Saturday, September 01, 2007

The Big Sub-Prime Bailout Game

It seems that everybody is trying to sort out the justice of the situation. People see empty neighborhoods with unkempt lawns and they want to help, it's only natural.

Bush: Nobody did anything wrong, there's just a confidence crisis keeping people from being able to re-fi. In this sense, this is the most blissfully academic conventional macro solution because it looks at the whole situation as composed of undifferentiated perfectly uniform economic quantities like interest rates and monthly payments.

Bernanke: Bernanke thinks that again no one should pay it's just that whoever bought the MBS paper got too smart and got scared and we need to add more complexity to get the con-job started again.

Obama: Think that obviously it's the financial industry that is to blame. He is right about the perpetrator but wrong about the victim. The borrower got to live in a nice house they would never be able to otherwise afford for a couple months and got tons of money for toys via home equity. Ruined credit ratings aren't that big of a deal, especially if it happens to everyone else at the same time. The real victims are the foreigners who bought all the loans.

Pearlstein: Pearlstein thinks that a mortgage is a kind of progressive income tax that is paid to banks and should be apportioned by income. He doesn't know yet that someone on the other end of the liar loan deal plunked down $500,000 because they had an open order to buy anything moody's said was AAA paper and doesn't think they should be getting such a painfully low ROI on their money when there are plenty of other investments like U.S Treasuries that yield better.

The real just solution would be to have the foreign banks, hedge funds, pension funds, etc owning the houses, the brokerage firms, the ratings firms, the banks, the conduits and everything in between. They'll only get 50 cents. The big problem is is that during the global savings glut all the global money managers had too many dollars flying around and couldn't figure out what to do with them all. Nothing could absorb all those dollars so they just plowed them back into the U.S markets. They should have all just stayed in cash but hey, they are fund manager and so they have to manage.


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