The view from the financial ledge

The Baltimore Sun

Yesterday's bailout approval is not the end of the financial crisis. Rather, it halts the free-fall, if only temporarily. It furnishes a narrow ledge to perch on, assess broken bones and contemplate the abyss.

Policymakers still need weeks to figure out how to spend the $700 billion allowed by the package. They don't know which toxic mortgage securities to buy, where to buy them, how much to pay or what to do once the stinking piles of junk are quarantined.

They have only the vaguest idea how they'll "implement a plan that seeks to maximize assistance for homeowners," as the law requires.

And the bailout doesn't directly address the ultimate causes of the crisis: the collapsing housing market and lenders' deep reluctance to issue credit even to longtime customers.

Many analysts believe it will be impossible for the economy to avoid the worst downturn since at least the 1980s.

The "best-case scenario," the (normally optimistic) George Mason University economist Tyler Cowen wrote on his blog this week, is this: "The American economy is in recession for two years and unemployment does not rise above eight or nine percent." (Unemployment for September was 6.1 percent.)

The $700 billion will buy distressed mortgage bonds and related securities, removing them from banking companies' balance sheets, furnishing banks with capital and - with luck - inducing banks' trading partners to touch them with a 10-foot pole.

Few particulars are spelled out. Will the Treasury Department negotiate one bank at a time? Will it hold "reverse auctions" in which banks compete to give taxpayers the best prices for mortgage garbage?

How will government even identify the best offers among mortgage paper that varies by geography, maturity and other attributes? What will the government's ownership stake in bailed-out banks look like?

If Washington drives a hard bargain, it will minimize taxpayer losses but reduce chances of rescuing the system. If it buys mortgages like Miley Cyrus on a Rodeo Drive shopping spree, the government will pay dearly.

Treasury Secretary Henry Paulson must hire hundreds or thousands of people to administer the plan. It's not like he'll be writing checks to banks starting Monday. Working out the details will prolong the uncertainty.

Even when the deal is up and running, nobody knows if it'll restore confidence or answer the one question on everybody's mind, especially after this week's decision to relax accounting rules for mortgage assets: Just how little are these things worth?

Seven-tenths of a trillion dollars - more than the country has spent on the war in Iraq - should go a long way toward unfreezing the economy. But it won't flow directly to consumers. And deeper economic trends are not encouraging.

Hard as it is to believe, the mortgage pain to date came even as the economy was technically still growing. If the economy reverses, workers will lose jobs and consumers will pull back. And more homeowners will start missing mortgage payments.

America is not in the aftermath of a mortgage catastrophe. The catastrophe is still happening. Across the country, tens of thousands of homes will begin foreclosure proceedings this month. Rock-bottom, "teaser" rates on tens of billions in mortgages are set to adjust upward in the next two years, putting new pressure on homeowners, according to an analysis by Credit Suisse.

Home prices are still falling. The number of empty houses on the market isn't.

And the bailout language about helping homeowners is more political decoration than substantive policy. The plan gives federal managers the authority to reduce interest and principal liabilities for homeowners on any mortgages the government purchases directly.

But this will often be impossible. Many toxic securities are derivatives that don't include ownership of the mortgages themselves. In that case, government should "encourage" other parties to modify the terms, says the bailout law. You will be excused for emitting a loud hoot at this point.

Yesterday's report that the nation lost 159,000 jobs in September reinforced the belief of many analysts that the country is already in recession. The economy has shed jobs every month this year for a total loss of 760,000.

This, too, stresses homeowners and hurts the financial system Washington is trying to fix.

Ugly as it is, the bailout had to be done. We needed something that looked like the Resolution Trust Corp., which isolated rotten savings-and-loan assets in the early 1990s.

But it won't be the last move. The Federal Reserve will certainly cut short-term interest rates again. Another expensive consumer stimulus package is probably in the cards.

Try to look up, not down.

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