I beg the Democrats in congress: write a bill that makes sense.
I probably should have warned you to put your coffee down first.
Now that you're finished guffawing, here's my take. Like Brad, and like Paul Krugman, I think that this bill gives awesome power to the Treasury Secretary. Unlike Brad and Paul, I wouldn't take the deal even if it came with a guarantee that the secretary of the Treasury would be someone they could trust.
Think about what $700 billion could buy, if you weren't using it to bail out the financial industry. I can't talk about mosquito nets and anti-malaria drugs for Africans, health care for the uninsured, and stuff like that, or they'll take away my libertarian union card. Let's stick to the purpose of doing something about the housing and mortgage markets.
Let's say we decided to give the money to households in order to put into equity into their homes. If you figure roughly 140 million households, then that's $5000 per household. If everyone added $5000 to their housing equity, there would be fewer defaults.
But that's silly. Most people already have plenty of housing equity. Only a few people are what I call "home borrowers." A home borrower, as opposed to a home owner, is someone who bought a house with less than a 10 percent down payment. If you did that, you are not a home owner. You are living in a borrowed home. I'm not judging you or criticizing what you did, just putting your situation in perspective.
Anyway, suppose there are 10 million home borrowers out there. Now we give $700 billion to them to use as home equity supplements, meaning that they put the money into their mortgages. That's $70,000 of housing equity per household, and $70,000 less mortgage debt per household. I think we could safely declare the mortgage crisis over. In fact, if you look at it that way, it's clear that we could solve the mortgage crisis for a lot less than $700 billion.
A couple of points.
1. We are not "giving" people anything. We are taking money from taxpayers and spending it on other taxpayers. Again, I feel like I need to say that to keep my libertarian union card.
2. Bernanke and Paulson don't think of what they are doing as charity. It's more like an entrepreneurial business, where they intend to buy what they think are undervalued mortgages assets, which they believe they can finance profitably.
They may be right, but if they took their business plan as written to any bank or VC, they'd be laughed out of the office. The plan is utterly vague, untested, and there is no proof that they have or can find the executive talent needed to run a pilot program of this kind, much less scale it up to $700 billion.
I tend to think that voters are really, really stupid. But I am optimistic that they will sense that the Paulson plan is not in their best interest. My guess is that if Congress goes home and faces the voters before they pass the bill, rather than the other way around, the plan will die a well-deserved death.
UPDATE: Yves Smith is, like me, a plan-basher. Pointer from Greg Mankiw, which suggests that Greg is at least skeptical.
Tyler and I have talked a lot about financial doomsday scenarios and systemic risk. Both of us have taken a relatively favorable view of government intervention to date. But this proposal has pushed each of us over the edge.