, by the deity’s invisible right hand.
“In God We Trust,” reads the Federal Reserve Note. God’s plan
for America no doubt accords with His judgment or Doom, and that
happens to be inscrutable at this time. As Secretary Paulson averred on
November 18, 2008 at an House Financial Services Committee TARP
oversight hearing, the Bush administration had "no playbook" to follow
hence the official strategy was being adjusted on an ad hoc basis. He
said the financial markets would be worse off if Congress had not
approved the package, but we know that only God knows if that is a
fact.
Naturally human intervention must be discretionary if man is
made in the image of his deity and thus has a portion of divine free will.
Discretion is a sine qua non of the deity’s omnipotence, and the
President and the People have duly delegated considerable discretion to
the Secretary Treasurer so that he might accomplish the Purpose
charged in the Bill and made Law after the political church was duly
convened in the name of God; to wit:
“The purposes of this Act are to immediately provide authority
and facilities that the Secretary of the Treasury can use to restore
liquidity and stability to the financial system of the United States; and
to ensure that such authority and such facilities are used in a manner
that protects home values, college funds, retirement accounts, and life
savings; preserves homeownership and promotes jobs and economic
growth; maximizes overall returns to the taxpayers of the United States;
and provides public accountability for the exercise of such authority.”
To that end the Secretary Treasurer may take Necessary Actions:
“The Secretary is authorized to take such actions as the Secretary
deems necessary to carry out the authorities in this Act….”
Section 8 of the original, 900-word plan submitted to Congress in
September for its approval provided virtually unlimited power to the
Secretary to do whatever he deemed necessary: “Sec. 8. Review.
Decisions by the Secretary pursuant to the authority of this Act are non-
reviewable and committed to agency discretion, and may not be
reviewed by any court of law or any administrative agency.” However,
in the final plan actually approved, the Secretary’s power does not seem
to be as unlimited as God’s, for his actions are subjected to statutory
judicial review: “Actions by the Secretary pursuant to the authority of
this Act shall be subject to chapter 7 of title 5, United States Code,
including that such final actions shall be held unlawful and set aside if
found to be arbitrary, capricious, an abuse of discretion, or not in
accordance with law….”
Well, the law has authorized a distribution of $700 billion, and the
distributions will be announced after they are made, so that leaves the
fallible reason of judges to determine whether or not a distribution was
arbitrary or capricious. May we then assume that the recipients of $700
billion might finally have to give it back? Hardly: “No injunction or
other form of equitable relief shall be issued against the Secretary for
actions pursuant to section 101 [purchase of troubled assets], 102
[insurance of troubled assets], 106 [sale of troubled assets], and 109
[foreclosure mitigation efforts], other than to remedy a violation of the
Constitution….”
The Supreme Court has already given Congress implied powers to
delegate constitutional discretion. The Bailout Bill states that there is no
other governing law to fall back on: “With the exception of section 131
[i.e. Exchange Stabilization Fund], nothing in this Act may be
construed to limit the authority of the Secretary or the Board under any
other provision of law.”
Wherever discretion is afforded during emergencies so severe that
atheists pray to God and appoint temporary dictators, there shall be
some bitter complaints about its exercise. Mr. Paulson and his team
have definitely not pleased all the people all the time. The discretionary
content of the bailout act has been abided by, but the initially stated
intent of the desperate legislators, which was for the Secretary to buy
the distressed assets financial institutions could not afford to hold, and
to provide some relief against foreclosure for the delinquent
homeowners in respect to those mortgages held by the property
manager for Federal government entities, was not complied with.
“The Secretary is authorized to establish the Troubled Asset
Relief Program (or ‘‘TARP’’) to purchase, and to make and fund
commitments to purchase, troubled assets from any financial
institution, on such terms and conditions as are determined by the
Secretary, and in accordance with this Act and the policies and
procedures developed and published by the Secretary.”
