Undernews is the online report of the Progressive Review, edited by Sam Smith, who has covered Washington during all or part of one quarter of America's presidencies and edited alternative journals since 1964. The Review has been on the web since 1995. See main page for full contents

February 11, 2009


Money Morning - Bloomberg News reported that the tally of U.S. government spending could reach as much as $9.7 trillion - enough to pay off more than 90% of the nation's home mortgages.

Already, the U.S. Federal Reserve, Treasury Department and Federal Deposit Insurance Corp. have lent or spent almost $3 trillion over the past two years and pledged another $5.7 trillion if needed. That adds up to almost two-thirds of the value of the entire gross domestic product for the U.S. economy last year.

As astonishing as the number itself is a continuing lack of transparency in how and to whom the funds are being distributed.

"We've seen money go out the back door of this government unlike any time in the history of our country,"� Sen. Byron Dorgan, D-N.D., said on the Senate floor Feb. 3. "Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. How much from the FDIC? How much from TARP? When? Why?"�

Notably, only the stimulus package currently on the table - along with the $700 billion Troubled Asset Relief Program and last year's $168 billion tax rebate - have actually been voted on by lawmakers. An additional $8 trillion is in the form of government lending programs and guarantees.

In fact, Bloomberg filed a federal Freedom of Information Act lawsuit against the Federal Reserve Bank Nov. 7 seeking to force disclosure of borrower banks and their collateral. Arguments in the suit may be heard as soon as this month.

Wall Street Journal
- Data released in December by federal banking regulators show that more than 40% of borrowers were at least 60 days past due eight months after their loan was modified. Critics say redefaults are so high because mortgage companies aren't doing enough to make payments more affordable.

Forty-seven percent of loan modifications completed in November resulted in higher payments for borrowers, typically because unpaid interest and fees were added to the loan balance, according to a study by Alan M. White, a professor at Valparaiso University Law School in Indiana.

Coming up with an effective modification is complicated by the fact that many troubled borrowers also have home-equity loans or credit-card debt, auto loans or other obligations that can make it difficult to afford even a lower mortgage payment. Other borrowers may be able to afford a modified payment, but lack the reserves to deal with unexpected bills.

"You don't want to modify a loan that you think will eventually redefault," said Thomas Lawler, an independent housing economist. "All that will do is delay the process and increase the cost."

With home prices tumbling, some analysts have been pushing for mortgage companies to reduce loan balances. Borrowers whose loan modifications include a principal reduction are less likely to redefault, according to an analysis by Credit Suisse, but mortgage companies have thus far been reluctant to write down loan balances.

Brad Reed, Alternet - Geithner says that letting private investors bid on these assets -- with government guarantees against large losses -- will allow the market to define concrete prices for them and thus "avoid a program that has government overpaying for a bunch of financial assets."

The trouble with this, of course, is that many of these assets will never be worth what the banks will accept for them. Economist Dean Baker, co-director of the Center for Economic and Policy Research, told me that the worst of these assets "have lost value because they rest primarily on underwater mortgages." The only way these assets will ever regain the value they've lost over the past few years, says Baker, is in the unlikely event that the housing bubble makes a comeback. . .

Another problem with Geithner's plan is that it leaves bank executives and shareholders relatively unscathed. If government dollars are used to prop up bad asset values and thus protect shareholders from being wiped out, then future banks will have more incentive to invest in risky assets, safe in the knowledge that the government will help pick up the tab and leave their executives intact when the next bubble pops. . .

If the nationalization solution presents a better alternative to the Geithner plan, why isn't it being employed?

There are two plausible explanations, and both are depressing. The first explanation is the most cynical one: that Geithner is protecting his friends within the banking industry from suffering the consequences of their poor decision-making. . .

The other explanation is that the Obama administration is so determined to transcend traditional partisan politics that it has bought into the false notion that America is an intractably "center-right" nation that will not tolerate massive government intervention into private institutions. . .

Brad Blog - At Monday night's prime-time press conference at the White House, President Obama was asked by NPR's Mara Liasson what he'd learned from his "experience with the stimulus" package, in regard to "future challenges" he will face, legislatively. The key part of his answer: "I suppose what I could have done is started off with no tax cuts, knowing that I was going to want some, and then let them take credit for all of them. And maybe that's the lesson I learned.". . . Yeah, giving away the store, by negotiating with oneself --- by handing billions of dollars in tax cuts to Republicans, before they'd even asked for it --- is something we long ago learned in Negotiations 101. Apparently Obama skipped class that day.



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