Got A Better Idea?
The new US Treasury Secretary, Tim Geithner, announced his reworked financial-sector bailout plan today, with the main headline being its projected $1 trillion price tag.
In case you’re still keeping track, we are now at a minimum, conservatively, of $2.3 trillion just in the past two months for the various bailout plans.
Now, as Geithner has correctly identified (the first Washington official to do so, as far as I can tell), the root of the problem is the huge mass of so-called toxic mortgage-backed securities*. But his plan, weirdly, doesn’t directly address that connection.
To put the numbers into perspective, let’s do some math. Around 3 million homes were in foreclosure proceedings during 2008, on top of a million or more in 2007. Foreclosure is a process, not an event, and it can take months, so some of those might be double-counts. Still, let’s say we have 3.5 million foreclosures, and that that number is a reasonable proxy for the total value of “toxic” assets in the banking system.
The National Association of Realtors says the current median home price in the US is $200,000. That’s for houses that actually sell, so it’s likely a bit high for a foreclosed property, which on average will have sat vacant for months and need several thousand dollars of repairs to be marketable.
3.5 million X 200,000 = 700 billion
That’s an astronomical number, but it’s still just 1/3 of what we’ve committed to spend sofar to treat the symptoms caused by the toxic assets sitting like a lump of mucus at the bottom of the financial sector’s collective throat. And we shouldn’t need to buy them all. Even half the total should be sufficient to give banks confidence that other banks aren’t going to suddenly collapse tomorrow. And the nice thing about owning real estate is that someday you can sell it and break even – or better. So the ultimate cost to the taxpayer of simply buying toxic mortgage-backed securities could range from a small loss to a small profit. Still, I’m talking about an initial cash outlay in the neighborhood of $500 billion, so let’s go with that number.
Sound better than $2.3 trillion?
UPDATE: Administration officials met with laughter while explaining Geithner’s plan to Congress. At this point, the mere fact of Congress being against something might be a reason to take a closer look, but it seems they were laughing specifically at the idea of “guaranteeing” toxic assets. I probably would, too. Not good.
* Roughly, the problem is that there isn’t a 1:1 correspondence between mortgage-backed securities and actual subprime-financed dwellings, so it’s difficult or impossible to nail down the exact value of the securities. What the big banks do know is that they all own enough of them to turn the bottom line red, and that several formerly respected institutions have already gone under without warning. That’s why the credit markets are “frozen”. You can’t lend money to someone if they might be flat broke or even dead tomorrow.