Alas, the panicky legislature, notwithstanding their regrettable
experience with the Bush administration, was afraid to tie the hands of
the Secretary Treasurer, and left him and the Chairman of the Federal
Reserve a broad alternative, which we emphasized below for good
reason:
“The term ‘’troubled assets’ means residential or commercial
mortgages and any securities, obligations, or other instruments that are
based on or related to such mortgages, that in each case was originated
or issued on or before March 14, 2008, the purchase of which the
Secretary determines promotes financial market stability; and any other
financial instrument that the Secretary, after consultation with the
Chairman of the Board of Governors of the Federal Reserve System,
determines the purchase of which is necessary to promote financial
market stability, but only upon transmittal of such determination, in
writing, to the appropriate committees of Congress.”
“To the extent that the Federal property manager holds, owns, or
controls mortgages, mortgage backed securities, and other assets
secured by residential real estate, including multi-family housing, the
Federal property manager shall implement a plan that seeks to
maximize assistance for homeowners and use its authority to encourage
the servicers of the underlying mortgages, and considering net present
value to the taxpayer, to take advantage of the HOPE for Homeowners
Program under section 257 of the National Housing Act or other
available programs to minimize foreclosures. (2) MODIFICATIONS.
—In the case of a residential mortgage loan, modifications made under
paragraph (1) may include (A) reduction in interest rates; (B) reduction
of loan principal; and (C) other similar modifications.”
Instead of taking the junk off the investment bankers’ hand, Mr.
Paulson decided not to fool around: he took George Soros’ suggestion
to heart, and proceeded to buy stock in the banks, which amounted to a
direct transfusion of taxpayer dollars into the patients’ circulatory
systems. The banks in turn were expected to turn around and lend out
up to ten times the increase in capital. Instead, given their bad
experience with loans and their mounting gambling liabilities for
derivatives, the funds were either sat upon or used to buy other banks to
further expand the capital base of the purchasers.
In other words, the bankers, unwilling to throw good money after
bad, were behaving prudently for a change. The hue-and-cry initially
raised against the emergency recovery bill by Main Street, that it was a
Wall Street bailout, was raised once again. The initial outcry had been
suppressed by rapidly declining stock prices; on second thought, it was
decided that it might be a good idea to save Wall Street along with
one’s own 401-k portfolio. Somehow, something also must be done to
curb the mounting foreclosures. And the economy should of course be
stimulated too. Maybe the taxpayers should buy the automotive
industry and other ailing sectors of the economy; eventually all the
directors of the stakeholders in big corporations and big governments
and big unions could sit on a pyramidal hierarchy of subsidiary
corporate boards that would put Italian corporativismo to shame and
prove once and for all that fascism is the perfection of capitalism in one
body with no more than four castes.
So what’s not to like about Mr. Paulson’s discretionary behavior
thus far? The financial plumbing seems to be working again albeit
sluggishly – Federal Reserve Chairman Bernanke testified on
November 18 that the flow is “far from normal.” The overnight interest
rate on loans between banks so breathlessly watched nowadays by
Americans who might be paying twenty times that rate on their credit
cards has come down somewhat from the height it reached because
banks go bankrupt in the middle of the night so their debts to one
another may be worthless in the morning. Okay, then, but the economy
is worsening and the number of foreclosures has increased and is
expected to get larger. Mind you that the vast majority of homeowners,
the Forgotten Homeowners, are simply making their payments and may
continue to do so until the government comes up with a program that
awards them with a loan modification to default on their loans. Not
much has been done in the way of foreclosure relief. A mere few
thousand mortgage loans have been modified, and a quarter of them are
in default again. The chief bureaucrats are bickering over what
approach to take, and how to persuade private holders of mortgages to
voluntarily cooperate with any such approach. Thus far no government
official that we know of is championing the one loan modification that
has been crucial to the resolution of similar problems in the past; in
fact, authority for that modification is provided in the Paulson Bailout
Bill: “reduction of loan principal.”
