Exclusively in the new print issue of CounterPunch
MARX: A HERO FOR OUR TIME? — Suddenly, everyone from the Wall Street Journal to Rolling Stone seems to be talking about Karl Marx. Louis Proyect delves into this mysterious resurgence, giving a vivid assessment of Marx’s relevance in the era of globalized capitalism. THE MEANING OF MANDELA: Longtime civil rights organizer Kevin Alexander Gray gives in intimate portrait of Nelson Mandela and the global struggle of racial justice. FALLOUT OVER FUKUSHIMA: Peter Lee investigates the scandalous exposure of sailors on board the USS Reagan to radioactive fallout from Fukushima. SOUTHERN DISCOMFORT: Kim Nicolini charts the rise of Matthew McConaughey. PLUS: Mike Whitney on the coming crash of the housing market. JoAnn Wypijewski on slavery, torture and revolt. Chris Floyd on the stupidity of US policy in Ukraine. Kristin Kolb on musicians and health care. And Jeffrey St. Clair on life and death on the mean streets of an America in decline
Bail Out the Homeowners!

Why Paulson’s Plan is a Fraud

by PAUL CRAIG ROBERTS

Is the Paulson bailout itself as big a fraud as the leveraged subprime mortgages?

Yesterday, here on CounterPunch,  I discussed the bailout as proposed and noted that the proposal cannot succeed if it impairs the US Treasury’s credit standing and/or the combination of mark-to-market and short-selling permits short-sellers to prosper by driving more financial institutions into bankruptcy.  

A reader’s comment and an article by Yale professors Jonathan Kopell and William Goetzmann  raise precisely this question of the fraudulence of the Paulson package.

As one reader put it,“We have debt at three different levels: personal household debt, financial sector debt and public debt.  The first has swamped the second and now the second is being made to swamp the third.  The attitude of our leaders is to do nothing about the first level of debt and to pretend that the third level of debt doesn’t matter at all.”

The argument for the bailout is that the banks will be free of the troubled instruments and can resume lending and that the US Treasury will recover most of the bailout costs, because only a small percentage of the underlying mortgages are bad.  Let’s examine this argument.

In actual fact, the Paulson bailout does not address the core problem.  It only addresses the problem for the financial institutions that hold the troubled assets. Under the bailout plan, the troubled assets move from the banks’ books to the Treasury’s.  But the underlying problem–the continuing diminishment of mortgage and home values–remains and continues to worsen.

The origin of the crisis is at the homeowner level.  Homeowners are defaulting on mortgages.  Moving the financial instruments onto the Treasury’s books does not stop the rising default rate.

The bailout is focused on the wrong end of the problem.  The bailout should be focused on the origin of the problem, the defaulting homeowners.  The bailout should indemnify defaulting homeowners and pay off the delinquent mortgages.  As Koppell and Goetzmann point out,  the financial instruments are troubled because of mortgage defaults.  Stopping the problem at its origin would restore the value of the mortgage-based derivatives and put an end to the crisis.

This approach has the further advantage of stopping the slide in housing prices and ending the erosion of local tax bases that result from foreclosures and houses being dumped on the market. What about the moral hazard of bailing out homeowners who over-leveraged themselves?  Ask yourself: How does it differ from the moral hazard of bailing out the financial institutions that securitized questionable loans, insured them, and sold them as investment grade securities? Congress should focus the bailout on refinancing the troubled mortgages as the Home Owners’ Loan Corp. did in the 1930s, not on the troubled institutions holding the troubled instruments linked to the mortgages. Congress needs to back off, hold hearings, and talk with Koppell and Goetzmann.Congress must know the facts prior to taking action.  The last thing Congress needs to do is to be panicked again into agreeing to a disastrous course.

PAUL CRAIG ROBERTS was Assistant Secretary of the Treasury in the Reagan administration. He was Associate Editor of the Wall Street Journal editorial page and Contributing Editor of National Review. He is coauthor of The Tyranny of Good Intentions. He can be reached at: PaulCraigRoberts@yahoo.com 

Your Ad Here