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The bailout debate for dummies

Wed, 09/24/2008 - 8:02am

Tyler Cowen offers a handy simplification of the difference between the bailout plan put forward by Treasury Secretary Henry Paulson and the revised version proposed by Democratic Sen. Chris Dodd:

Think of a barrel of apples, some good, some less good. To oversimplify, the Paulson plan has the government buy some of the bad apples. The Dodd plan has the government buy a 20 percent share in the barrel. In both cases government buys something.

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Economists against the Paulson Plan

by Sam on Wed, 09/24/2008 - 9:20am

http://faculty.chicagogsb.edu/john.cochrane/research/Papers/mortgage_protest.htm

Useless letter

by jgarzik on Wed, 09/24/2008 - 11:44am

As pointed out in the Marginal Revolution comments, this letter fails to add substantively to the debate, because it does not address the choice before the pols and voting public: Do we accept the Paulson plan, or not?

It is easy to take potshots at the Paulson bailout — so easy that Paulson and Bernacke do so themselves. They readily admit many downsides to the bailout.

But what are the alternatives? What are their pros and cons?

Assailing the Paulson bailout is useless if you do not also address the consequences of not bailing out these assets, or at least propose and analyze an alternative plan.

The Bush administration's argument is that not bailing out the system will have worse consequences than the bailout. No analysis is complete without taking that into account, precisely because that is what the nation is being asked to decide.

Jeff @ Armchair FP

What about the land?

by EarnestFrog on Wed, 09/24/2008 - 10:23am

Here's what I would like to know.

If the feds are buying bad mortgages, do they get the real estate?

If not, this whole plan is a sham. Why should banks get to be reimbursed for a mortgage *and* auction the property?

If the feds get the land, this plan might not be so bad.

Maybe a good policy would be to sit on the land for 2 years before putting it on the market. That would decrease supply and raise house prices. Once the housing market is in better shape, land could be sold back to whoever wants it.

So, is the plan to piss away $700 billion, or to buy $700 billion of land? Anybody know?

There is no land

by Ben on Wed, 09/24/2008 - 10:45am

The land would have already been sold if the house if foreclosed, and the remainder would be the difference between the value of the mortgage and the value of the house - which would have fallen, due to the drop in housing prices.

Bailout alternative

by jgarzik on Wed, 09/24/2008 - 1:13pm

Arnold Kling, an economist who worked at the Federal Reserve Board in the 1980s and at Freddie Mac in the 1980s and 1990s, suggests alternatives to the bailout over on right-leaning Pajamas Media.

He suggests that the bailout may be worse than doing nothing.

Does anyone else have good links that compare directly the issue at hand: bailout vs. not, or bailout vs. alternatives?

Many commentors on the 'net have criticism of the bailout, yet few have fully thought through the consequences of alternatives (including inaction, a valid and very real alternative).

Jeff @ Armchair FP

Glad you asked, Jeff

by Blake Hounshell on Wed, 09/24/2008 - 1:14pm

Here's today's Seven Questions on this very topic.

Don’t hold your breath

by Lisa_P on Thu, 11/20/2008 - 2:55am

Don’t hold your breath waiting for mortgage relief. A bill hac been passed that would offer FHA-insured mortgages to replace existing high-interest adjustable rate loans.
Apparently, $700 Billion in relief is just not enough. Secretary of the Treasury Henry Paulson, and his Troubled Asset Relief Program, or TARP, hasn’t turned into the credit repair that many consumers need at this point. However, now that the chairperson of the FDIC, Sheila Blair, is able to weigh in on the situation, things are going our way a little bit more. She has pushed a $24.5 billion program to assist more than 1.5 million homeowners in danger of foreclosure, and it is very simple. Lenders will be given $1,000 for every loan that they renegotiate with homeowners that are facing foreclosure, and if default can’t be avoided, the FDIC will take on up to 50% of the loss. Paulson says it is a huge mistake that will bankrupt the FDIC. Others hail it as a route to re-establishing the liquidity for the mortgage market. It may not solve all the problems, but it’s an attempt to help repair credit.

Click to read more on Credit Repair