Across-the-board reduction of loan principal, when the amounts
owed are much larger than the collateral is presently worth, is naturally
anathema to lenders, especially when the value of the collateral is
expected to recover any time soon. But the borrower may not expect
such a recovery; and in any event he might not want to pay for lost
equity he can no longer borrow on: he might prefer to just walk away
and rent a place to live, and perhaps re-enter the market when he stands
to gain some equity instead of lose his shirt.
Analysts were rightly worried all along about the effect
speculators were having on condominium construction and prices in
Miami and other markets. Speculators, who never intended to live in
the units they purchased, were flipping their condos for substantial
gains even before they took title. “Buy now, pay later,” is the old
standard refrain. Credit standards were incredibly low, and now the bill
has come due with a vengeance for those people who do not have the
cash or further credit to pay it. Many working stiffs feel cheated out of
the homes they never would have been able to obtain without lowered
credit standards; they blame the realtors and lenders for their
predicament, and might vandalize their homes before moving out. But a
speculating immigrant, a practical nurse in New York, bought three
luxury condos in Florida on speculation, she blames the collapse on the
vagaries of the market and the alignment of the planets; she would take
another chance at good fortune if she had the credit to make another
wager if the tide were rising again. Let us not forget that there is a
speculative factor at play even when people purchase residences to live
in, and also think of the purchase as an “investment.” Ordinary people
are actually “speculating” on a rise in prices because, despite recent
experience, real estate prices may stagnate for decades. It is not, as our
generation has said, always better to own than to rent.
Naturally, there are more speculators and investors in higher
income brackets than in the lower brackets. Lower income homeowners
find compensation enough in simply having their own home to live in,
and may take pride in it to such an extent that they are often,
paradoxically, less likely to default than those who think of their
residences as more of an investment than as a home-sweet-home.
One Charles W. Calomiris not only believes in “reduction of loan
principal” but he also believes taxpayers should pick up the tab for part
of the write-down. His views are well worth noting, as he is the Henry
Kaufman Professor of Financial Institutions at the Columbia University
Graduate School of Business, and has enjoyed such positions as
Professor at Columbia's School of International and Public Affairs,
Research Associate of the National Bureau of Economic Research, and
was a Senior Fellow at the Council on Foreign Relations, Co-Director
of Project on Financial Deregulation and Arthur Burns Scholar in
International Economics at the American Enterprise Institute, and
Member of the Shadow Financial Regulatory Committee. His has some
hands-on banking experience – he was Chairman of the Board of a
troubled bank, the Greater Atlantic Financial Corporation, a position his
esteemed father, William Calomiris, a Washington, D.C. real estate
magnate, left him – and has written erudite tracts on banking crises. His
papers, "Consequences of Bank Distress During the Great Depression"
(with Joseph Mason), in the American Economic Review (June 2003),
"Fundamentals, Panics, and Bank Distress During the Depression"
(with Joseph Mason), in the American Economic Review (December
2003), are well worth reading. We first encountered him in his October
14, 2008 Forbes Commentary, “How To Prevent Foreclosures.”
“A more modest proposal than that of Sen. McCain…would
follow the example of the successful Mexico ‘Punto Final’ plan of
1999, which resulted in substantial debt write-downs very quickly and
the resolution of much financial gridlock in that country. The
government would share losses borne by lenders from mortgage
principal write-downs on a proportional basis. For example, taxpayers
could absorb 20% of the write-down cost borne by lenders on any
mortgage so long as it is agreed through a voluntary renegotiation
between lenders and borrowers, and so long as doing so creates a
sufficient write-down for borrowers to be able to qualify for
refinancing….” He explains that lenders would be far more apt to
modify the principal amount if the cost of doing so is shared by
taxpayers in such a way that the total cost to the bank is less than what
it would be if the bank foreclosed.
