Fix mortgage problem, then blame

Posted on September 27, 2008

Before Monday Congress should enact a significantly amended (to protect the taxpayer) version of the "Paulson Plan" to permit the Secretary of the Treasury to buy and then sell troubled mortgage-related assets. This is necessary to unfreeze credit and make sure that Americans can secure car, auto, mortgage and student loans and cash their paychecks. What's the problem? People, businesses and even banks are hoarding their cash. For example, Volkswagen Credit Corp. borrows $300 million each month to make auto loans. If money becomes hard for Volkswagen (or Nissan or General Motors) to borrow, then you and I can't get an auto loan. If we can't get a loan, we can't buy a car. If we can't buy cars, there are fewer jobs making cars. The Tennessean reported Thursday that the State of Tennessee paid twice as much as usual for its short-term borrowing. What's causing this credit freeze? The biggest cause is mortgage loans that people can't pay back and securities based upon those mortgages. This has derailed housing, created problems for banks, spread uncertainty and caused people with cash to be cautious. How will the Paulson Plan help? The secretary of the Treasury will be able to buy enough mortgage assets so that institutions are strong again, will start lending again, and people will stop hoarding their cash. Won't this cost taxpayers a trillion dollars? No. The secretary could buy up to $700 billion in mortgage assets — enough to restore confidence — but he may buy much, much less. Over time, he will then sell these assets, hopefully at a profit, sometimes at a loss. My guess: Net cost to taxpayers will be $100 billion or less — two-thirds of what Congress spent in January on the economic stimulus package of tax cuts and rebates. How can taxpayers be protected: (1) Oversight by a tough board of directors. (2) Don't allow executives who caused the problem to get rich with "golden parachutes." (3) Give taxpayers an ownership position in some firms selling mortgages. (4) Let the Secretary invest $250 billion and then require presidential approval for the rest. (5) Limit the program to two years. And most important, any profits go to reduce the federal debt — not for federal programs. Can there really be profits? Yes. For example, many believe that the Federal Reserve Board will make money on the "AIG Bailout" because the Fed took warrants on 80 percent of AIG's stock in return for an $85 billion loan. Telephone calls to my office have been angry about this. I'm angry, too. But the callers' opinions have been changing, as have been the minds of senators. Most realize that credit is freezing, that we have to do this and we have to do it now — with as much protection for taxpayers as possible. Next week we can fix the blame. This weekend we need to fix the problem.