If Only They Were Kidding...

by hilzoy

Ladies and gentlemen, I give you the House Republican plan:

"* Rather than providing taxpayer funded purchases of frozen mortgage assets, we should adopt a mortgage insurance approach to solve the problem.

* Currently the federal government insures approximately half of all mortgage backed securities. (MBS) We can insure the rest of current outstanding MBS; however, rather than taxpayers funding insurance, the holders of these assets should pay for it. Treasury Department can design a system to charge premiums to the holders of MBS to fully finance this insurance."

-- Bear in mind: this still leaves taxpayers on the hook for all the MBS that default. It just sounds nicer without that $700 billion price tag attached to it. Moreover, how much would we insure the MBS for? Is it at all obvious that insuring them at face value would be cheaper than buying them at a serious mark-down? Doesn't insuring really bad MBS at face value just increase moral hazard?

"* Have Private Capital Injection to the Financial Markets, Not Tax Dollars. Instead of injecting taxpayer capital into the market to produce liquidity, private capital can be drawn into the market by removing regulatory and tax barriers that are currently blocking private capital formation. Too much private capital is sitting on the sidelines during this crisis."

-- Sorry; that bit is just too funny. "Private capital", I can hear the market saying to itself: "What a great idea! And so novel, too! Those Republicans sure are brilliant!" Aha, you might say: capital gains taxes have scared people off. But, as Justin Fox notes, the assets that people are having trouble selling have lost value; why anyone would be deterred from selling them by the prospect of being able to write off the loss is a mystery.

"* Temporary tax relief provisions can help companies free up capital to maintain operations, create jobs, and lend to one another. In addition, we should allow for a temporary suspension of dividend payments by financial institutions and other regulatory measures to address the problems surrounding private capital liquidity.

*Immediate Transparency, Oversight, and Market Reform. Require participating firms to disclose to Treasury the value of their mortgage assets on their books, the value of any private bids within the last year for such assets, and their last audit report.

* Wall Street Executives should not benefit from taxpayer funding. Call on the SEC to review the performance of the Credit Rating Agencies and their ability to accurately reflect the risks of these failed investment securities."

-- I thought no one was going to get any taxpayer money. Color me confused.

"*Create a blue ribbon panel with representatives of Treasury, SEC, and the Fed to make recommendations to Congress for reforms of the financial sector by January 1, 2009."

A Blue Ribbon Panel: brilliant!

This is an idiotic set of proposals. Republican politicians have spent several decades convincing themselves that any economic problem on earth can be solved by cutting taxes and deregulation. We now face a problem which is caused by deregulation and to which taxes are largely irrelevant. Do they rethink their views -- the views that got us into this mess to start with? Do they wonder whether the same old exhausted ideas can possibly be stretched to fit our current crisis?

Of course not.

It would be funny if it weren't tragic.

Comments

[gwangung]

Yup. True blue Marxists, only with their polarities reversed.

[Simon K]

Isn't this just a ploy for McCain to waltz in tomorrow and announce that he convince the house republicans to do something that would, y'know, actually help?

[Jackie]

Tonight we listening somberly to news reports of political infighting, brinksmanship and imminent financial collapse. The mood was grim. Sen. Richard Shelby, Republican of Alabama, came on to offer the rough outlines of the Republican plan. To my surprise, everyone in my household erupted in simultaneous, spontaneous laughter.

I'm sorry Mr. Shelby, I know you were doing your level best to get this one by us without a fuss. You somehow managed to keep a straight face--a feat I find truly remarkable. Admittedly, none of us here are financial experts. Still, in spite of our relative naivete, it was obvious to everyone that your plan to reduce "tax barriers" and scrap regulation is simply a laughable "throw you in the briar patch" gambit.

It is true we all laughed, but you should know we have no doubt you and your congressional collaborators are determined to make sure the joke is on us.

[ThatLeftTurnInABQ]

Let me see if I can understand the logic here:

Whatever is taxed heavily is unnaturally suppressed
Whatever we cut taxes on, naturally increases

Did I get that right? Taxes are like a Clarkian "sufficiently advanced technology" - they are indistinguishable from magic.

I think I see a solution to our problem. We should repeal the capital gains tax (i.e. set it to zero) and instead impose a capital losses tax. We will only tax you if your asset loses value!

Then, by the magic property of taxes, assets will go up in value, because nobody will want to sell at a loss, so prices can only go up, not down.

i can haz Nobel Priz now?

[kindlingman]

I think it's a throwdown with Bush. Party officials worked all week with Administration and Congress while McCain secretly worked to line up the Republicans to his plan. Then he set up a public situation to de-rail the bailout plan. His plan is flawed but his message is clear: "There never was a deal, but I do believe the meeting was important to move the process along," McCain said. "It gave us a renewed sense of urgency and I'm confident we will move forward, and I'm confident that we will reach a conclusion."

[S.G.E.W.]

"It would be funny if it weren't tragic."

I can't even tell the difference anymore.

[Matt McIrvin]

The whole point here was to wait until the Dems had been cowed into almost accepting a deal that was just a bit too similar to Paulson's proposal for comfort, and then spring the trap: McCain and the Republicans are against it. The Democrats are the party of George W. Bush and his stupid bailout. Barack Obama, more of the same!

