Christmas already?

The Treasury plan before Congress is getting loaded up like a Christmas tree and it is doing the plan no good. Indeed, it may doom the plan before it gets going. The basic provision of the plan is that the Treasury will buy assets which are stuck in the system without a clear valuation and will price these assets by means of a reverse auction. This will allow the financial institutions to set prices that they can live with, while also forcing the prices to be low enough so that the Government will be able to buy the assets without overpaying. The extras that Congressmen like Frank and Pelosi are adding onto the bill will compromise the effectiveness of this basic pricing structure. First, the Democrats want the financial institutions to give the Government stock in their companies as part of the plan. This is a big problem for two reasons: it may convince certain institutions not to participate in the plan and it also will lead to the government paying higher prices for the same assets since the companies will add in additional costs for their stock. The end result will be higher cost for the governemnt, a bigger likelihood of losses for the American people and less chance of a successful plan. Second, the Democrats want limits on executive compansation at the financial companies. This may work, but the issue is what will the limits of compensation be. Set too high, this is just a public relations ploy by the Democrats. Set too low, this will undermine the effectiveness of the plan again. We will need to see where the level is set. Third, the Democrats want to add a program to help those homeowners who are in danger of losing their homes. Once again, the question is how will this be done. Many of these homeowners are in their homes only because of the structure set up during the Clinton years which pushed banks to lend to uncreditworthy buyers -- i.e., buyers who really could not afford the homes into which they moved. Why is it now up to the American people who lived within their means to protect those who did not. The obvious response to this question is why should we help banks and financial institutions that also screwed up in major ways by taking on debt backed by these questionable mortgages. The answer is that letting these institutions fail will bring down our entire economy and hurt everyone. The treasury plan is actually a plan to save us from a depression, not one that bails out banks. The help to the banks is incidental to the main purpose.

Obviously, it is a harsh rememdy to let those who cannot pay lose their homes to foreclosure. Indeed, many banks will lose far more by foreclosing than by renegotiating with their borrowers. That renegotiation, however, should be up to the banks and their clients, not Congress.