The government wants to buy up all bad loans

Some comments by Professor Allan Meltzer of Carnegie Mellon U. on a recent PBS nightly news program –

ALLAN MELTZER: Yes. I don’t want to join a debate about different ways of picking the public’s pocket. I think, if they’re going to do something — and I don’t think that we really need to do anything. I’ve heard these stories over and over for 40 years. You know, maybe there will be a crisis.

But despite all the talk, Main Street is not doing so badly. And the fact is that they’ve been predicting disaster since January. It hasn’t happened.

And if they’re going to do something, then what they ought to do is make loans, which the financial institutions have to repay with interest. And if you think — that’s an idea which the Chileans have used in a bigger crisis than this for them in 1982, and it worked for them.

People paid back the loans. They weren’t allowed to pay dividends until they repaid the loans. They weren’t allowed to take bonuses until they repaid the loans. I think that’s the way — if we’re going to do this, then that’s the way we should do it.

Putting limits on executive pay

JEFFREY BROWN: Professor Meltzer, are you concerned about rewarding the people who caused this, the trouble? Is that part of this? I mean, one of the questions or issues on the table we just heard on the tape is whether we should use this opportunity to put limits on executive pay, for example.

ALLAN MELTZER: Well, I don’t want to get into the distribution of income arguments that are so prevalent in the Congress. I’m against this mainly because it seems to me this is private interest activity at the expense of the public interest.

I mean, Mr. Paulson can talk about all the things that are going to be good for Main Street, but the fact is that Main Street is going to incur a huge debt and a big loss, for the reason that Paul Krugman just mentioned, because most of these assets are not worth much.

Well, let’s do loans, which they have to repay with interest, and let’s see what happens.

I know that many people think it can’t happen. But, look, today, Morgan Stanley sold 20 percent of its company to a Japanese bank. There’s lots of money out there, liquidity. The Chinese have it. Others have it. They’ve come in.

If the government steps aside and says, “Solve this problem,” then we’ll see more of that activity and people will begin to do it.

Merrill Lynch sold itself. It sold out some of its assets. It got 22 cents on the dollar. It’s correct to say nobody knows how to value these things, and they won’t know how to value them until the housing price reaches a bottom or is expected to reach a bottom, because you can’t value the mortgages until you know what the underlying asset, which is the house, is worth. And nobody knows that.

JEFFREY BROWN: … what’s fascinating and, you know, kind of scary for people at home is just the notion that nobody really seems — nobody really knows, so it’s a bet either way. You’re saying we shouldn’t take this kind of action, but what’s the alternative?

ALLAN MELTZER: The alternative, if we’re going to do something, it is to put them in the responsible position of borrowing the money and having to pay it back with interest. That’s how…

JEFFREY BROWN: But their answer…

ALLAN MELTZER: … we could go a long way to protect the interests of taxpayers.

JEFFREY BROWN: But their answer is that the repercussions are on the rest of us. That’s what we’ve been hearing.

ALLAN MELTZER: Well, you know, I just don’t believe it. It may be true. It may turn out to be true this time. I’ve heard it now for 40 years over and over again.

Whenever they want to make a grab of this kind and bail out their friends, that’s what they tell us. Well, let’s try, and test it, and see whether it really is that bad.

In a democratic country, we discuss these things thoroughly. We air the problems. We listen to various points of view. And we take our time about making decisions of this magnitude.

ALLAN MELTZER: May I just say one last thing?

JEFFREY BROWN: Well, OK, make it very briefly.

ALLAN MELTZER: Very brief. No one, no one has said this will solve the problem. No one has said it will solve the major problem in housing and finance.

As I’ve watched Paulson & Bernake calling for hurry-up action on this financial crisis bailout/massive power grab, I notice they say nothing about making the financial institutions involved PAY for the services the taxpayers will be providing them with by picking up their rotten loans.

Instead of giving them a free ride, why not make LOANS to them, with interest, like Meltzer says, which they have to pay back to the Treasury. Until those loans are paid back do not allow them to pay dividends or pay out bonuses to their employees or executives.

Then, as those loans are repaid, earmark the repayments to go into a special fund to put the Social Security & Medicare systems on a better financial footing.

Maybe some actual good could come out of this thing instead of merely preventing some theoretical financial disaster – which may not even occur or the Paulson/Bernake power grab might not solve, anyway.

So if the government buys my studen loan, does that mean I own it, and therefore don’t have to pay it?
I watched that same interview last night. I think he is right, make it a loan, make them pay the government back with interest, and set that interest at 30% maybe then we can work our way out of the national debt.

Well, we need to scrutinize the details of this bailout plan and make sure that the fundamental purpose is to restore the credit markets that froze last week , causing a global panic. Paulson and Bernanke argue that the economy is alrady verging on a recession; with clogged or frozen credit markets it could morph into a deep recession or worse that could cost the nation a lot more than the money involved in the bailout.

During the days of the early Great depression the Fed and the Hoover administration sat on their hands at the urging of conservatives and watched some 7,000 banks fail causing a vast number of people of all classes to lose their life savings. This ushered in the Roosevelt administration that found a way to prolong the Depression for about ten years. Bernanke BTW is an expert on the Great depression.

Meltzer is a fine economist whose view needs to be considered and respected, though , he is one economist; should his view be adopted and turn out to be wrong an exceedingly high price would be paid.

The real danger in my view is that the mainly Democrats and a few spineless Republicans, who are responsible for the lowering of mortgage credit standards through Fannie Mae and Freddy Mac , will make a Christmas tree of Paulson’s proposed bill.

At any rate, people need to think carefully about this matter and not jump to any hard and fast conclusions, though if the Congress dawdles on this much damage could be done.

An incisive summary of all this is the lead WSJ editorial today, The Paulson Sale Taxpayers are going to put up capital one way or another

Actually, Peter, Hoover did anything but sit on his hands; he was, according to Rothbard’s history of the Great Depression, convening groups of industrial leaders within a few weeks of the initial market shock. (available from http://www.mises.org for free) The Fed also had relentlessly inflationary policy throughout the Depression.

Which, ahem, suggests that the proposal may in fact deepen the problems by diverting resources from profitable enterprises to ones that are not.

Methinks that the Fed governors need to take a look at the data; throughout 1929, the Fed was keeping interest rates low, though to his credit, Hoover did recognize the time bomb in Wall Street investment loans and tried to dissuade them.

In other words, although Fed policy was not quite as inflationary in 1929 as it had been from 1920 to 1928, the money supply still rose, and while the money supply actually did drop in the Depression, it wasn’t for lack of trying by the Fed to boost it!

According to the data, Bernanke is wrong. Read Rothbard. 1929’s money policy wasn’t as loose as 1928’s, but it was hardly deflationary.

It’s the myth we’ve all been taught; the disaster of the Depression was due to Hoover’s inaction. Nothing could be further from the truth; the disaster of the Depression was due to Hoover’s action.

Anon (@14), I’d love to see a source for your assertion that Soros “has said he will do anything to elect” Obama.

And yes, I Googled it. The most authoritative source I could find was reader mail posted on the American Spectator site. … Yeah.

So back up your claim, would you? Thanks.