What about the House GOP plan?

Any armchair (or real) economists out there? If I understand the House GOP plan correctly, these banks must buy “insurance” from the federal government that will then guarantee these toxic loans.

At first blush that sounds like a great way to get their feet out of the fire without selling the farm to the tune of $700 billion, but I must confess this is way out of my league.

Any ideas on this alternate plan? Good, bad, neither?

Didn’t we basically already do this by buying out AIG (which insured many of the mortgage backed securities)?

But I’ve seen several different alternative bail-out plans. Do you have a link to a summary of which one your talking about.

How can these banks buy insurance when the entire crisis boils down to their lack of liquidity (i.e., they have no money)?

Isn’t this what credit default swaps where? Insurance for if MBS failed?

I haven’t seen the details, but I don’t see how insurance would let the banks value these loans. And it certainly doesn’t give them any capital unless they can find some suckers to buy the papers, insured or no.

When would insurance be cashed in? I didn’t think these things were the type where they become totally worthless, since they contain some good loans. It kind of sounds to me that it is just a ploy to not spend the money now - though we’d be on the hook later, with no up side.

In any case, I think I heard that this was proposed and rejected by the Administration and the Dems three days ago. If the House Republicans really cared about fixing the economy, it would be a dead issue, even if they truly think it is a good approach.

They seem like the California Republicans - so committed to dogma that they don’t care if the government crashes all around them.

This is the crux of the biscuit - these institutions are holding paper they have valued on their books by bascially pulling a number out of thin air (thin air existing up their asses). The insurance they currently hold on the paper (credit default swaps) is based on assigned risk, also a number that was devised out of whole cloth (whole cloth existing up their asses).

So, the wise GOP is suggesting an insurance instrument? How, pray tell do they intend on valuing the risk? Could it be that they will use the same method the geniuses on Wall Street used?

I’m confused as well, not seeing how ensuring against losses on loans already made will free up capital for other, unrelated loans. I know these things are interconnected, through tubes, but how does insurance on mortgage loans free up money for small business loans?

And I thought that these mortgages had been “bundled”, so not all the mortgages have goat leprosy, but some do. It seems to me that the insurance premiums on something that has already pretty much failed would be very high. So are these mortgages to be individually assessed for value? A daunting prospect, no?

What we need on these boards is a Marxist MBA. Or maybe Krugman. Could we invite Krugman?

A couple of things.

First, I get confused how insuring the banks is suppose to be better than handing them money. If the premiums cover insurance payments, then how would this recapitalize the banks?

And if the premiums don’t cover the insurance payments, then this is just a less transparent bailout for Wall Street. What’s the point?
Second, the economist Robert Waldmann notes that the banks are already overinsured. And that furthermore, overinsurance creates severe moral hazard problems. Let’s see his example:

Get it? Put governmental insurance on top of additional insurance, and Wall St has every incentive to send their firms straight into Chapter 11 - but on their own favorable terms and on the taxpayer’s dime.
Finally, Paulson’s Treasury Department has supposedly looked at the insurance option and found it unworkable for crisis managing (as a deliberately-crafted financial reform, it might show more promise). And let’s not forget that the RWG’s plan was to have Treasury design an insurance plan based upon their sketch. It’s a plan for a plan.

The Republican Working Group generated another proposal. You betcha - they want to cut capital gain taxes.

But this makes no sense. Wall St has made losses on these toxic instruments. And under existing tax laws, they can claim capital losses and receive a tax benefit - the RWG’s plan would be a reduction in aid.

These clowns are not serious. This is pure political gamesmanship: they don’t want to put their names to a humongous bailout, but they don’t have any coherent ideas of their own.

Interestingly, there are proposals that involve little or no taxpayer money. Here’s one by Luigi Zingales, Professor of Entrepreneurship and Finance, University of Chicago. It’s called the “Cram-down”. I like it, excepting that I frankly don’t know whether it is plausible or not.

Heh. From Politico:
According to one GOP lawmaker, some House Republicans are saying privately that they’d rather “let the markets crash” than sign on to a massive bailout.

“For the sake of the altar of the free market system, do you accept a Great Depression?” the member asked. Admittedly, a market crash is not the same as an economic recession, but if credit seizes up there will be a lot of pain on Main St.

In the thread The Republicans have lost their mind, I posted the following (slightly edited):

Somewhat unsurprisingly, with the contentiousness in the thread, no one responded. Assuming threemae’s contention is correct, my guess is that the idea is to make the risk more palatable to some such that they willingly assume the burden, relieving the troubled institutions of some problematic/weak assets. In an effort to understand this better, I’ll ask here: is that incorrect?

Digital Stimulus
Firstly, I’ll note that it’s difficult to get the details of the Republican Working Group’s proposals, possibly because they are vague.

--------- Here’s the way I see it: the securities in question are risky (i.e., likely to contain many bad loans; part of what makes them risky are that the valuations are sketchy at best). By cutting the capital gains taxes only on these securities, they become more attractive to buyers. That is, the possible benefit becomes higher, which mitigates some of the risk.

Ok. A cap gains tax cut will increase after-tax returns for buyers, making them apt to bid higher. That’s one conduit (albeit an indirect one) that could recapitalize the banks.

The seller, though, will lose a tax break, since he no longer will be able to declare capital losses. So, along these lines, perhaps we should cut cap gains taxes only on assets purchased after 9/25/08 or whatever.

The problem is that the RWG hasn’t seemed to think this through:

Just to be clear, the working group really was oblivious to these issues: “The RSC plan, which will be unveiled at noon, calls for a two-year suspension of the capital gains tax. “By encouraging corporations to sell unwanted assets, this provision would unleash funds and materials with which to create jobs and grow the economy,” an outline of the proposal said.” http://thehill.com/leading-the-news/rsc-pitches-market-based-alternative-to-bailout-2008-09-23.html

Frankly this has all the appearances of knee-jerkism. There was no hint that they recognized that they were creating conflicting incentives.

