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Wednesday, October 8, 2008

McCain’s Insanely Stupid Bailout Plan

posted by on October 8 at 11:40 AM

During last night’s debate, I was astonished by the stupidity of McCain’s plan for dealing with the mortgage crisis.

Don’t take my word for it. Here’s University of California Berkeley professor J. Bradford DeLong’s take:

* The Paulson Plan: Have the government buy up distressed securities at market value, thus reducing the supply of high-yield debt securities that the private sector must hold. When you reduce the supply of anything you raise its price. Hence the Paulson plan’s $700 billion purchases will push the prices of risky debt securities up, and so companies will then be able to sell their bonds again and so hire more workers, and depression will be averted.

* The Elmendorf Plan: Have the government directly invest in and take an equity stake in troubled banks, thus reassuring their depositors and creditors that they are sound. The banks will then be able to profit by buying up distressed securities—hence raising their prices—and by directly lending to companies that will then be able to hire more workers, and depression will be averted.


The McCain plan is:

* Take $300 billion.
* Pay double current market value to banks that have troubled mortgages on their books, thus:
o Give a present of $100 billion to the bankers who made the loans.
o Acquire and regularize the mortgages of only two-thirds as many homeowners as could have been accomplished if the $300 billion were invested wisely.

There’s a big difference here: Democrats want to prevent depression and support the financial markets by investing taxpayer money in banks with troubled assets. Republicans want to give taxpayers money away to the shareholders and managers of banks with troubled assets.

I would say that this is unbelievable, but I do believe it.

Cronyism, indeed.

RSS icon Comments


At least he didn't propose in injection of ball-and-paddles. In lieu of pay.

Posted by sw | October 8, 2008 11:55 AM

Or infusion.


Posted by sw | October 8, 2008 11:59 AM

Somebody better go back and get a shitload of dimes.

Posted by Jonathan Golob | October 8, 2008 11:59 AM

I get the feeling that when he announced his "plan" it was after the same consideration and due diligence that he announced Sarah Palin as his running-sore, er... mate.


What a maverick!

I'll bet his handler were back stage looking at each other and saying "he wants to do what now???"

Posted by Al | October 8, 2008 12:02 PM

Point of order: it's BerkelEy, not Berkley.

Posted by kebabs | October 8, 2008 12:06 PM

Thanks kebabs. I've made the correction.

Posted by Jonathan Golob | October 8, 2008 12:11 PM

You missed the best part: he also promised a spending freeze. Right after admitting that, yes, this plan would be really expensive.

Posted by Fnarf | October 8, 2008 12:15 PM

"We've gotta protect our phoney-baloney jobs, gentlemen!"

---Governor William J. LePetomane

Posted by flamingbanjo | October 8, 2008 12:17 PM

Proof positive that McCain's advisors' plan is way less likely to work than the other thing that is unlikely to work.

Posted by tomasyalba | October 8, 2008 12:26 PM

Is 300 billion even enough? It should be enough to cover mortgages that are currently in default, but what about over the next several years as ARMs continue to readjust?

Posted by keshmeshi | October 8, 2008 1:23 PM

I kind of like the ides of exchanging Treasury debt for mortgage debt. Essentially go to the holders of these bonds and replace them with a treasury bond that has the same, or less yield (the risk however would all but evaporate).

The government could then refinance people where possible and foreclose those that are never going to afford to pay what they owe, with relocation assistance. The government can then slowly release these homes onto the market.

The government could then back the securities they now own rendering useless all the credit default swaps purchased on them. Over time these new G-MBS could be resold onto the market.

If done right you would help stabilize housing, remove this bad debt from the system, and avoid the catastrophe of CDS. We could then regulate the fuck out of this stuff.

Posted by Giffy | October 8, 2008 1:57 PM

Oh and the payments received from the home owners would pay the debt on the treasury notes.

The estimated about of new treasury bonds needed would probably be around 10 trillion, offset by a roughly equal amount of mortgage bonds now held by the government.

Posted by Giffy | October 8, 2008 2:00 PM

"Work, work, work. Work, work, work. Work, work, work - hello boys! Have a good night's rest? I missed you!"

Posted by COMTE | October 8, 2008 3:22 PM


That's an excellent idea, but it's probably the last thing this government is going to do.

Posted by keshmeshi | October 8, 2008 3:39 PM

Mmm, Giffy, but isn't your "never be able to pay what they owe" group based on the assumption that the houses they borrowed too much on are in fact worth what they said they were? It's pretty obvious that they aren't. So if you have a defaulter who couldn't make the payments on his $400,000 mortgage, would he possibly be able to successfully make the payments on a $200,000 one? Since, in the worst of these cases, in the Imperial Valley, Arizona, and Florida, that seems to be about what the real difference is.

If you just foreclose on them, you're stuck with houses that are worth half of what you think they are, and your pool of potential buyers is hugely reduced (no foreclosed borrowers are going to be able to get loans for ANYTHING nowadays). So the government's going to be sitting on all this inventory, which is going to rot away, thereby destroying the property values of the neighbors who AREN'T defaulting, until the entire region is basically for the wrecking ball.

Just thinking aloud here.

Posted by Fnarf | October 8, 2008 3:40 PM

I thought that his plan sounded like something that the FDR administration did during the depression.

Although I'm sure the crucial difference was that the FDR plan was actually intended to help people, while the McCain plan is intended to somehow screw people.

Posted by Catalina Vel-DuRay | October 8, 2008 3:41 PM

@15, But that's happening anyway. These people are going to lose there homes whether its the government that forecloses or a bank. This way we could at least save the people who might not be able to afford their 10% ARM but could afford a 6% 30 year fixed. We could also smooth the transition for people.

And unlike a bank the government could say, rent the houses out. Just turn them over to property management companies and slowly unload them over the next decade.

Ideally you not only decrease the number of foreclosures but stop the glut of houses flooding the market.

Posted by Giffy | October 8, 2008 3:53 PM

Were is the money going to come from???

It is shame that most Americans have no clue as to who in our government spends our money.

Is it the President??? No. It would be
Congress and not a dime is spent with out their vote.

So first, if you would like to fix the problem that we are in today, you must look back at who has been in charge of spending
our money???


Obama and McCain are in Congress. LOL.

So any one who thinks the next President
is going to be able to change our spending ways,
well they are not very educated. If you really want change, You need to change who is in control of congress/our money.

Posted by rich | October 9, 2008 7:24 AM

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