We note well Professor Calomiris’ interest in deregulation and his
association with the American Enterprise Institute, a neoconservative
think tank with which the Bush administration has so many ties, and we
wonder why he would therefore propose such a monumental
intervention by means of government funding of mortgage principal
write-downs. The cynical leftist might fall back on the great right-wing
conspiracy theory, that the neoconservative agenda made wildly
popular by Ronald Reagan, who in 1988 said that "The American
Enterprise Institute stands at the center of a revolution in ideas of which
I, too, have been a part,” was to unleash Greed and eventually bankrupt
the government, leaving it with just enough funding to wage war and
protect the property of baron robbers from peasants and proletariat. On
the other hand, perhaps the professor, who is, after all, a professor at
Columbia, is simply being objective, and is just as sincerely concerned
as Henry Paulson is with closing the gap between rich and poor by
broadening the home-owning middle class, voluntarily.
However that may be, the evidence seems to support the notion
that “reduction of principle” might go a long ways towards alleviating
the foreclosure crisis. For example, take the 2000 study, “The Mexico
Mortgage Market Boom, Bust and Bail Out: Determinants of Borrower
Default and Loan Restructure After the 1995 Currency Crisis”
published by the Joint Center for Housing Studies at Harvard
University. Secretary Paulson might find work authored by Natalie
Pickering, an Associate at Goldman Sachs at the time, pleasing, for it
seems that "the best and brightest" in finance are associated with that
illustrious firm. He has been severely criticized for stacking his
recovery team with Goldman Sachs associates because that investment
banking firm, lead by his good self, were instrumental in bringing on
the financial ills we presently face. But the causes may better effect a
cure, if the homeopathic approach has merit, so let the wizards have at
it. We take brief excerpts from Dr. Pickering’s paper for good health:
“This paper examines borrower choice to default or restructure
mortgage loans under the initial phase of the [Mexican] government
relief program called ‘The Accord for the Assistance of the Banking
System’ or ADE. It uses microdata from a commercial bank to test
whether it was borrowers net equity or ability-to-pay that primarily
drove them to default or restructure. Under the assumption that it was
primarily an ability-to-pay problem that drove default, the ADE
provided borrowers with an interest rate subsidy, and later a monthly
payment subsidy, if they restructured their loans. However, the results
here show that it was borrowers’ net home equity that primarily
influenced the decision to default or restructure and that lower income
borrower’s were both less likely to default or restructure, choosing
instead to continue paying under their original loan contracts. The ADE
program was an inappropriate policy response to borrower default.”
“Higher relative wealth and income were actually associated with
higher default rates as well as higher restructure rates. Low income
borrowers were more apt to continue paying on their original loans. The
results provide new evidence in the long-standing debate on the causes
of mortgage default. Over the years this debate has centered on the
question of whether the borrower’s net equity position in the house or
ability to pay drives default. Cunningham and Capone (1990) were
among the first to synthesize the evidence in the United States, and they
concluded that for both fixed and adjustable rate mortgages, equity was
of greater importance than ability to pay in predicting default.
Subsequent research has conceptualized default as a financial put
option and focused on the so-called “ruthlessness” with which
borrowers exercise this option.”
“The results presented here reveal that discounts directly off the
loan balance—not payment discounts--were needed from the onset of
the crisis to encourage restructure and stem default. In fact, such
balance discounts were ultimately granted in a much later borrower
relief program called El Punto Final (January 1999). This study points
out that it was possible to predict, based on data available as early as
May 1996, that balance rather than payment discounts would be a more
effective policy measure. It also shows that payment discounts had a
regressive distributional effect.”