--------- …my guess is that the idea is to make the risk more palatable to some such that they willingly assume the burden, relieving the troubled institutions of some problematic/weak assets.

Part of the problem is that troubled institutions don’t want to sell their weak assets at firesale prices. (Another aspect is that the so-called firesale prices may be entirely appropriate, given the underlying quality of the assets.) Changing the cap gains rate for buyers from 15% to zero won’t amount to a hill of beans.

Furthermore, from what I can tell of the press reports, this cap gains cut isn’t targeted at all. It’s not targeted at buyers of new assets. Heck, it’s not even limited to the financial sector. So it seems like an expensive way of providing little in the way of benefit.

I wish the Republican House Leadership had access to a few MBAs in finance. As it is, one economist opined, “First of all, we have the Republican Study Committee blowing things up with a complete nonsense proposal — solving the crisis with a holiday on capital gains taxes. How is that possible? Well, if a party runs on economic nonsense for 25 years, eventually many of its foot soldiers will be people who actually believe the nonsense.”

Thanks for responding. Yes, if anyone can link to these proposals – even the “one page list of principles” – I’d appreciate it. I’ve been keeping an eye open for them as I surf the 'net, but have come up with bupkis thus far.

Ah, that does make it a somewhat silly idea. Not sure if this has any bearing on the situation at all, but isn’t there some asymmetry in CGT gains vs. losses? Obviously, if there is, it would have some effect on the calculus involved, although it might be so minor as to be correctly disregarded. Which, I guess, might also be said about the whole idea in the first place – that is, if the packages really are that bad, tweaking the tax rate may not be enough, as you indicate here:

Again, I’d really like to read the RWG’s proposals.

What really strikes me about this is that the root of the problem is lack of information. That is, no one is sure what the actual valuation of these securities is. No one wants to buy them without knowing the risk, but the holders don’t really want to put a value on them, as they’re better off not knowing than confirming their low value. I’d appreciate being corrected if I misunderstand, but that’s the sense I get from today’s Krugman blog entry:

I’d be really surprised if the portfolio analysis company I worked for back in the mid-90s doesn’t end up making huge profits in the next couple years…

John Galbraith has a really interesting viewpoint on all of this - the best I’ve read thus far.

er, that would be James, not John. Sorry about that.

Digital: Bear in mind that housing valuations have not yet settled back to their long run averages. So I’m highly dubious about claims of undervalued MBOs. Sure, there’s uncertainty. But there’s also a reluctance to write off troubled assets if it results in the bankruptcy of the firm.

Today’s NYT’s article on the House Plan is interesting.

Whew. So the capital gains part was symbolic. Actually, I’m ok with that, provided it is joined with constructive steps.

On Thursday, John Boehner told the Bush admin and the Democratic leadership that there would be no deal. Barney Frank blew a fuse, wanting to know why he didn’t bring these issues up earlier. Then, on the following day:

I guess the adults called a time-out.

I’m wary of the insurance proposal, as I would want to know how they would address moral hazard. Some of the Republican House’s other trial balloons don’t inspire much confidence:

Hoo-boy. This is the Japanese approach: sweep your problems under the rug and put off the day of reckoning. I’d rather see immediate carnage, rather than artificially dragging out asset price declines and bankruptcies over many years.

What I want to know is who got these loans with no down payments and no check into financial status? I’ve certainly never had anyone lend to me like that, nor have I ever seen anyone offering loans like that.

Why didn’t the Pubbies bring it up before? Because they had been too busy to check with thier offices, they didn’t get word until late that their constituents were enraged and engorged, furious. Pitchforks and torches furious, tear your throat out with their teeth furious. Vexed.

Manna from Heaven. A chance to get out from under this cloud of electoral doom, a chance that they might not have to run for re-election hauling this stinking corpse from fund-raiser to photo op. They needed to oppose this monstrous giveaway! They would stand with heartland America against the Democrat/Bush juggernaut, as the sworn enemies of the running dog jackals of Wall Street pigs. And thus is born the People’s Republican Party of America.

Geat minds think alike, ths is also true of craven, grasping slimeballs.

The capital gains flim-flam is a gimme. They know it won’t fly, but if it did, it wouldn’t hurt anything, because it doesn’t actually do anything. It fills an appropriate space on a printed page where an actual proposal might have been, if they had such.

They never intended to actually do any of this. They don’t want to be responsible for buying the Acme Economic Plan, which works about as well as most Acme products. Far better to propose an alternative, vaporware. Because even if the plan works, there will be tremendous hurt, people gonna be mad. And if it doesn’t work, multiply by …three?..ten? It doesn’t, well, shit, they* tried* to stop Bush and the Democrats, but were crushed beneath Nancy Pelosi’s liberal jackboots.

And if it does work, they get to say that their plan would have worked* too*, but without all the hassle.

But they gotta blame somebody else, and right now! So they are exposing the Wall Street/Bush/Democrat conspiracy to bleed the proletariat for the running fat cats of Wall Street, but the People’s Republican Party of America stands in solidarity with…you know the drill.

The more I think about them, the more I understand how they think. I worry that this is not conducive to good mental hygiene.

You clearly had no brokers who were going to get a bonus to write that type of loan, which would then be sold off, eliminating the risk (so they thought) to the originator.

Clarify: I thought once the broker had sold it off, and especially after it was absorbed into a financial entity, the broker had no exposure. Not so?

BTW, the PBS affiliate in the Philadelphia area, WHYY, showed Oliver Stone’s Wall Street tonight, and I watched it. Some one there obviously had a taste for the topical. :smiley: