The reason the relaxation of mark to market is bad in Paulson's plan but good in DeFazio's is that in the latter, the whole point is to extract actual value from otherwise bad paper--that is, an estimated real value of a mortgage based on the physical structure it represents--and establish a level of equity, that banks would then use to once more begin offering credit. In the Paulson version, we'd leave that job to...Henry Paulson. No thank you. In the DeFazio version, the FDIC would carry out that task, and issue "net worth certificates."

This exact thing was done in the S&L crisis, and created $200bil of equity at a cost of about $2bil.

Easing the credit crunch would then buy time to address the rest of the problem, without simply handing $700bil to the Master of the Universe at Treasury.

I don't think it's fair to conflate the two plans on this basis. DeFazio's makes sense, as something that could be done RIGHT NOW to ease the credit crunch, without handing over a bunch of taxpayer dollars in the process.

Thanks for the hat tip.

BY the way, the Sirota link takes you right back here. The real link is: http://www.ourfuture.org/blog-entry/2008094030/strategy-memo-turning-wall-street-giveaway-economic-rescue-all-americans

It's an excellent piece.

One thing that is becoming clear is that the longer this deadlock persists, the risk grows that this bill will get worse.

The FDIC insurance limit increase is good and, if the bill is successful, shouldn't really cost anything. The "mark to market" provision was already in the bill that was voted down, although it was permissive, not mandatory.

I don't like Congress prescribing accounting methods, but this should be relatively harmless, since it is my understanding that the relief relates to assets for which there is no ready market anyway.

The tax stuff bothers me only because it clutters the bill, isn't really relevant to the issue at hand and risks polarizing votes, i.e., for every vote it gains on one side, it risks losing one on the other.

I'm one of those who believes this needs to get settled and the sooner the better--not because of the stock market (although that helps focus Congress's attention) but because of the impact the credit crunch is already having on businesses large and small, and by direct implication on their workers and customers.

After the dust settles, there will be plenty of opportunity to look at more fundamental changes in the structure and regulatory regime of the financial markets. Now is the time to unblock the flow of credit and keep the economy, adn the people in it, working.

After the dust settles, there will be plenty of opportunity to look at more fundamental changes in the structure and regulatory regime of the financial markets.

The time to press for regulations that will keep us from falling off of this cliff a second time is right now, when these very large creditors are asking the American people for an additional $700 billion on top of the nearly $1 trillion that we have already paid out.

After American taxpayers have given these people what they want, there will be no need for them to agree to concessions.

Congress would be better off taking a few weeks to pass the right bill, than to pass the wrong bill just because people are feeling panicked right now.

The total value of the bad mortgages is around $1 trillion. Fully discounted, it's probably a $200-$300 billion problem, tops. None of this would be happening if we just had bad mortgages. We'd just be in the doldrums, with falling housing values and anemic growth in income.

The problem is the $62 trillion in credit derivatives. Originally designed as insurance on loans, the investment banks turned these into a printing press. As designed, a lender might pay $10,000 for insurance on a $100,000 risky loan. The insurance is called a credit default swap. If the loan goes bad, the issuer of the swap owes the lender for the whole value of the loan. Makes sense.

The problem is the investment banks saw this as a profit center, and started issuing multiple swaps on the same loan. Side bets, essentially. So, a $100,000 loan might have $5 million in insurance policies on it. The effects of the subprime loans going bad are magnified by something like a factor of 50.

The investment banks violated some cardinal rules. They assumed these mortgages wouldn't go bad. And they didn't hedge. They saw the value of these swaps increasing, and rather than balance their positions by buying as many of the swaps as they sold, they started holding massive amounts of these swaps themselves. Like a bookie who just collects bets from people who say the team will win, when the team loses, he's toast.

$62 trillion is close to the total value of every material thing in the world. There is no way this should have been allowed to happen. Any financial company who took these positions deserves what they get. They knew what they were doing. They were bringing in record profits and earning fat bonuses. The responsible people couldn't compete.

TJ, thanks, I seem to have forgotten to paste the link in, it's fixed now.

David Sirota seems to see real questions about the version in the DeFazio, Kaptur et al. bill. As you know, that's what the article was addressing.

