Tag: Alternatives

Plan A, Plan B

We’ve been getting quite a few questions about our views on the big picture.  Let me try to set this out clearly, in terms of where we are (September 27, 2008, early Saturday morning) and where we are heading.

Let’s call the $700bn package currently under discussion Plan A.  Despite the roadblock thrown up by the House Republicans, we think some form of this plan will pass Congress soon, and so it should.  The situation in the financial system is serious and inaction would be a recipe for disaster, especially now that the government has created the expectation of action.  We are also of the view that the package could have been better designed (e.g., we emphasized governance and transparency in the articles posted here).  And we are encouraged that its design has improved this week, at least in the draft agreement of Thursday afternoon.

Plan A is obviously not comprehensive, and again we’ve covered the two main missing issues (a direct approach to defaulting mortgages and deficient bank capital) here and in various other on-the-record remarks.  (We’ll post more of these to help complete the picture regarding our views.)

If Plan A comes out of Congress in reasonable shape, as seems likely, we will support it.  We need it to work.  But we also need to start discussing what would have to be done if Plan A does not work, or if the cracks now visible in the global financial system continue to widen.

Yes, we need a Plan B.  Even if the odds of success for Plan A are high (ask us again on Monday about that), it makes sense to plan for contingencies.  And we really don’t want to repeat the experience of this week, in which the initial proposal is weak and has to catch up with economic and political realities in a hurry.

And it strikes us that the discussion on Plan B needs to be public, in places like this.  This does not undermine Plan A, in our view, because Plan B will not be so difficult.  It will not be business (lobbies) as usual, but it will be doable.  Our submission, longer than 2 1/2 pages, will be up here by 9am Monday, Washington time, at the latest.

The Feldstein Proposal

There’s a resurgence of interest in the proposal originally made by Marty Feldstein.  The link to his recent Financial Times piece is here.  He wants the Treasury to borrow and on-lend to homeowners, in a way that would improve their cash flow and make it easier for them to avoid defaulting on mortgages.  Of course, anyone who participates would reduce their mortgage (a claim on their house) but create a debt to the government (to be collected, if necessary, by the IRS.)

I must say that I find this broadly appealing, in the moment we now find ourselves.  I know it doesn’t address mortgages already in default, and there are many questions about how it could be implemented.  And I agree that Congress, at this juncture, would need a lot of convincing.

Still, it’s one way to use the Treasury balance sheet to directly reduce likely mortgage defaults.  And, if it’s part of a comprehensive approach (including recapitalizing banks), I think this general approach could make sense.

I hope others will post reactions, or links to any variants with plausible details.