Bailout Plan Thin On Details
LIANE HANSEN, host:
From NPR News, this is Weekend Edition. I'm Liane Hansen. Speaking on NBC's "Meet the Press" this morning, Treasury Secretary Henry Paulson said the credit markets are still very fragile right now and frozen. Paulson called on Congress to swiftly approve a sweeping proposal to buy $700 billion of mortgage assets from U.S.-based financial institutions.
Robert Litan is an economist with the Brookings Institution. He has worked for the federal government in several capacities, including investigating the causes of the country's savings and loan crisis. He told us how the administration's handling what many call the worst financial crisis since the Great Depression.
Dr. ROBERT LITAN (Senior Fellow, Brookings Institution): I think they're doing as well as can be expected under extraordinarily difficult circumstances, the likes of which I don't think anyone has seen, at least on the economic front, since the Great Depression. And I think you accurately described that.
HANSEN: We're just beginning to get details of the bailout proposal. First of all, what's your impression?
Dr. LITAN: Well, I've taken a look at those details. They're very brief. And in fact, I would describe the plan as audacious in its simplicity. It's only a two-and-a-half-page plan, and basically asks Congress to give a 700 billion blank check to the Treasury Department and to the future Treasury Department, because, after all, this one is going to leave town very soon. And it basically says, we want maximum freedom to be able to solve this problem, and we'll report back to Congress in three or six months. The by and large, give us the money and leave us alone.
HANSEN: Are there any parts of it that trouble you? Are you comfortable with this proposal?
Dr. LITAN: Well, if I were in their shoes, I would have asked for something like this too. But Congress being what it is, I think it's unlikely to give them as broad an authority. Now, the one thing they have in their favor, as I said, is they're on their way out the door, and there is going to be a future Treasury Department, and the Democrats presumably think they're going to be in control. Nonetheless, I think there's an institutional prerogative up there that congressional people tend to have. And I don't think the check is going to be as blank as the Treasury wants at the end of the day.
HANSEN: Where did the number $700 billion actually come from?
Dr. LITAN: I don't think any of us have any idea. It's just like the $100 billion for each of Fannie and Freddie Mac that were asked for just a couple of weeks ago. The administration justified those requests then as just trying to be conservative, ask for as big a number as possible so that they didn't have to go back to Congress. But some of this stuff, and ideally all of it, is going to eventually be sold. And even if it isn't sold, there will be some interest and repayment coming in on some of these securities.
And so this 700 billion is the gross cost of this. The net cost is going to be far lower. We don't know much how far lower because these securities really can't be priced, which is the reason why Treasury is doing this. But I think the public should understand that ultimately we're not going to pay $700 billion for this. It's going to be some amount lower. But we won't know that for several years.
HANSEN: You know, the U.S. government is facing some looming Social Security, Medicare bills. I mean, it feels a little like a family that's getting ready to send its kids to college and suddenly deciding to buy a second home. Can the government actually pay for this?
Dr. LITAN: That's the one thing that makes the government different from you and I. The government can borrow money and, if necessary, print money to pay for the borrowing. But you're right that this is just far beyond anything. It's like, you know, your kid comes home and says, oh, dad, I forgot to tell you, I smashed about 45 cars on the highway. And oh, dad, by the way we don't have insurance for it, so we have to pay the liability for this. And the bill, oh, dad, by the way, is going to be millions of dollars.
And dad normally doesn't have millions of dollars lying around. But the government does. The government can borrow money. And as long as investors, especially foreign investors because, I think, the Chinese and the oil-rich countries and so forth are going to buy our bonds to pay for this, I think the government will be able to do this, whereas you and I couldn't do it.
HANSEN: What happens in the long run? What's the likelihood the government actually will be able to sell off the bad mortgage debts and get its money back?
Dr. LITAN: There are people in the private sector known as vulture funds, people that come in, swoop in, buy assets that are troubled and nobody else wants, obviously at a very, very low price. And I have a feeling they'll be able to move a lot of this to vulture funds. On the other hand, some of it's going to be stuck. It's going to be the equivalent of a radioactive waste. In fact, what Washington is going to become is the Yucca Mountain for unwanted mortgage-backed securities.
HANSEN: Robert Litan is a senior fellow in the economic studies program at the Brookings Institution. Thank you for you time.
Dr. LITAN: Thank you.
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