Well thought out post to which I must reply point by point:
1) The problem is not liquidity, it’s velocity. The Fed is pumping money into the economy but the banks are sitting on it. If people could get loans they’d refinance to be able to make their payments. Mortgage lenders and banks would take their closing costs and pass the mortgages up the chain. Mortgage lenders and banks would then have more money to lend to new homeowners. etc.
2) Sub-primes, for the most part, have already been digested. The ones that were going to fail have failed. We are now entering into the Alt-A portion as longer term ARMs start kicking in. Then will be primes as people who are underwater (negative equity - usually from maxing their equity lines of credit and then watching home prices drop) decide to bail. Each of these two latter groups represent a larger portion of the total mortgage market, but a much smaller risk of default than the sub-primes.
3) Freddie, Fannie, Moody’s and S&P all share blame in first packaging those securities and then rating them AAA. There’s no way they were AAA. Call it your Democrat corruption machine at work. At the end of 2007, the spread between sub-prime and prime loans was down to less than 1%, ignoring the fact that the known default rate spread then was closer to 10%.
4) I’m not against a bailout per se to avoid another great depresson. I’m simply trying to put a number on how large the bailout needs to be. Of course the price we are paying for staying home in 2006 is that the Dhimmi controlled congress who caused the problem in the first place will end up doing more harm than good.
5) Credit card debt will be a problem, but if banks had some liquidity, they could refinance that debt at current interest rates. Don’t tell me they wouldn’t rather you continue to pay your unsecured debt at 9% (instead of the 25% you may be paying now) rather than have you declare bankruptcy and just walk away.
6) Panic. Panic caused by uncertainty. So pull a number out of the hat and call that the value. Now you need some serious chops to be taken seriously when you do that, but I think that was what Paulson and Bernanke were attempting to do. Give the debt a value. Any value. But make it stick.
1- I was referring to illiquidity of mortgage-backed securities. The Fed is making loans to banks, but that doesn’t help their capital impairment problem.
2- You missed the point about the “digested” loan writeoffs having already caused capital impairment.
3- I don’t disagree with your finger-pointing on blame and as everybody knows the ratings were downgraded, but it has nothing to do with the point I made.
4- The truth is, there is no single amount that can be ascertained as the precise fix. The bailout plan itself depended as much on indirect effects in putting a floor on the value of the securities and encouraging trading activity generally in this market as it did on the direct effect of exchanging those particular assets for cash.
5- The question of whether an individual bank is or is not taking what you or others might consider to be a smarter approach to its defaults on its particular portfolio of credit card debt is not a central question in the crisis.
6- You are absolutely correct in the importance of psychology as a factor in the situation. A number of alternatives might work. The House Republican insurance scheme could be made to work. One economist has suggested rights offerings by the undercapitalized banks backstopped by the US government.
One thing someone might take from your original post is that the problem is least costly if tackled from the bottom of the pyramid, at the individual mortgage loan level, rather than farther up the pyramid at the level of banks’ holdings of mortgage-backed securities. To my mind that is clearly correct, but would require a much larger government bureaucracy and a more profound interference in the markets.