Quick links to a few of the suggestions out there on what to do about pending mortgage defaults.
In the early 1990s the government absorbed the bad debts of the failing savings and loan industry. Why is it possible to rescue corrupt S&L buccaneers yet 2 million homeowners must be thrown to the wolves today? If we can bail out Chrysler, why can’t we support American homeowners?
Yves Smith rather effectively demolishes this idea:
The US did bail out Chrysler, but not at any explicit cost to the taxpayer. The government guaranteed a Chrysler bond issue, and orchestrated a cram-down of other Chrysler creditors….
As for the Resolution Trust Corporation, that entity came into existence not to line the pockets of S&L buccaneers but to liquidate failed S&Ls in a orderly fashion. Let me stress that point: failed. The US government was on the hook for payouts to depositors, since these banks were members of the Federal Deposit Insurance Corporation. The RTC had conflicting objectives: to minimize its burn rate (it took working capital and walking around money to manage the assets the RTC absorbed), maximize returns, get the assets sold as quickly as possible (the overhang of bad thrift assets, particularly real estate, was a threat to sound institutions in the same geographic area as the failed thrifts).
…what Gross calls for is a massive redistribution from taxpayers as a whole to people who bought near the peak of the bubble.
I am among the many with serious doubts about the wisdom of the government quasi-guarantees that supported the government-sponsored entities, Fannie Mae … and Freddie Mac … But surely if there is ever a moment when they should expand their activities it is now, when mortgage liquidity is drying up. No doubt, credit standards in the subprime market were too low for too long. Now, as borrowers face higher costs as their adjustable rate mortgages are reset, is not the time for the authorities to get religion and discourage the provision of credit.
Greg Mankiw has this perspective on Summers’ suggestion:
This reminds me of Saint Augustine: “Oh Lord, give me chastity, but do not give it yet.”
I’ll be offering some of my thoughts at the Federal Reserve conference in Jackson Hole this weekend. But in the meantime, I’m interested to hear from our readers– what do you think we should do?