Watch, this is going to be the media story into next week. McCain might even get another poll bounce from it.

[CharleyCarp]

Matt McIrvin, I think that's the exact thinking from the McCain campaign. A real test for Paulson and the grown-ups whether they'll let whatever they think is going to happen, happen, rather than call him out on it. Bush should openly break with McCain -- which will help McCain with the Palinistas, but probably, at the end of the day, hurt him more with the money people.

[Neil the Ethical Werewolf]

"Require participating firms to disclose to Treasury the value of their mortgage assets on their books..."

These are the assets that nobody has any idea how to value. And their value is deeply dependent on whether other banks collapse and dump similar assets onto the market, depressing prices.

[Anarch]

I can't even tell the difference anymore.

If you lose your house, it's funny.

If they lose a nickel, it's tragic.

[Bernard Yomtov]

Isn't this just a ploy for McCain to waltz in tomorrow and announce that he convince the house republicans to do something that would, y'know, actually help?

This has been my suspicion. McCain is setting himself up to be the savior who brings the House R's in line, demonstrating his leadership, etc. The plainly useless plan Boehner pushes is just decoy. He's in on the game.

I think Pelosi should tell Paulson to call out McCain in the harshest terms possible.

[ThatLeftTurnInABQ]

This has been my suspicion. McCain is setting himself up to be the savior who brings the House R's in line, demonstrating his leadership, etc. The plainly useless plan Boehner pushes is just decoy. He's in on the game.

I think you underestimate the stubborn ideological blindness of the House GOP wing currently in revolt. Also, you haven't been listening to AM talk radio, which is a howling lynch mob making leftblogistan sound phlegmatic by comparison right now.

I think the House GOPers really mean what they say, and McCain is just winging it and making stuff up as he goes. Unfortunately he hasn't done much of anything in years except spin the press, and this is one problem where spinning the press won't do any good.

I think Pelosi should tell Paulson to call out McCain in the harshest terms possible.

I can haz poniez? Pleeeeeeease! [makes big eyes]

[Ugh]

I think Pelosi should tell Paulson to call out McCain in the harshest terms possible.

Isn't this what McCain would want? Thus showing how he is there to clean up Washington, is a maverick, etc. etc. etc.?

[A.L.]

It reminds me of that old SNL skit where Steve Martin was the Medieval Barber. His solution to everything was to give the patient "a good bleeding." That's the modern GOP. Everything can be solved with a good bleeding, er, tax cuts.

[The Crafty Trilobite]

the assets that people are having trouble selling have lost value; why anyone would be deterred from selling them by the prospect of being able to write off the loss is a mystery.

I don't think this is what the goopers are proposing, but I guess you could do it the other way around: exempt gains from mortgage-based securities bought during, say, the next month and all subsequent re-sales of the same securities (but please, not of subsequently-generated derivatives). This would effectively increase the gain and make the MBS a more attractive investment (it would also spread out the burden on other taxpayers over time). But this just highlights the stupidity of the basic approach: there is always a buyer for anything IF the price is low enough. If the MBS isn't selling, you need to set the price lower. Sooner or later, it will get down to a price that is commensurate with the risk. The problem is not that investors don't want to invest, it's that they don't see a good deal. So, why aren't the current owners (or their receivers or bankruptcy trustees) lowering their price? Partly because they haven't had time to sort themselves out, but mostly because they are all waiting to find out which way a bailout will be structured.

Another problem with a gains exemption is that, since nobody in America has much $$ to spend right now, the effect is a transfer of our tax money to Chinese investors. Also a big administrative headache for the IRS.

[Carleton Wu]

So, why aren't the current owners (or their receivers or bankruptcy trustees) lowering their price?

Perhaps also a realistic valuation (insofar as that's possible in this environment) would leave some institutions insolvent. Better then to not look at the bugblatter beast.

[Porcupine_Pal]

DOn't forget, behind all the tax cuts were a group, Grover Norquist et al., who wanted to see the goevernment collapse. This is precisely the outcome all those 'death tax' and '10 year repeal' people INTENDED>

[Ara]

Um. Am I missing something? Almost every portfolio in the world has taken a severe hit, meaning that most everyone has capital losses to carry over. That's gonna offset the capital gains of any likely investors for a long, long time.

The insurance plan makes no f'in sense. If the banks are undercapitalized to begin with, where's the wiggle room on their balance sheet to buy insurance? And if they picked what MBSs they are buying insurance for, we'll have adverse selection. I don't see why that wouldn't stand to lose more money than the original plan.

[Carleton Wu]

I don't see why that wouldn't stand to lose more money than the original plan.

It certainly would avoid the disaster of the taxpayers getting some stake in the institutions that they've bailed out; better to be ripped off than to endorse socialism.

[Bernard Yomtov]

Isn't this what McCain would want? Thus showing how he is there to clean up Washington, is a maverick, etc. etc. etc.?

Depends on what Paulson says exactly, I guess. But if he says something like,

"McCain offered no helpful suggestions, was clearly unwilling to support any specific proposal, and seemed not to have any real grasp of the issues,"

then I don't see how that's going to help McCain.

I suspect that would be a true statement. McCain does not want to try to defeat the bailout, despite its apparent unpopularity, because he doesn't want to take responsibility for a market crash. He wants it to pass, but be able to say he opposed it. That should be made clear.