Trillion dollar life preserver
The US government is about to write the largest welfare check in history, and the recipients will be banks and other financial institutions holding worthless debt. You and I will have the privilege of paying for it.
In a late-night meeting in Nancy Pelosi's office, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson met with the leadership of both parties from both houses of Congress. In apparently terrifying terms, they explained to the assembled members of Congress that this country was "maybe days away from a complete meltdown of our financial system," according to Senator Chris Dodd.
To avert that catastrophe, Bernanke and Paulson have proposed a massive government bailout of financial institutions which hold a staggering amount of now-worthless debt; bonds and derivatives based on sub-prime mortgages are now worth less than the paper they're no longer printed on, and the government looks poised to buy most, if not all of it. The bill could run over a trillion dollars.
Although the details of the rescue plan are yet to be fleshed out, it appears that Bernanke and Paulson are suggesting that the government purchase the actual sub-prime mortgages themselves, in addition to the bonds and other securities derived from them. Obviously, if nothing is done to stanch the flow of foreclosures on sub-prime mortgages, any paper instruments based on those mortgages will always be worthless, regardless of who owns them.
With a significant portion of existing sub-prime mortgages yet to reset their interest rates upward, the number of foreclosures is certain to increase substantially above those already seen around the country. Unless those mortgages are converted to low-interest fixed-rate terms, the looming threat of more foreclosures will simply end up repeating and deepening the crisis we've already witnessed: home prices will continue to collapse, credit markets will freeze up again, and consumer confidence will plummet again.
That means that this trillion-dollar bailout won't really fix the underlying problem unless those mortgages are transformed in such a way that the epidemic of foreclosures is stopped.
If that last part happens, the government entity holding those mortgages could theoretically hang on to them long enough for housing prices to climb back up and for the threat of widespread foreclosure to fade. If the government did that, they could even stand to make a profit on the whole deal. I personally doubt that will happen, but it is possible.
On the other hand, if nothing is done about the sub-prime problem, we'll simply be witness to a trillion-dollar handout to the institutions perpetuating this mess; in the meantime, you and I (and future generations) will be stuck with paying for the chaos created by Alan Greenspan and Phil Gramm.
I have no doubt that the urgency described by Chris Dodd is an accurate description of just how close we came to calamity, and I have no doubt that something resembling this bailout is necessary. However, the anti-oversight, anti-accountability, anti-regulatory zealots who created this crisis in the first place have shown the rest of us just how clever they are; they privatize the profits while socializing the risks.
I don't know about you, but I'm awfully tired of being trickled on.