Treasury Secretary Hank Paulson has been putting on a full-court press in the last 24 hours, making the case for his plan to shore-up Fannie Mae and Freddie Mac.
“I would rather not be in the position of asking for extraordinary authorities to support the GSEs,” Paulson said in a speech Tuesday in NYC. “But I am playing the hand that I have been dealt. There is a need to support efforts that strengthen Fannie and Freddie’s ability to continue to play their important role in financing mortgages and in our capital markets more broadly.”
The timing of Paulson’s speech — and various and sundry media appearances — is not coincidental. This week, Congress is expected to vote on housing legislation that includes Paulson’s plan, which a GAO report said is likely to cost the government $25 billion.
But $25 billion — or even the GAO’s worst-case $100 billion estimate — pales in comparison to the cost of doing nothing, says Nouriel Roubini, NYU professor and chairman of RGE Monitor.
“We have to find a solution where government intervention prevents a disorderly outcome” in the housing market that leads to a “systemic banking crisis,” Roubini says.
The housing bill, which earmarks $300 billion to backstop mortgages after lenders agree to lower mortgage payments, is “a step in the right direction” but “doesn’t do enough,” he says, predicting the government will ultimately need to spend more than $1 trillion.
The economist believes U.S. home prices will ultimately fall 30% from their peak — vs. 18% to date according to the S&P Case-Shiller Index — “before bottoming out some point in 2010.”
In the interim, the negative wealth effect of declining home values and increase in “underwater” mortgages will lead to more Americans walking away from their homes. Such “jingle mail” threatens to ultimately cost $1 trillion in credit losses, wiping out 75% of the capital of U.S. financial institutions, Roubini warns.
It is that “disorderly” outcome Roubini says the government cannot afford to let happen. With “the charade” that Fannie and Freddie weren’t already government agencies over, he believes a nationalization of the 50% of mortgages not owned or guaranteed by Fannie and Freddie will be necessary, and the Frank-Dodd Bill is a small step down that road.
From Roubini’s view, nationalizing housing avoids the government having to nationalization the entire banking system, making it the lesser of two evils
THIS IS TAXPAYER MONEY!!!
we are now bailing out!!
Lehman Brothers bail out imminent – it can cost hundreds of billons of dollars in the long run
Sep. 13, 2008
The meeting, which was attended by Treasury Secretary Henry Paulson, was held at the offices of New York Federal Reserve Bank president Timothy Geithner. Fed spokeswoman Michelle Smith confirmed the meeting.
Smith refused to disclose what financial institutions participated in the meeting or whether the group had reached any conclusion over how to resolve the crisis facing Lehman Brothers.
Lehman Brothers, the