Jack, unless NPR is seriously misreporting something, whatever's in the Senate bill scheduled for vote tonight must be different from what was in the House version that failed. One thing that concerns me is that the ability to keep "assets" on the books as such when there is no market for them is that it may increase the bargaining power of their holders on the price the government pays for them, & thus the risk to the public fisc.

I think there is an area of middle terms between "ASAP by any means for the banks," and "more fundamental changes in the structure and regulatory regime of the financial markets."

One part of that territory is "who will carry the burden of a short-term bailout in the longer run?" That question is affected by the terms of asset purchase, including both price of assets and the possibility of government equity stakes, and other mechanisms to offset the public risk / long term addition to the national debt, e.g. the transfer tax proposal, or what William Greider of The Nation calls "due bills," which if I understand him correctly would seem to change the nature of the transaction from a simple purchase to something like giving a no-interest, open-ended line of credit under which the asset holder would have to repay any difference between whatever the government eventually realized from the assets and the money paid for them, once the markets were functioning again and the institution returned to profitability.

I think securing the public against indebtedness for a transfer of wealth to the banks created by the unknowability of the value of the mess of "assets" they've created is a legitimate part of the process of short term solution-finding. Possibly this could be done in a less detailed way to move quickly but I think making it definite that the public is to be so secured should be a minimum requirement.

Relatedly, I think it should be built into whatever is done that the underlying foreclosure crisis will be handled in a way that keeps as many people in their homes as possible. This is not about the long term structure of regulation but about a dimension of remediating the whole mess that is comparable to remediating the problems of the asset holders, and connected to it.

Underlying my view on both of these dimensions are views about what all this means for our social contract, and a view that the "moral hazard" problem is much more important at the level of the big institutions than at the level of individual borrowers, and the imperative not to reward the bad behavior of the big players that much greater.

More than likely the right bill, or close to it, could have been passed in a few days if the involved senate and house committees had been open and honest by inviting impartial authorities - Joseph Stiglitz, William Greider, Paul Krugaman come readily to mind - and considered a variety of opinions.

That you would describe Stiglitz, Greider and Krugman as "impartial authorities" is revealing. Maybe they should be paired with "impartial journalists" like Rush Limbaugh, Sean Hannity and Bill O'Reilly.

Jack Roberts: I'm one of those who believes this needs to get settled and the sooner the better--not because of the stock market (although that helps focus Congress's attention) but because of the impact the credit crunch is already having on businesses large and small, and by direct implication on their workers and customers.

I have zero doubt that you said that in good faith and with good intentions. It's a sentiment being expressed widely by financial experts and politicians alike.

But... isn't appealing to our jobs tantamount to economic blackmail?

I had no hand in creating this mess. I don't own a home, and in fact have never owned a home - and thus, never a mortgage. My 401-K (the closest I've ever come to playing any kind of economic market) amounts to chump change in the grand scheme of things and I've always tended to be moderate in the level of risk I was willing to move funds into.

The threat to my livelihood may be real, but it's blackmail nevertheless.

Jack,

I don't have a malignant tumor, Wall Street does. Thus the doctor would be lying - at best - if she tried to convince me that I have the tumor.

I have owned a series of internal combustion vehicles and still do. Thus it's entirely appropriate for scientists to appeal to me to help mitigate global warming by mitigating how much I personally contribute(d) to it.

Do you really think this stuff through or is this coming from some talking points email?

What we're saying is that if the economy implodes, a lot of people will lose their jobs--not as retaliation but as a fact of economic reality.

I understood it perfectly the first time, but please feel free to rephrase as needed to assist your own understanding.

It's still economic blackmail. The potential for dire consequences don't alter that reality, as we all found out during the Lebanon Hostage Crisis of the 1980s.

No, Kevin, I don't repeat anyone's talking points. And it is obvious you don't either.

Let me try another analogy. Your neighbor, who lets trash pile up around jis house, burns candles everywhere and smokes in bed, finally sets his house on fire. It is burning like crazy and the volunteer fire department shows up and say, "Quick, help us put out this fire!"

So you say, "No sir, I'm a responsible homeowner. It's my neighbor's own fault his house is on fire and I'm not going to help."

So the fireman says, "But you don't understand. If we don't put this out soon, it will spread to your house and it will burn down, too."

