From: Council on Foreign Relations
By Benn Steil, CFR's senior fellow and director of international economics, discusses what he sees as positive and negative aspects of the plan. Steil says the "basic idea" of establishing an institution along the lines of the Resolution Trust Corporation (which was created in 1989 to liquidate assets, including distressed mortgage loans, from troubled U.S. savings and loan institutions) is a good one.
But he also points to several potential problems. First, he says, the bailout that's currently being proposed is "utterly enormous" and will add "very, very significantly to the U.S. national debt."He says the fact that the Treasury is considering buying up all sorts of distressed assets ( this is the DAMNED banking lobbyist at work. G. ) is "quite dangerous," and the plan should be limited to debt from mortgages. "A lot of these assets [that the U.S. government might buy under the current plan] are very complicated and exceptionally difficult to value," he says, adding the plan "could wind up leaving very bad assets on taxpayers' balance sheet for a considerable period."
This, he says, stands to have a broad impact on the valuation of the U.S. dollar, with potential ripple effects throughout the global economy.Steil proposes a different plan. Under his plan, financial institutions that wanted to sell mortgages would come to the Treasury, ask for their mortgage-backed assets to be evaluated, and pay a fee to have them evaluated. The Treasury would then classify the assets based on the evaluation and would offer to buy the assets at prices based on what tier they are in. The firms holding the assets would then be able to choose whether to sell them to the federal government, or could attempt to sell them to other investors through the open market.
Originally published at https://warintel.blogspot.com/2008/09/good-and-bad-of-bailout-plan.html on September 30, 2008.