THE BLOG
11/01/2008 05:12 am ET | Updated May 25, 2011

Republican House Bailout Plan Is A Hidden Tax

Borrowing in the U.S., public and private, is 2.5 trillion dollars annually.
Current U.S. indebtedness, public and private, is 32 trillion dollars.
The GDP is 14 trillion dollars.
The London Interbank Offer Rate (LIBOR) is 4.05% for a three month loan, up from 3.21% last week.
The Fed has doubled liquidity in the credit system as of 9/30/08.

The Federal Reserve is in a position to know whether or not the banking/credit system of the country is in danger of collapse. The Fed is the "broker" for loans between banks. If those loans are not happening, then it indicates that banks are entering into survival mode, fearing the default of other banks on the loans they make to them.

Loans in the mortgage industry have been drying up, hard to get for a year now, even for high credit score individuals with 20% down. This is because of a lack of trust by the secondary market that due diligence, qualifications, have been met. If the secondary market will not buy the loan then the loan will not be made. This too is survival mode for banks purchasing in the mortgage secondary market.

It is all about real estate and trust in the diligence of other lending institutions. The question is whether commercial and consumer credit will follow in suit of declining trust in peoples and business' ability to repay a loan.

Banks are flush with cash but will not loan to the public, to business, or to each other. So 2.5 trillion, the amount of credit used every year, of our 14 trillion dollar economy is in immediate danger.

The Paulson plan proposes to buy up $700 billion of questionable loans, questionable because of the rampant disregard for lending standards that created them. But even more troubling than lending standards is that the securitized debt products that contain the bad loans can't be easily separated from the securitized debt products that do not contain bad loans. Therefore, all securitized debt is in question.

It does not seem likely that buying up every troubled securitized debt product in the country, and beyond, will achieve much more than rescuing the institutions that hold them. Whether propping those institutions up will reassure the solvent institutions enough that they will then lend bank to bank is simply guesswork. And if that is accomplished, there is still the issue of slowing, survival mode, lending to the public and business, which is a systemic crisis of confidence.

The "free marketer" Republican House members propose a national mortgage insurance plan that will be paid for by contributions from banking concerns. The only problem with that is that it does not already exist and there are no funds in it. It would be a government bailout with the prospect that bank contributions would cover the costs over time. Those contributions, you can be sure, will not come out of bank profits but will be passed on to consumers, further adding to the costs of credit. A hidden tax that insures the profitability of banks. This accomplishes the same thing as the Paulson plan without any chance of upside and a permanent, recurring, downside.

The House plan requires that Americans insure banks against bad loan practices ad infinitum. The Paulson plan is, at least, a one shot deal, and does not ask the public to insure the profits of banks going forward.

For the Paulson plan to work, immediate re-regulation of lenders a necessity, along with strong enforcement. It is a crisis of confidence that only the assurances of a strong regulation system can cure. And it should be obvious that regulation is not necessary for the house plan, they simply propose to pass the risk of bad lending practices on to the public, forever.