I know my economic rantings are sometimes arcane and hard to follow. As a result I chose the above headline with great care to see if I could help make the point a little clearer.

House Republicans came forward with a bailout mini-proposal at the last minute on Thursday to change the nature of the bailout such that the government would create a huge mortgage insurance agency. McCain, because he’s stupid about all things economic enabled this particular piece of stupidity by posturing that the bailout can’t be left on the taxpayer’s front door and blahblahblahblahblah.

The House Republican proposal plays well on the surface. We, the people, don’t appear to be responsible, mortgages are insured, which sounds like people won’t get foreclosed.

The problems are legion:

  1. The problem in the economy right now is, first and foremost, that credit markets are frozen. No one is issuing credit either because they are unsure of the risk of the borrower or (more common right now) the financial institutions have no fucking clue how exposed they are to bad debt in their own portfolios (which tells you something about how smart the financial wizards of Wall Street actually are). The insurance plan does nothing to inject cash into the system. Without an injection of cash the credit markets remain frozen. That means that banks will continue not to lend. This has very little direct impact on consumers…you buy a house or a car or take out a college loan very infrequently. It crushes business, particularly labor and raw materials intensive industries (i.e. industries that supply blue collar jobs). They need to borrow to smooth out cash flows associated with the cycles of their industries. They need to borrow to invest in materials, plants, and technologies that make them competitive. Without an injection of cash you will see some relatively rare examples of companies going out of business but you will see, daily, massive layoffs and downsizings, plant closings, production line interruptions, etc. Our staggering 6.1% unemployment rate (to put that in historical context the last time the rate was that high was 1994), which McCain thinks is a sign of a fundamentally sound economy, is trending up at a frightful pace (a 30% increase since the beginning of the year from 4.7% to 6.1% with the majority of that in the last four months when you usually see a seasonal drop) and will continue to do so with a bailout. With this stupid ass House Republican proposal it will go through the roof as, again, companies lose access to capital in the form of credit.
  2. People will still get foreclosed. Mortgage insurance doesn’t insure the people in the homes. It insures the companies holding the mortgages so that when they kick you out of your house those entities still get the money they carry on their books. It would likely increase foreclosure rates. You boot someone out of their house right now and you, the noteholder, have an utterly worthless property. You have an incentive to work with the homeowner. In the case of the insurance scenario, you have an incentive to foreclose because the insurance on your book value (which will always be higher than the actual value in this economy) kicks in and you come out better off. Then you sit on the worthless property, wait for prices to rise, and sell it (essentially) again.
  3. For the notes in the worst shape right now (and this shit is liquid and ever-changing) the insurance program provides nothing to anyone. Those 10%-15% at the bottom of the mortgage system are already worthless…they have essentially no value. Meaning that “insuring” them insures a value of zero. This is kinda not so helpful to the noteholders. Like, at all. Even an ideologically vapor locked airhead like Representative Eric Cantor (R-VA), one of the most aggressively vociferous of the House Republican Rebels, had to cop to the fact that in dealing with the worst of the securities in question the House Republican plan would accomplish nothing so that in those cases “you have to go with Paulson’s”. Again, Grumpy Old Man McCain thinks that this House Republican plan (which I assure you he does not understand and which he didn’t actually come out in support of and didn’t actually come out in opposition to the negotiated plan ’cause he doesn’t fucking understand it either) thinks this is plan, put together by pinheads like Cantor, needs to be part of the negotiating process.
  4. As bad as Paulson’s bailout is, it at least has the opportunity for the taxpayers to recoup some or all of the expense a looooong way down the road. The insurance proposal does not do that. In fact, it makes the government the insurer of last resort meaning that it will be exposed to greater losses than the Paulson bailout proposal with no prayer of recoupment.

There’s more, but it gets even more arcane than those four points above.

Don’t get me wrong. I don’t like the Paulson bailout. I still can’t find specific reference to what regulatory changes will be made that will shore up the financial system so that this shit doesn’t happen, again. However, the House Republican version is utterly devoid of any regulatory requirements, where Paulson’s at least refers vaguely to an ability for the government to impose “regulations and controls as needed” (there ain’t alot of mystery here as to what they should be, starting with capital reserve requirements and oversight or elimination of the credit rating services). Regulations and controls as needed would, in fact, be imposed under a Democratic President. Under a McCain administration, not so much. Still, the Paulson plan injects caqital into the markets and the House Republican Dumbfuck plan does not. Which means it does nothing to prevent the collapse of the economy.