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Billions From Heaven

I keep reading about the Republican Eric Cantor's plan being better than Paulson's Folly because it says banks, financial firms and other investors h

Crisis I keep reading about the Republican Eric Cantor's plan being better than Paulson's Folly because it says banks, financial firms and other investors holding toxic mortgage securities would pay premiums to the Treasury to finance the insurance coverage. The idea is that institutions holding higher-risk securities would require higher premiums and the whole thing would involve the investment houses forking over instead of the taxpayer.

Huh? This whole plan relies on most people thinking "insurance" just flies out of the heavenly spheres fully formed. But no-one knows how much these toxic debts are worth and it seems to me that if no-one can set a fair price for buying them outright, then no-one can set a fair premium for them. The premium, following good insurance practice, given that these debts are toxic and pretty much certain to result in payouts anyway, should be as near to the costs of just taking them on outright as makes no difference anyways. Think of it as just a form of gambling - you don't give decent odds to someone betting on a sure thing. That is, the costs of insurance will be exactly the same to the taxpayer in 2008 dollars as the costs of the Paulson bailout - just kicked down the road instead of right now. By which time, inflation and prospects for the dollar being what they are, they'll cost one heck of a lot more. And along the way, the Republican plan will have drained some more liquidity out of the financial system and helped finance house along the road to insolvency as the banks will have to reserve money to pay premiums that they could be lending to Main Street USA at financially sound terms instead.

Worse, it has been suggested that some of the toxic debt might not be so toxic after all and that some might even show a profit if the Treasury could "hold to maturity". If so, Cantor's plan really is outrageous because it would let the finance houses keep the profit for such while the taxpayer indemnifies them for the bad. And if the banks can in any way identify which portion of their toxic debt might be good at "hold to maturity" prices, they don't even need to pay the insurance premiums on that portion. The manager of the country’s largest bond mutual fund thinks his team can indeed seperate the truly bad from the potentially good, and has offered to do the job for the Treasury for free.

It looks like a political shell game to me, relying on common ignorance about insurance to push a plan that is actually functionally worse than the one it would replace while having almost exactly the same long-term costs to the taxpayer, only disguised in the short term for the GOP's political advantage. "Look how much we saved taxpayers!" It would also, according to Cantor's bullet points, remove " regulatory and tax barriers" - the same old Republican mutton dressed as lamb.

The other Republican plan floating around - that there be less regulation, more tax cuts and a suspension of capital gains tax for assets that are worth less than paid for them - is just dumb economically. It's a transparent attempt to hand ownership of the crisis to Dem's by throwing a spanner in the works then proclaiming loudly that they preside over a "do nothing Congress" and have wrecked the economy by their failure to act.

Warren Buffett today was quite clear where that kind of petty political obstructionism is going:

“We are looking over a precipice in terms of the economic condition of the country for the next few years,” Buffett said during an interview on the Fox Business Channel. “If Congress doesn't help us on this, heaven help us.”

So we have two alternatives, because Paulson's Folly really is dead. The Republican alternative calls for kicking the can down the road, increasing taxpayer costs thereby, making no meaningful plans to regulate financial services and even so leaving the taxpayer empty-handed at the end of it all. The Dem plan puts the costs up front but in tranches so that no-one is running away with taxpayers money without accounting for it and leaves the taxpayer owning a sizable chunk of admittedly partially damaged banks. Where's the debate?

Crossposted from Newshoggers

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