One must gaze in wonder at a country which works for a couple of weeks on a plan to save the nation's economy and passes into law something which the vast majority of authentic economists claim cannot solve the problem it supposedly addresses. The most obvious deficiency is one I have seen described as its inverted methodology: the plan will buy up "troubled assets" from purchasers who hold mortgage-backed securities, on a worldwide basis, in order to establish a floor for the price of such esoteric obligations, and also to take them off the beleagured books of the banks and other holders. The solvency of the banks will thus improve, since their asset-to-liability ratios will improve, and that will allow and encourage them to start lending again.
As the numbers people point out, however, this relief applies to a snapshot in time. TARP throws a blanket over the problem as it exists today; however, the underlying problem, the sinking housing market, will produce more "troubled assets" tomorrow. It is as if an economic tide is ebbing slowly away from shore and revealing in its wake more toxic crud: old tires, beer cans, lawn chairs, coolers, plastic bottles, Jimmy Hoffa. All that flotsam & jetsam are the American houses losing equity, shedding loan to value ratio, moving toward foreclosure. In a few months billions more in mortgage-backed securities will begin to deteriorate as housing prices drop another few fathoms. Subprime was first revealed, then alt-A, then jumbo prime, then prime. With a 40% drop in housing prices to take us back to 2000 prices, we're going to be looking at a lot of dead starfish.
So the sensible and humane thing to do is to work from the other end. Bail out the homeowners. Restructure their loans, reduce their principal, alter their interest rates, and reimburse the mortgage holders for that modification. The government could arrest the erosion of home prices by keeping people in their houses. The market would not be flooded with abandoned houses. Prices would begin to stabilize and the regular payment of mortgages would resume.
The problem, of course, is ideological. That looks too much like what FDR did in the 1930s because that's more or less exactly what the New Deal provided. George W. Bush would then buy into a "socialist" program of government-subsidized housing. It doesn't matter if it would work; indeed, the problem for Bush & Paulson is that it would work. It is exactly the same problem as the gargantuan military budget. Of course we can't afford such a huge outlay and these unnecessary wars; but once we begin to slash military spending we will have to admit to ourselves that the American Imperium is at an end.
So it is a kind of national narcissistic disorder which makes us incapable of enacting real solutions to the actual problem. The wound to our self-esteem is too great; we're not "Exceptional" anymore if we can't be a big military power with capitalist-only institutions. There are, as they say, 545 people who run the country. Congress (535), the President (1) and the Supreme Court (9). With the exception of a few ethical practitioners like the wondrous Bernie Sanders, the pugnacious Pete Stark, the steadfast Mark Feingold and Patrick Leahy, you simply never hear anyone among those 545 (and I sadly must include Barack Obama and Joe Biden) talk any sense about what really needs to be done. They can't; it's considered bad politics in America to tell the truth about where we are. So we're trapped. Even when pressed for solutions on an act-or-fail basis, we choose failure because we have worked our way to a psychological impasse which forecloses an honest assessment.
Our failure to adapt, which has doomed so many species who could not adjust to a changing environment, is about to exact its Darwinian price.
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