THE BLOG
10/31/2008 05:12 am ET Updated May 25, 2011

Republican "Workout" Is A Cop Out

There are plenty of people to blame for our current financial crisis. Wall Street, Main Street, and Washington all played a role. However, the House Republicans will be to blame for any calamities that may yet be in store for our economy. Their objection to the modified Paulson Plan is supposedly ideological; they assert that the plan would fundamentally change America, permanently injecting a form of Socialism into the markets. Yet, a careful examination of the plan reveals that their "nay" vote was a political manipulation, not an ideological objection.

The House Republicans have offered an alternative plan that they have labeled a "workout." The plan would be based on a government backed insurance plan that would require premiums from firms. The House Republicans would also require that the "uptick" rule be reinstated and "market to market" valuation for security assets be removed. I agree that the "uptick" rule affecting short-selling should be reinstated, even if it is merely symbolic. But, changing "market to market" valuation of security assets would do nothing at the present. The current zero value of mortgage backed securities is very real in the sense that they are not liquid because no one will buy them. Yet, changing the valuation to some other method will do no good because we are not dealing with one mortgage, but many, many mortgages bundled together again and again. We know that the market value is zero, but we have no alternative method to value these mortgage-backed securities in their present multi-bundled form. That is why we have the modified Paulson Plan (which was not passed by the House). One must wonder, why the House Republicans would do away with a valuation method based on the free market, when they are proposing free market solutions?

The House Republicans "workout" insurance plan offers no better solution. The credit component of the financial system is freezing up. There is no time for rubbing two sticks together. We must use a lighter to start this fire. The proposed insurance plan has several problems, including: 1) designing and implementing a plan more complicated than the modified Paulson Plan; 2) requiring the prompt valuation of assets for insuring, when that is a fundamental problem; 3) requiring under capitalized firms to pay insurance premiums; 4) providing risks to the taxpayer in the form of a government guarantee of insurance with an under funded program and loans to "shaky" borrowers; 5) providing very little upside to the taxpayers if all goes well. It is doubtful that this "workout" program can be efficient and effective in unclogging the mortgage backed securities from the financial system.

As stated above, the House Republicans seek to remove "market to market" valuation of securities. This valuation method is based on the market setting the price. A fundamental aspect of free markets is that the market sets the price. This leads one to believe that the House Republicans rejected the modified Paulson Plan for political reasons.

Statements made by members of both parties in both houses of Congress suggest that this is an extremely unpopular piece of legislation. So one has to ask, should a representative in Congress vote the way his or her constituency wants him or her to vote? Or should a representative vote the way he or she believes is best for America and/or his or her constituency? I will not offer a long discourse on this question, but I will propose that at times a representative has to rise to the occasion and vote for what will provide the best results in a time of crisis. There is no time for an ideological "workout" that is merely a cop out for shirking one's responsibility.

If each and every Republican had voted "yea" on the modified Paulson plan, our government would have sent a strong message to the American people: the only possible choice for America was the choice that was made. Such a statement would be heard clearly by every American. Certainly, the markets would hear too.

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