Cross-Posted From TPM
Though it is hard for Democrats to swallow, we have to step up to the bailout. And if the bill is written well, it won't be as bad as you think.
This crisis does confirm that Bush is the Worst President Ever, and it might not be a bad name for the legislation. But Democrats do have to show they can govern in a crisis. Taxpayers won't be much hurt, and fatcat bankers won't be much enriched, as long as the legislation is written so that the government buys mortgage bonds for value.
Let's say a car dealer is in financial trouble and needs to get rid of his inventory. It's your job to go there and make an offer. He has a few current models in pretty good shape, so you offer 85 cents on the dollar for the wholesale price. He has a Hummer that has been on the lot for a year and a half, so you offer 35 cents on the dollar. You give him $200 each for two 10-year-old Toyotas, and you don't buy the cars that don't run or don't have good title.
The car dealer is neither enriched or empoverished by accepting your offer. He is more liquid. He can take the money and pay one of his bills. You are not enriched or empoverished by the deal. If you bought right, you can sell your carss for a little profit.
In a similar way, we have to make sure the bailout legislation buys mortgage bonds for value. That way, it won't enrich the banker, or empoverish the taxpayers.
First, let's look at what the taxpayers will be buying. Let's say that within a brief period about two years ago, 1,000 people closed on new houses, taking out $200 million in mortgages. Someone bundled the mortgages and sold the interest payments to one group of buyers and the principal payments to another.
Let's say Goldman has bought $10 million of the principal bonds. Since then, things haven't been good for this group of homeowners. A few have been transferred, repaid their loans, and Goldman already received its share of that principal. Another 20% of the houses are in foreclosure. Prices have dropped, and some homes are not worth what is owed on the mortgage. Goldman would like to sell its bonds at a steep discount, but nobody wants to buy.
So the federal government steps in and says it will buy $10 billion of mortgage bonds on Friday, and asks for offers. Goldman offers its bonds in this series at 32 cents on the dollar. Merrill, which originally bought $25 million, offers its bonds at 39 cents on the dollar. Citibank, which bought $5 million, offers its bonds at 53 cents on the dollar.
The government decides to accept all offers on this bond below 35 cents. For other bonds, the government might not know enough yet to accept any offers.
The government sets up another auction and goes through the process again, as long as bonds are offered at a price at which the government wants to buy. When there are no more good offers, the government stops the auctions.
Just like the car dealer, the bankers are not financially enriched or empoverished by the transactions. They are more liquid. If they have enough money to pay their bills, they can operate. If not, they can close.
As long as the government has not overpaid, it won't lose much money. The key is to make sure the government gets value for what it pays. An auction format would help to do that.
This could be sweetened by offering stimulus cash to Americans, and offering incentives for fuel efficient cars built in America.
Though the Republicans are totally discredited, the Democrats will have to demonstrate they are ready to govern. It should be clear to everyone that Bush/McCain made this mess and the Democrats are cleaning up after the worst president ever.
Please don't be mad at Obama and the other Democrats when they step up to lead the country through this Republican-made crisis.