This sort of discussion would normally put the average reader to
sleep, but given the severity of the present crisis and the impact it might
have on his well being, the patient is advised to stay with us for another
dose:
“Nearly two decades of research on mortgage pricing have shown
that default should be viewed as a contingent claim attached to the
mortgage contract. Lenders sell a put option when they originate a
mortgage that explicitly allows the borrower to relinquish the home at
the price of the mortgage. When the value of the outstanding loan
exceeds the value of the house, the put is in the money and a rational,
wealth-maximizing borrower will default. Mexican mortgage holders
have largely responded, as financial theory would predict, by exercising
the put option to default on their loans. The ADE program, by giving
payment discounts, did not affect borrowers’ negative equity and did
not address the root cause of default. In fact, the results presented here
show that this policy decision was also regressive in that lower income
borrowers were less likely to participate in the program choosing
instead to continue paying on their current mortgages. High and
medium income borrowers were more likely to default or to restructure
and thus receive the benefits of these discounts. Many loans fell into
delinquency subsequent to restructuring. Some claim that because
payments rose with inflation under the restructured contracts, borrowers
became delinquent again when they were unable to keep up with
payment increases. Others point out that the ADE program only
provided borrowers with an opportunity to defer foreclosure, but
borrowers’ participation in the program did not represent a greater
willingness to pay. Later evidence suggests that many borrowers did
restructure only to fall into delinquency again. Foreclosure deferral was
a plausible motivation for this behavior, but payment increases were
not. A more likely reason is that since many borrowers were still in a
negative equity position following restructure, they were rationally
exercising the option to default even subsequent to the ADE.This is not
to say that default was only brought on by negative equity. Borrowers
have suffered payment problems due to a decline in income under the
old and new contracts alike. In addition, the systemic rise in default has
made foreclosure even more difficult for banks. Moral hazard has
plagued the mortgage market, creating excessive administrative burdens
for banks and courts alike. Many borrowers, recognizing that banks are
unable to possess their properties without an extended and costly court
case, have chosen non-payment as a means to obtain a discounted
settlement with the bank. The results of this study would suggest that
higher income borrowers, who here show a propensity to default even
when holding positive equity in their homes, are more adept at
receiving these discounts. Again this leads to a regressive outcome for
resolving the delinquency problem. The results of this study point out
that basic research on the causes of borrower behavior in the mortgage
market would have aided the government in designing a relief program
that better addressed the causes of default and benefited lower-income
borrowers. Direct discounts off the balance of the loan would have been
a more effective policy for stemming default and encouraging
restructure. Eventually, nearly three years later, the government did
decide to support banks in granting such discounts through a program
called Punto Final. By this time, however, borrowers had grown to
expect a new relief program each time delinquency rose. Strategic
default was well cultivated in the market making it ever harder to attain
positive results even from a well-designed program. Successive policy
failures, such as that of the ADE program, helped nurture a culture of
non-payment. Only better-designed policy initiatives t hat take into
consideration the causes of borrower choice can reverse this trend.”
“El punto final” is the final point, the final reckoning, meaning in
our context, “the last chance.” Professor Calomiris puts the Punto Final
plan’s best foot forward in Forbes, but elsewhere, in a paper on
financial debt restructuring, “A Taxonomy of Financial Crisis
Resolution Mechanisms: Cross-Country Experience”, World Bank
Policy Research Working Paper 3379, August 2004, with scholars
Daniela Klingebiel and Luc Laeven, serious doubts were expressed.
Both financial doctor and patients should find the following brief
excerpts edifying if they are not to big to swallow:
"As an example of government sharing of loan losses, we
consider the Punto Final Program in Mexico. The Punto Final Program
in Mexico For three years, the FOBAPROA program initiated in 1995
had failed to reduce the amount of past due loans and to provide debtor
relief. In a final attempt to offer debt relief, the government initiated in
December 1998 the Punto Final program, which was a government-led
debt-relief program targeted to mortgage holders, agribusinesses, and
small and medium-sized enterprises (SMEs). The program offered large
subsidies (up to 60% of the book value of the loan) to bank debtors to
pay back their loan..."
