Thursday, September 25, 2008

Why the McCain "insurance" plan is a bad idea

Here's the problem with an insurance approach to the present banking crisis.  The notion here is that the government will insure mortgage products, charging a premium for doing so.  The thing is, these banks are holding mortgages that they are ready to default on.  If you offer them insurance on those mortgages, and the premium is less than their expected loss in foreclosure, they will take the insurance and foreclose as soon as the terms of the insurance allows them, divesting themselves of the unwanted mortgage and walking away with the profit.  The feds end up holding the bag for the loss, and the homeowner ends up evicted.  If, on the other hand, the premium is priced so as to make the cost greater than the loss, the banks will simply not participate, and the bailout does no good.  Either way, it's a blindingly stupid idea.  The reason McCain and other Republicans are backing this is that it is a convenient vehicle for corporate welfare (which it quite clearly is), and because it avoids the bugaboo of government ownership of banks, which has been a taboo in American politics since the middle of the 19th century.

There is simply no way that the McCain proposal can end up revenue-neutral for the government.  The administration proposal and the Democratic proposal, as I understand them, are both similar enough to the Stockholm Plan that there's at least a chance of revenue neutrality, even profit in the long term.  McCain's idea is simply utterly daft.

I can't believe we're letting this clearly barmy old geezer disrupt what were obviously productive negotiations.  Thanks to his self-centered meddling, which is clearly intended as some sort of long-shot gamble to save his increasingly bizarre candidacy, instead of having a plan that had a good chance of passing both houses of Congress and getting a Presidential signature, we have nothing.  I don't want to think about how far the market will drop tomorrow now.

1 comment:

  1. Although a long time passed since this blog was posted but even then its worth reading.the way its presented is good although a bit aggressive.

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