Saturday, September 20, 2008

Mortgage Bailout Bill, Part 2

A more expansive bailout proposal than the last one is making its way through congress, and will no doubt be signed in to law. The key feature is that is authorizes the Treasury to buy up to $700 billion in toxic mortgage securities. Now the prior bailout bill had two major parts to it; one was a mortgage rescue proposal that assisted conversion of adjustable loans to fixed rate at the current price of the house minus 10%; and the other part authorized the conservatorship of Fannie Mae and Freddie Mac such that the Treasury Department could purchase unlimited mortgage securities with T-Bills. If one good thing can be said of this bill it limits such purchases—to $700 billion dollars. At least there is a price on it. But I'm sure that will be expanded as necessary.

This current bill dispenses with any pretense of helping the American citizenry and is squarely a bailout of the banks. The only justification made is to expect really really scary things to happen if it doesn't pass. This is all congruent with my prediction earlier that the shape of the banking bailout would be the Treasury department exchanging T-Bills for problematic mortgage securities. If banks can chuck mortgages so easily one wonders how motivated they will be to participate in the rescue part of the first bill.

Anyway, this bill isn't passed yet so discussion of the details will wait until then.


East.Bay.Miser said...

Bernanke claims the main beneficiary is Main Street(testimony to Senate committee). A recession is guaranteed w/o the bailout(i.e. GDP shrinks, job losses, etc...).

SF Mechanist said...

Yeah, that's right-- I'll comment more on the nitty gritty once the bill is passed. I think Bernanke's comments though are perfunctory attempt to argue for a general social benefit of keeping the present banking system intact, which is the main justification for a taxpayer bailout.