White House Explores Aid for Auto Deal

I am disappointed to learn that the Administration is considering giving additional aid to the Automobile industry (White House Explores Aid for Auto Deal, New York Times, October 28, 2008: A1). An industry that, at least in Europe, has the technology to give us very fuel efficient cars but whose members have not seen fit to adopt this technology in the United States. As a result their sales have plummeted in the era of high gasoline prices.

The Administration, in its recent rejection of market forces, has forgotten the one thing that, in spite of its faults, the market does reasonably well: picking winners and losers.The market does this much better than politicians who are manipulated by industry lobbyists. Foot-dragging Detroit has proved to be a loser. The industry is no place for Government money to be invested.

There is a place for government money: to improve unemployment benefits for laid-off workers; to provide widely available retraining opportunities for laid-off workers; and to finance early retirement opportunities for older workers.

To encourage the development of non-fossil fuel energy, the federal gasoline tax should be raised. I can just see in ten years time the re-tooled former plants of the auto companies and their suppliers turning out wind turbines and photo-voltaic cells. This will lead to a true renaissance of Detroit.

Sent to the New York Times

Mortgage rescue plan will save your house but will cost you equity

I am surprised at the negative tone of Michelle Singletary's article on the new HOPE plan to save homeowners (Mortgage rescue plan will save your house but will cost you equity, Boston Globe, Business Section, October 19, 2008: G6).

She is correct that the homeowner will suffer some long term cost in having to share equity appreciation with the government. However the upside benefits to the homeowners and to society are enormous.

The homeowners get to keep their homes. They will have an affordable place to live for the foreseeable future. The will have the opportunity to build up some equity in their homes, a privilege that renters do not have. They will continue to be able to take mortgage interest payments from the income taxes that they owe, another privilege that owners do not have.

The continuation of residence in the same neighborhood will ensure that the neighborhood reduces the possibility of foreclosure blight that is beginning to afflict some streets in our towns and cities. For local and state governments, property taxes will continue to be paid on time. For those homeowners with children, their education will not be disrupted by a move to a new school catchment area.

All in all, I believe that the benefits of HOPE outweigh its disadvantages.

Sent to the Boston Globe

Op-Ed: A Different kind of Bailout. Cambridge Chronicle

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A Different Kind of Bailout

Martin G. Evans

Several weeks after Congress passed a $700 billion bailout bill, the world=s financial system is in chaos. Banks have stopped lending, stock markets are in free fall or fluctuating widely, and the rot is starting to infect the Areal economy@ where firms are unable to get their usual credit to carry out their operations. Layoffs and short time working seem to be inevitable.

The problem with the Administration=s original plan, buying the derivative debt of the banks to build up their balance sheets is that they are dealing with the phantom derivatives (monetized mortgages, credit swaps, and insurance contract) built upon the shaky foundation of bad mortgages. The Administration recognized this and last week moved to Plan B. They made direct investments in nine major banks. It now appears that the banks have used this money to reduce their leverage rather than to start making new loans to their customers. There is still a credit strike by the country=s bankers.

The place to intervene is with the mortgages themselves.

Senator McCain is partly right. The mortgages must be supported at their face value, not at the discounted value that many now have. Anything less and the banks would not be helped. They hold the monetized, sliced and diced mortgages at their face value and that face value has to be restored if the financial system is to be shored up effectively.

The small HOPE or H4H plan included in the bailout bill has it partly right but takes too big a share of any built up equity in the house and gives the lender only the discounted value of the mortgage rather than the full amount.

Senator McCain is wrong in his suggestion that the government buy up these mortgages. Rather like H4H plan, the government should enter into partnerships with the current mortgage holder. The current mortgage holder will pay an affordable amount each month; the government will become a co-owner of the mortgage and of the property and will pay the balance each month. Over time, both the property owner and the government will build up a proportionate share of equity in the property. Homeowners will be able to stay in their properties. This will contribute to stabilizing the housing market. The continuation of residence in the same neighborhood will reduce the possibility of foreclosure blight that is beginning to afflict some streets in our towns and cities.  For those homeowners with children, their education will not be disrupted by a move to a new school catchment area. Finally, it will maintain a flow of property tax money to the local governments who are already in dire straits as more and more foreclosures occur.

The one problem with this plan is what to do if the house is sold before the price reaches a state of profitability. There are two alternatives: the new owner should be able to take over the existing mortgage and the federal government’s partnership in paying the mortgage and ownership of the property; or the new owner can negotiate a new mortgage without the government’s involvement but the government will retain the percentage share of ownership that it has already accumulated and will benefit once the house price is “above water.”

Yes, this plan is more expensive than either Senator McCain=s or the H4H plan. But it will do the job of making the lenders whole and it is more generous to the homeowners when they have built up some equity in their homes. This will help them in their retirement years. Unfortunately, the plan will bail out the predatory lenders and the other scoundrels who have deceived us all, but that may be a small price to pay to save the world=s financial system.

OPEd: A Different kind of Bailout. Cambridge Chronicle

Here it is

The Bailout will not be Successful

The Treasury's latest plan (following the recent British action) of taking equity positions in commercial banks is yet another attempt to avoid dealing with the central problem that precipitated the crisis.

The plan is unlikely to be successful in injecting new equity into the markets and freeing up funds for lending. Like our $600 stimulus checks, the new funds will go to paying off old debts rather than resulting in new lending.

Furthermore with the government taking equity positions in the banks, the equity of current shareholders will be diluted. This will contribute to the stock market's downward spiral.

The solution to the crisis is to make the mortgages whole.

Sent to the New York Times

Op-Ed: Critique of the Treasury Decision Process to Decide the Bailout (Cambridge Chronicle)

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The fragility of the global nuclear order

I am horrified that Graham Allison, a Harvard Professor/Administrator, and Ernestino Zedilo, an IAEA Commissioner, managed to write a column about the Fragility of the Global Nuclear Order (Boston Globe, September 30, 2008: A11) without once mentioning the forthcoming treaty on nuclear cooperation between the US and India.

This horrendous treaty gives India a pass on the requirements of the nuclear non-proliferation treaty. They will receive nuclear assistance from the United States without having to comply. Today, your sister newspaper, the New York Times (A bad India Deal, September 30, 2008: A30) editorialized that passage of the treaty "would make it even harder to rein in Iran's (and other's) nuclear ambitions."

Your authors did your readers a disservice by failing to point out that with this treaty, the United States is contributing to the fragility of the nuclear world order.

Sent to Boston Globe