Is a $400 billion (with a bullet, it seems) taxpayer bailout of homeowners on its way? One school of thought, promoted by columnist Holman Jenkins in today's Wall Street Journal, posits that since the Federal Reserve has now made it clear that it will "step up and prevent price-crashing fire sales by illiquid institutions," the credit markets may begin to slowly defrost. And since the main reason many on Wall Street have been pushing for a bailout is to bring a sense of certainty to the markets, an expanded federal effort on the housing front—such as creating new government-backed mortgages for struggling homeowners and paying off lenders to prevent a tsunami of foreclosures—may no longer be needed. Holman concludes thusly:
The test of the Fed's latest action will be if oversold mortgage debt begins to look like a mouth-watering opportunity to Wall Street sharpies. Then we're out of the woods. If not, the chorus for a federal housing bailout will quickly become irresistible, since leaving Mr. Bernanke to fight the problem single-handedly would be to invite an inflationary crisis on top of a mortgage crisis.
But I think we may already be in the "irresistible" phase of things. Indeed, Jenkins's own paper today reveals the following:
The Bush administration and congressional Democrats have begun negotiations over a plan designed to stave off hundreds of thousands of home foreclosures. After months of stalemate—and a week of financial turmoil sparked in part by the housing crisis—the White House signaled yesterday that President Bush is open to compromise with Democrats, who want more federal action. Rep. Barney Frank (D., Mass.) said his aides are holding discussions with Treasury Department officials.
See, the Fed's actions, rather than a momentum killer, have actually made a homeowner bailout more likely by making it seem that Uncle Sam is already bailing out Wall Street. And what's good for Wall Street is good for Main Street. Fair's fair, after all. Just look the sort of questions that White House Press Secretary Dana Perino got at her gaggle with the media on Monday:
Q: For people who are losing their homes, or losing their jobs, and then they see the government helping engineer this $30 billion line of credit for Bear Stearns, and help for other financial investment firms on Wall Street, how do you reconcile the two?
Q: But people who are facing, say, foreclosure, the individuals, the little guys who are facing a foreclosure are looking at the big guys getting government, if not brokered, certainly they're overseeing deals that are engineered to sort of keep the big picture financial community afloat, and they're saying, well, where's my boost of liquidity?
Q: The President, in his radio address Saturday, said that the housing crisis was the root of a lot of the troubles. Mr. Frank and Mr. Dodd have the legislation on the Hill that will call for a write-down on some of the principal, and then have FHA come in and guarantee the rest of those mortgages. The market is looking for a floor. Wouldn't that kind of legislation give the market a floor?...The administration opposes that legislation; is that correct?...
I expect this "fairness" meme to get pushed in hard in the coming weeks and months, even if the Fed's actions are successful. And if they're not, the pressure for a bailout will become monumentally intense. In that case, you can expect not only a New Deal-style program to refinance home mortgages but also the so-called Stockholm Solution, which refers to the way Sweden handled its banking crisis in the 1990s.
That nation's government set up a company called Securum, which recapitalized troubled financial institutions, basically a partial nationalization of its banking system. Nobel laureate and hedge fund guru Myron Scholes has been pushing such a plan, as has Merrill Lynch economist David Rosenberg. As Rosenberg puts it:
Do not think for a second that Bernanke and Paulson are not preparing for this "crisis management" stage. We can't be sure if we end up following the Swedish example tit for tat, but we are fairly certain that our two primary financial statesmen are examining that experience right now. To add some perspective, Sweden today has a vibrant economic and financial sector backdrop, so it's important to note that this is not about the end of the world or financial Armageddon. At the same time, even with an effective government solution in Sweden, the process of extinguishing the bad debts was painful.
One more sign that the era of big government is back.