So we're to believe your answer would be, "I won't be blackmailed! Let it burn!"

So the fireman says, "But you don't understand. If we don't put this out soon, it will spread to your house and it will burn down, too."

Will it, though? I could assert that the Moon is made of Green Cheese and that wouldn't necessarily make it so. N'est pas?

Let's say that it would burn my landlord's house down too - since I'm not a homeowner. So we put out the neighbors housefire by dumping enough cash - which we've mortgaged our own homes to get - on it to smother the worst of the flames until his own well water can handle the rest? And then what? The irresponsible neighbor takes what's left of the cash we dumped on his fire, rebuilds and proceeds to pile trash around, leave burning candles sitting around and smokes in bed just like before? No? Why not? Because he learned from the massive conflagration in the early 20th Century? Except that no, he obviously hadn't learned from history or he wouldn't have caused the fire. Either that or he's so confident that we'll just keep bailing him out and underwriting his rebuilt home that he just doesn't care whether he starts another fire or not.

How many mortgages do you expect my landlord to take out on her property until she says "Enough with the blackmail!!"?

Okay, Kevin, I give up. Keep sleeping through the fire. I'm sure you'll be just fine.

I submit Stiglitz, Greider and Krugman are slightly to the left of center

Joseph Stiglitz is certainly a distinguished economist, but defnitely a liberal economist. Paul Krugman was a once promising young economist who was enticed by the fame and fortune of becoming a very partisan political pundit and in the process has undermined his credibility as an economist. William Greider is a left-wing journalist, not an economist, and would not meet anyone's definition of even a "relatively impartial" authority on anything.

The total in bad mortgages is 1 trillion? I thought the total amount of ALL mortgages was 3 trillion--and there's no way that 33% of all mortgages are bad. (Or is the total number higher, and I just misremember?)

"If banks don't have enough money to lend, a lot of businesses that need credit to survive will fail and a lot more will have to cut back, spend less, and lay-off workers. This isn't a threat, it is a prediction of foreseeable economic consequences."

...which IMO is why the DeFazio plan, which addresses immediately the credit crunch by providing those banks the equity to begin lending again, makes so much sense to me. It's the credit crunch and lack of confidence that makes this an imminent crisis. Fix that, then let's talk about structural solutions.

I'm not sleeping through the fire, Jack. I just don't understand why a bunch of volunteer firefighters are refusing to answer the alarm until a smorgasboard of unrelated BULLSHIT is agreed to before they'll even consider responding to the fire. The whole process being complicated by the fact that the Fire Chief has almost no credibility with either volunteers members or citizens and was slept through a couple years worth of warnings that the neighbor's house is a tinderbox of flammables.

At the same time most of the rest of the volunteer firefighters are still back at the station trying to find creative ways to put the stationhouse and most of the equipment into hawk so they can bribe the holdouts to respond to the fire.

Meanwhile, the borrow-and-spend holdout firefighters look very suspiciously more like pyromaniacs than firefighters. A perception which is just underscored by the ongoing wrangling back at the station house over tax cuts and how not to pay for them.

I think my skepticism is more than justified.

If the crisis is as grave as you make it out to be, why are members of your own party petulently insisting on unfunded tax cuts for utterly unrelated things before they'll fight the fire?

I trust you've heard the parable about taking care of the log in your own eye before worrying about the splinter in my eye...

Torridjoe, the $700 billion figure was based on a belief that 5% of mortgages may be bad. There are approximately $14 trillion in mortgages outstanding, hence the $700 billion figure.

Despite my original preference for a clean bill, the Senate bill that just passed added county timber payments and mental health parity, two things Gordon Smith has been working on for a long time.

Smith voted yes but Wyden voted no. Go figure.

Can't wait to hear where Merkley is on this.

Smith voted yes but Wyden voted no. Go figure.

Imagine that. A borrow-and-spend Republican backed it and a pay-as-you-go Democrat didn't.

Remind us again why this bailout is needed?

Jack,

You're a smart guy. Are you ignoring the role of the derivatives on purpose? It's convenient to blame the mortgages, but the real problem is the credit default swaps, which dwarf the actual mortgages.

Do you have a source on the tying the $700 billion to the idea that 5% of mortgages are bad?

Damn you, Tom! I had the exact same idea... Nice!