Government Housing Market Intervention Is Bad Plan
Irwin Kellner is a learned economist, but his recommendation for “braking the fall” is wrongheaded. We don’t need bigger government! And we don’t need the scams that would come with government being the buyer of last (and eventually, first) resort. What our country needs is the prudent and streamlined regulation of financial institutions. Proper regulation can be instituted without growing the government’s role in the economy.
The meltdown on Wall Street is not happening merely because real estate values are declining but because real estate has been turned by Wall Street into a financial security to be collateralized as a means of reaching for more leverage. Consequently, as financial institutions “mark-to-market” their real estate based securities, their equity to debt ratios fail to meet regulatory requirements. So, what is to be done?
The ‘lesser evil’ remedy (but not without its ills) is to suspend mark-to-market balance sheet requirements for financial institutions while requiring transparency of asset estimates in quarterly reports. In other words, banks should be required to estimate what their assets would be worth if they were forced to liquidate in credit-seized markets; nevertheless, they should also be allowed to keep their assets on their books at full value. The assumption here is that the banks can and will hold such assets to maturity if a bust is avoided. Indeed, without a securities-led financial bust, real estate will stabilize and bank assets will recover most of their value. This approach will help the balance sheets of banking institutions while taking the courage out of short sellers who prey upon the vulnerability of bank stocks in this environment.
While this recommendation does not create a bailout — private or public — it does paper over serious problems UNLESS accompanied by other regulations. (God knows, we need to face our problems and amend our ways.) Hence, this recommendation should NOT be utilized except with companion regulations that progressively reduce the amount of leverage that banks can employ, especially leverage based upon debt instruments or speculative equity as collateral. And we need other reforms as well — ones that preserve quality jobs for Americans and accelerate our move toward sustainable energy policies.
In sum, the proposal I set forth will guarantee a protracted recession, and possibly an economic depression, as the credit bubble is forced to gradually deflate. At the same time, this approach will gradually cleanse the system of its toxins. By contrast, Kellner’s recommendation creates an excuse to maintain a quasi-Ponzi-scheme form of growth market capitalism — the financial disease that plagues us, allows elites to prey upon us, and makes our future precarious. America does not need more growth: we need sane and sustainable financial markets and ecological environments.
