As he explains, the HOLC "was created [back in the Depression] to buy mortgages from banks at a discount price...and refinance distressed homeowners into new mortgages with lower face value and lower fixed rate mortgage rates."
[bolding mine]
[O]f the five possible uses of fiscal policy - income relief to households (the 2008 tax rebate), rescue/bailout of financial institutions (Bears Stearns, Fannie and Freddie, AIG), purchase of assets of failed institutions (an RTC-like institution), recapitalization of undercapitalized financial institutions (an RFC-like institution), government purchase of distressed mortgages to provide debt relief to households (an HOLC-like institution) - the last option is the most important and effective to resolve this severe financial and economic crisis...
Creating a new HOLC mechanism is likely to be more effective than creating a new RTC (whose purpose was to buy and dispose over a number of years of the assets of already failed S&Ls)...
An RFC mechanism may be necessary once an HOLC is created: purchasing mortgages at a discount implies banks taking an additional capital hit (if they have not already written down the value of such assets or have not provisioned for the loss with loan loss reserves); therefore the purchase of such assets will further undercapitalize such institutions that do need more capital. So the government injection of capital with preferred shares will allow distressed but solvent banks to increase their capital and thus not to be forced to contract further credit as it would be the case if they remain undercapitalized.
So, Roubini who has seen this coming earlier and more clearly than most anyone, proposes we:
1. Focus first on funding a HOME program to directly help mortgage holders;
2. Once this is done, it'll be clearer which financial institutions are ailing but solvent (vs. insolvent) and therefore worthy of government support.
3. When that support is extended, taxpayers should be granted preferred shares that are "senior to common shares and other preferred shares (and carry a high enough dividend)."
These taxpayer shares, Roubini says, "should also be senior relative to all of the other creditors of the bank (with the exception of insured deposits)."
[T]hus, no more of the bailout of unsecured and sub-debt creditors that occurred in the case of Fannie and Freddie. Sub-debt holders of banks (and creditors other than insured deposits) should be appropriately whacked if needed to ensure market discipline and avoid future moral hazard [bolding mine].
Roubini also proposes ten steps that need to be taken to reform our financial system, including direct regulation of what he and others describing as our "shadow banking system."
http://www.rgemonitor.com/roub...
Roubini closes his article with the following:
[L]et us not delude ourselves that even a HOME program of debt reduction will prevent a recession: the recession train has already left the station and the economic downturn is already becoming global. What we can avoid now is only the risk that a severe US and now advanced economy recession will turn into a Japanese style decade long stagnation. Thus, the time of dithering and using band-aid to deal with the financial storm of the century is over and the time to act boldly is now! Lets create the HOME (Home Owners' Mortgage Enterprise) now!
I think this approach is not only the most effective way to deal with the problem, it has the potential to be extremely attractive to voters...a focus on helping Americans keep their HOMES instead of bailing out Paulson's pals on Wall Street, who need a very different kind of help--more like Gamblers Anonymous.
It is a fundamentally progressive solution in that it focuses on the many citizens who are suffering due to the recklessness of Republican lawmakers and the non-regulators they've appointed (and failed to oversee), and the wealthy elites that abused the license to make obscene profits. Then, when the drunken (Bush's term, not mine) party ended, these same irresponsible politicians and financial elites are scaring the American taxpayers and their representatives into paying to clean up the mess, even though they were never invited to the party (except perhaps to serve the meals and drinks).
And while focusing on providing help where it's really needed, it also seems reasonably likely that Roubini's plan could cost significantly less than the proposed bailout, since it approaches it in a more bottoms up way that more directly addresses its fundamental causes. At the least it would generate a lot more bang for the buck in terms of relieving real suffering. |