"Although both the Punto Final program and the FOBAPROA
program combined an element of loss sharing between the government
and the financial institutions, there were four key improvements of the
Punto Final program vis-à-vis its predecessor. First, loss sharing was
geared toward small loans, as the discount offered was higher for
smaller loans. Small borrowers are a desirable group to target, since
assisting them improves competition in the economy, and since
assistance channeled to these borrowers is less likely to result from
their political or economic power over governments or financial
institutions. Second, the loss sharing arrangement offered an incentive
for banks to restart lending to SMEs and individuals because it linked
the size of government assistance to the amount of new lending by the
participating bank. Third, the program may have made more effective
use of taxpayers' resources, because it relied on borrowers' willingness
to participate, and it required borrowers to pay part of their outstanding
loans. Borrower self-selection, in principle, can reduce the number of
participating borrowers, and reduce taxpayers' cost of resolution per
borrower by requiring borrowers to repay part of their loans. Just as
important, self-selection may ensure that participants are more likely to
be those that were "worth helping." The borrowers willing to repay part
of their loans should be those that value access to credit in the future,
which also tend to be more value-creating borrowers. The FOBAPROA
program, in contrast, had not been selective, and had greatly benefited
large borrowers at high cost to taxpayers, irrespective of the desirability
of assisting them, and even if those borrowers were not in default.
Fourth, unlike its predecessor, the Punto Final program offered to
quickly resolve ongoing disputes between creditors and debtors, and
thus made it easier to analyze the balance sheets of participating
borrowers and banks going forward. Resolving the uncertainty about
how much of their preexisting debts would be repaid is a key
requirement for analyzing the balance sheets of borrowers when
making new loans. Debt resolution, in theory, should help to make
credit available to creditworthy firms. Despite these potentially
attractive features, it would be premature to declare the Punto Final
program a model of successful restructuring."
"The selectivity that comes from conditional programs like Punto
Final can result in better targeting of taxpayer resources toward
borrowers that were worth saving, because of the type of borrowers that
will self-select into the program. In the case of Punto Final, resource
savings and effectiveness probably were enhanced by the fact that the
program focused primarily on SMEs and other small borrowers, which
are less likely to be entwined in the too often corrupt iron triangle of
banks, conglomerates, and government officials. Furthermore, by
linking assistance to new credit supplied by banks, the Punto Final
program helped to further its goal of restarting the credit supply process
more than an across-the-board subsidization of write 21 downs would.
Finally, because conditional subsidization requires borrowers to share
somewhat in the costs of financial sector subsidies, the adverse
incentive effects of these subsidies for future borrowing and lending
behavior will be less than for unconditional subsidies of write downs.
For all of these reasons, conditional subsidization of loan losses through
a program like Punto Final seems superior to across the board
subsidization of loan write downs by bank"
"If the goal is a large-scale restructuring of the financial system,
the microeconomic advantages of selectivity must be traded off against
the macroeconomic advantages of large-scale improvements in
corporate debt capacity and bank net worth. For that reason, to be
effective, the Punto Final model would have to be applied to a
significant share of the population of borrowers (not just SMEs). The
strengths of Punto Final, however, are mainly confined to assistance to
SMEs, where concerns about corruption in the implementation of
selectivity, and concerns about inefficient use of resources to prop up
powerful conglomerates may not be as great. Finally, we note that
conditional subsidies and across-the-board write down subsidies share
some of the same limitations. Neither approach distinguishes among
banks with respect to the allocation of assistance. Indeed, banks that
made the worst lending decisions prior to the crisis will receive the
most assistance after the crisis. Thus neither approach does much to
address the adverse-selection and moral-hazard problems of providing
assistance to insolvent banks."
"It is difficult to assess the effectiveness of the Punto Final
program, not least because it was preceded by, and coincided with,
numerous other financial support and debtor relief programs. After all,
the Punto Final program, as its name indicates, was intended to finalize
the bailout of the banking sector and the debtor relief program in
Mexico. There were also other positive developments: growth,
increased banking sector income, and foreign entry into banking, which
improved the condition of banks and the supply of credit during this
period. Nevertheless, despite the difficulties of attribution, we note that
the banking system did show some improvements in indicators of asset
quality, profitability, and capital adequacy during the years 1997-2000,
and that Punto Final may have played a role in those improvements....
