Wednesday, March 4, 2009

At least this administration, unlike its predecessor, is trying something.

From the NY Times:

Two New Plans to Fix the System

The plans from readers who have good, smart ideas about how to fix the mess we’re in keep rolling in. I haven’t posted any in a while (sorry — I’ve been kinda busy!), but these two plans were interesting enough that they were worth sharing with you. Let me — and them — know what you think.

The first plan, by a firm called Derivative Bridges, bills itself as “a private sector solution to extinguish toxic assets (C.D.O.’s) and reliquify homeowners on a massive scale, with minimal taxpayer cost.” I don’t know if I would go quite that far in describing it, but it’s still a pretty nifty idea. Essentially, the government would buy the pools of mortgage securities (i.e., toxic assets) at, say, 60 cents on the dollar, which would actually be a higher price than they are currently valued at. When the trustees are paid off, the toxic asset disappears and what remains is, well, a whole lot of mortgages. Then the homeowner would refinance those mortgages at — hmmmm … — 60 cents on the dollar. Thus the mortgage is drastically reduced, but the whole thing is a wash for the government, which essentially acts as the middleman. You can read the details here.

The second plan, which was put together by a former Lehman Brothers executive named John Herman, might be called the “Split the Difference Plan.” In this plan, underwater homeowners would be allowed to refinance their mortgages at below-market interest rates, using a government entity like Fannie Mae, thus allowing for larger mortgage amounts than they would otherwise be able to afford. Then, the homeowner would have to go to the existing lender and pay off the old mortgage — but the lender would have to take a haircut equal to the amount of the subsidy being provided by the government. You can read about it here.

Although the details are different from the Main Street Solution, their basic purpose is the same: to keep people in their homes. I think they would both work. Let’s hope the same turns out to be true of the new government plan. At least this administration, unlike its predecessor, is trying something."


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Here’s a plan to buy toxic assets and have quantitative easing:

“Central Banks should bet on recovery - literally

Ben Bernanke should publicly bet $1 trillion dollars that the US economy will recover quickly from deflation and recession. He should make that bet on the Fed’s behalf. The Treasury should publicly disavow all responsibility for bailing out the Fed if Bernanke loses the bet. If he loses the bet, it would be paid for by printing money.

This is how people would react to the bet.

If they expect deflation and recession to continue, so they expect Bernanke to lose the bet, they will expect the Fed to print an extra $1 trillion, which would be highly inflationary…..which is a contradiction.

If they expect the economy to recover quickly, so they expect Bernanke to win the bet, they expect the Fed will not print an extra $1 trillion, so they will not expect hyperinflation, just a normal recovery, which confirms their expectation.

By making such a bet, and making it publicly, the Fed creates the very expectations it wants to create: that deflation and recession will not continue, and that the economy will recover, and return to the normal rate of inflation.

We need to refine the bet a little. It shouldn’t be an all-or-nothing bet. It needs to vary continuously with the speed and extent of the recovery, so that the quicker GPD and inflation and financial markets recover, the less money the Fed will have to pay on Bernanke’s bet. This creates a benign negative-feedback loop, helping people’s expectations, and the economy, self-equilibrate.

The bet introduces considerable uncertainty into future money creation. But we are equally uncertain about how much money the Fed will need to create to promote recovery. The bet makes those two things, each uncertain, correlated with each other. That’s good, just as the uncertain payoff of my home insurance policy is good, since it is correlated with the uncertain damage that fire will do to my home.

One way to implement such a bet would be for the Fed to buy a large amount of risky assets, where those assets would have a very high value if the economy recovers quickly, and a very low value if the economy did not recover.

Oh, wait…..

Posted by Nick Rowe on December 22, 2008 in Monetary policy | Permalink ”

If we have to buy TAs, this is the best use to combat Debt-Deflation.

— Don the libertarian Democrat

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