Tax rebates and interest-rate cuts like the kind being called for by government leaders won’t be enough to revive the U.S. economy, a tiny but growing number of voices is arguing.
Some financial experts say something more radical is needed, possibly similar to the savings-and-loan bailout, which had the government selling off troubled properties in the early 1990s.
“If we wind up with a recession, it will have less to do with housing and energy than the credit crunch that began in the first week of August,” said Lou Barnes, president of mortgage lender Boulder West Financial Services.
Barnes argued for radical intervention when the credit crisis first broke last summer. The deepening slowdown, manifesting in sharp declines in stock values this month, has brought others around.
Benn Steil, director of international economics at the Council on Foreign Relations, broached the idea in a Financial Times editorial in late December with Mark Fisch, a managing partner at Continental Properties.
“We believe that what is needed is a new Resolution Trust Corporation, based on the 1989 model that cleaned up the S&L mess,” the two proposed.
The RTC was created to liquidate assets backing troubled loans. Government intervention cost taxpayers $125 billion but avoided much more costly damage to the economy. In Japan, by contrast, bad loans were allowed to fester on the books, keeping that economy flat for more than a decade.
The new RTC would value and purchase deeply discounted mortgage-backed securities. If needed, it could also disassemble them and parcel out the collateral, primarily foreclosed homes, as quickly as possible, proponents argue.
By siphoning out the venom within the credit system, the economy should recover fast, at a minimal cost to taxpayers, they say.
But such a resolution would require a political consensus that likely won’t emerge until it becomes much more costly to implement, they say.
None of the presidential candidates has publicly supported the highly unpopular idea, much less the outgoing Bush administration, Barnes acknowledged.
Opponents of such intervention consider it a bailout that rewards risky behavior.
Why should responsible home owners be made to foot the bill in higher taxes for the blunders of irresponsible borrowers and lenders? asked Sanjai Bhagat, professor of finance and entrepreneurship at the University of Colorado at Boulder.
Savings and loans were under government supervision, creating an obligation for intervention. The private mortgage markets are another story, he said.
“There is no government obligation to bail anyone out,” Bhagat said.
But the Federal Reserve and the comptroller of the currency did fail when they allowed a “shadow banking” system outside of its control to thrive, backers of an intervention argue.
That system’s lax practices led to huge economic repercussions, Barnes said.
“You can’t trust lenders to maintain good credit standards,” Barnes said.
But that is exactly what regulators have done for more than a decade.
With investors uncertain of how to price securities on poorly underwritten loans, many credit instruments aren’t trading, leaving banks and investors unable to measure their losses.
The Federal Reserve has responded by pumping money into the economy and slashing interest rates, but lenders don’t know whom they can trust and remain hesitant to part with their capital.
Aldo Svaldi: 303-954-1410 or asvaldi@denverpost.com
Stimulus debate
Congressional leaders and Treasury Secretary Henry Paulson are narrowing their differences in search of a bipartisan economic-stimulus deal that could move swiftly through Congress:
What’s in
Tax rebates: Checks of at least $300 for all people earning a paycheck, including those who make too little to pay income taxes. Families with children would receive an additional $300 per child, while those paying income taxes could receive higher rebates. Rebates may be capped at $1,200 for couples with children.
Write-offs: Spurring business investments with so-called bonus depreciation, more generous expensing rules and a change to allow businesses suffering losses now to reclaim taxes previously paid.
Housing rescue: Allowing Fannie Mae and Freddie Mac to buy loans larger than $417,000.
What’s out
Permanent tax cuts: Republicans concede that cementing the Bush tax-rate reductions would have to be left out.
Unemployment insurance: Extending benefits past 26 weeks. The White House sought to limit extensions to states with unemployment rates above 5.5 percent.
Food stamps: Democrats give up a boost in benefits.
Medicaid: Democrats give up on including Medicaid payments to states.
Low-income heating subsidies: Democrats are surrendering the fight.
Infrastructure spending: Spending on transportation or repair projects already underway is off the table.
The Associated Press
