tag:blogger.com,1999:blog-8866683815436246416.post7803072757092864393..comments2009-11-06T10:42:52.784-08:00Comments on Word Stem: To bail or not to bail?Meghan Wolfhttp://www.blogger.com/profile/04630537263731095687noreply@blogger.comBlogger1125tag:blogger.com,1999:blog-8866683815436246416.post-35637698939373058382008-09-28T09:56:00.000-07:002008-09-28T09:56:00.000-07:00I like what Krugman has been writing in the times....I like what Krugman has been writing in the times.<BR/><BR/>I've synopsied some of his comments below. <BR/>This really broke it down for me:<BR/><BR/>1. The bursting of the housing bubble has led to a surge in defaults and foreclosures, which in turn has led to a plunge in the prices of mortgage-backed securities — assets whose value ultimately comes from mortgage payments.<BR/>2. These financial losses have left many financial institutions with too little capital — too few assets compared with their debt. This problem is especially severe because everyone took on so much debt during the bubble years.<BR/><BR/>3. Because financial institutions have too little capital relative to their debt, they haven't been able or willing to provide the credit the economy needs.<BR/><BR/>4. Financial institutions have been trying to pay down their debt by selling assets, including those mortgage-backed securities, but this drives asset prices down and makes their financial position even worse. This vicious circle is what some call the "paradox of deleveraging." <BR/><BR/>The Paulson plan calls for the federal government to buy up $700 billion worth of troubled assets, mainly mortgage-backed securities. How does this resolve the crisis?<BR/><BR/>Well, it might — might — break the vicious circle of deleveraging, step 4 in my capsule description. Even that isn't clear: the prices of many assets, not just those the Treasury proposes to buy, are under pressure. And even if the vicious circle is limited, the financial system will still be crippled by inadequate capital.<BR/><BR/>Or rather, it will be crippled by inadequate capital unless the federal government hugely overpays for the assets it buys, giving financial firms — and their stockholders and executives — a giant windfall at taxpayer expense. Did I mention that I'm not happy with this plan?<BR/><BR/>The odds are, instead, that the U.S. government will end up having to do what governments always do in financial crises: use taxpayers’ money to pump capital into the financial system. Under the original Paulson plan, the Treasury would probably have done this by buying toxic waste for much more than it was worth — and gotten nothing in return. What taxpayers should get is what people who provide capital are entitled to: a share in ownership. And that’s what the equity sharing is about. <BR/><BR/>The logic of the crisis seems to call for an intervention, not at step 4, but at step 2: the financial system needs more capital. And if the government is going to provide capital to financial firms, it should get what people who provide capital are entitled to — a share in ownership, so that all the gains if the rescue plan works don't go to the people who made the mess in the first place.Meghan Wolfhttps://www.blogger.com/profile/04630537263731095687noreply@blogger.com