September 24, 2008
I Have a Financial Dream
In Thursday's New York Times is a very useful story, the first story I've seen that actually digs into the investments of a particular firm, using numbers to explain the challenges of arriving at an accurate value for the homes underlying the mortgage-backed securities.
But I think we can do it.
I'm thinking about the country's response to the terrorist attacks seven years ago, and the mobilization of the private sector and citizenry when the governments failed us in Katrina. I lived in downtown Manhattan in September 2001. The way that we responded will stay in my memory more strongly than the attacks themselves.
You can't tell me that we would not be able to come to a fair valuation for most of these assets if it was the highest priority. We could supply enough credit in short-term no-interest loans to keep the oil in the financial engines for a week or two while we put the country on an economic war footing and flooded the housing markets with unbiased experts called on to serve, to come up with a fair medium-term value for every house at risk. Then feed that information up the chain.
A massive project, but doable, especially with modern information technology. This is the same country that 67 years ago totally transformed its economy to equip the Allies with the materiel required to win World War II. This country has so many great stories to offer the world - let's give it another one.
But it's not a high priority, because if we can actually arrive at a fair number, it's likely that the number will be too low for the financial companies' liking. The administration wants to be able to get away with buying assets from the firms at a price near the firms' most wishful valuations. Fed Chairman Bernanke said that we should be buying assets not at current value but at hold-to-maturity value, or what we think they might be worth when the markets recover.
That gets the financial companies more off the hook and gives them more money to put back into the credit markets (or, we worry, their pockets). An argument can be made that if the Treasury buys these assets at bargain prices the firms won't get enough cash to be able to recover. So then find some creative path, mix a sale package with loans that have repayment terms such that companies have a chance to recover and then re-pay the Treasury at higher rates down the road when the firms are able to profit on more sound risk-reward decisions.
This is a much more sensible way to "punish" the financial firms than to try to restrict or take back the compensation of the CEO's, which is understandable emotionally but can't be legal and would certainly lead to lawsuits that would drain energy and probably cost us all a lot of money. Don't banish the financial leaders to their villas in Grand Cayman. Compel them to become part of the solution.
There is an opportunity here not only to cleanse the markets of all the garbage from the last six years but in fixing the problem to choose a path that demonstrates a new and better way to mix government and the private sector, to pull us together, to make all of us richer in more ways than one.
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