Rick presumes that this will be used to buy low-tranch mortgage-backed securities, but there was (and still is) nothing in the proposals to require this. If you go by the original proposal (which was the only thing floating around when I originally wrote that post) the Treasury is basically given complete discretion on the what, who, where, and how much.

There’s also no indication as to whether the price paid will be ‘market’ or ‘hold to maturity’ prices. That could make the difference between taxpayers ever breaking even on this deal.

The last thing I’ll say is that there was a radio interview a couple days ago with a former Japanese finance official (Japan basically went through the same thing a dozen years ago). His sentiment was that no amount of government interaction at this level is going to make much of a difference. Instead of freeing up the credit markets, what happened in Japan was that financial institutions hoarded whatever cash was thrown their way, if only to improve their balance sheets. Most sat on it for the next decade, leading to basic stagflation and caused deep structural issues in the Japanese economy that they still live with today (that’s how the infamous 0% prime-rate came to be — and even that didn’t help).

His point was that the best way to invest money is to do whatever it takes to bring up the value of the underlying real-estate, so all the securities that rely on it will rise as well — by doing the sort of thing that needs to be done to increase property values and reduce mortgage defaults. Offering incentives to builders and buyers, to get the real-estate pump going again so this stuff is worth something. That’s the only way you work your way out of the hole, not by handing off some cash to banks and hoping they circulate it.

Sounded like pretty good advice.

While this is unpalatable, and a direct cause of the Republican deregulation obsession, crony appointments of the Bush regime (anyone remember SEC Chairman Pitt, who had to resign under a cloud in the first Bush term?), and the misguided “mark to market” rules that forced firms to mark assets at 0 when credit seized up, the idea that this is a “phony baloney” crisis, and that it will not benefit families, the unemployed, retired folks living on market interest and gains, and stressed mortgage-holders, is simply incorrect. I agree with Dems that this needs significant oversight, foreclosure protection, and regulatory language that protects taxpayers in the event of profits, but a populist movement to stop this action would be a grave error, in my judgement.

Pelosi Statement on Legislation to Address Crisis in Financial Markets

Washington, D.C. — Speaker Nancy Pelosi issued the following statement today as Congress and the White House work to craft legislation to address the crisis in our financial markets:

“Congress will respond to the financial markets crisis by taking action this week in a bipartisan manner that will protect the taxpayers’ interests. The Administration’s $700 billion proposal does not include the necessary safeguards. Democrats believe a responsible solution should include independent oversight, protections for homeowners and constraints on excessive executive compensation.

“We will not simply hand over a $700 billion blank check to Wall Street and hope for a better outcome. Democrats will act responsibly to insulate Main Street from Wall Street.

“As we proceed to deal with this crisis, this is clear recognition that the party is over for the Bush Administration’s anything goes, failed economic policies that have damaged our economy, undermined the middle class and further pointed out the need for a New Direction.”

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We do not appease economic terrorists.