Past due loans to total loans excluding FOBAPROA decreased from
17.6 percent in 1997 to 8.5 percent in 2000. The improvements in asset
quality largely reflect the conclusion of debtor relief programs through
the Punto Final program (IMF 2001a). 20 However, even with
additional debt relief offered under the Punto Final program, bank
lending did not restart as expected. Bank credit to the private sector has
contracted from about 19 percent of GDP at end-1998 to 10 percent of
GDP at end-2000."
"We were unable to undertake a microeconomic analysis of the
Punto Final program to determine the extent to which the allocation of
assistance was executed fairly and efficiently owing to a lack of
available data. That lack of data, in part, seems to reflect the political
climate of Mexico and the political controversies that surround debt
relief programs."
Must something be immediately done to ameliorate foreclosure
pain in the current crisis? Federal Deposit Insurance Corporation
Chairwoman Sheila Bair thinks so: "The root cause of the current
economic crisis is the failure to deal effectively with unaffordable loans
and unnecessary foreclosures," she testified at the TARP oversight
hearing. Conservatives might think that the root cause of the crisis was
in making the unaffordable loans in the first place, and that the best way
to deal effectively with the unnecessary crisis is to foreclose on the
collateral, sell it, and write off the balance. The ulterior aim of writing
and selling mortgage-backed securities and other collateralized debt
obligations, and then the so-called insurance derivatives called credit
default swaps, was to offload the risk onto someone else willing to take
the gamble. Mission accomplished; let the gamblers fall under the load,
not the taxpayer. Why not take a page out of the neoconservatives’
playbook, before the neocons cowered and ran to Congress for a
handout, and let them fail? If we heed the ambiguities proffered by
Steve Forbes and the like, government is damned whether it intervenes
or not, and it probably only prolongs the pain when it does.
Maybe the foreclosure issue should be put on the back burner for
now: When questioned, Secretary Paulson said he had to save first
things first. First of all, the financial system had to be saved, and, for
the time being at least, that mission had been temporarily accomplished.
"Congress passed legislation to deal with financial instability, and that
is what we are doing," he said in response to complaints at the
November 18 TARP oversight hearing.
Well, we must admit that, if the worst case scenario for
foreclosures came true, and all those debtors foreclosed upon were
thrown out of their homes and had to rent some place to live or live
under viaducts, more people in the United States would still own their
own homes than in any other country in the world. Eventually the
foreclosed homes, given falling real estate prices, would be purchased
by someone else. But if the banking system went down, that would be
the end of the world as we know it.
Policy architects must consider the greatest happiness of the
greatest number; undoubtedly pain will be keenly felt by some in order
to achieve that end, so let the sacrifices be voluntary.
We should not worry so much about the administrative
inconsistencies, or bother to call leaders like Secretary Paulson
hypocrites instead of pragmatists for changing course in midstream
because the facts have changed: we certainly would not call a man a
hypocrite for changing his clothes! Facts that seemingly fly in the face
of policy should be conveniently written off as political misconceptions
of divine providence or justified as God’s unfathomable mysteries.
After all, " A foolish consistency is the hobgoblin of little
minds."(Emerson). Mr. Paulson’s actions do not really vary from the
overarching policy: "Congress passed legislation to deal with financial
instability, and that is what we are doing," he rightly declared, as we
can see if we reread the Purpose of the Act above.
The Secretary Treasurer acted as he thought best, and acted
according to the discretion delegated. The overseers and inspectors
general may complain as they like but they may not undo what has been
done. His behavior was bound at the outset to be consistently
inconsistent in a sense, because history never precisely repeats itself.
History, after all is said and done, is always a mistake, for only Nothing
is perfect; the Ideal can never be truly realized in this absurd dimension
given the limitations of our fundamental categories. Whatever we have
done, we might be sorry for it, but it could have been much worse. We
are moving on, looking forward to our El Punto Final with high hopes
for the afterlife.