Quote:
Originally Posted by MysticCat
Not sure it's that new. As I understand, the Treasurer already has the authority McCain was talking about -- it was in the bailout bill passed last week. The only thing McCain added was that he would direct his Treasurer to exercise the authority he already has.
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I just watched a forum on the financial bailout, and apparently the bailout bill allows the Treasury Secretary to "do what is necessary" to fix the credit crunch. So what needs to happen is that banks need to be able to sell their mortgage-backed securities to raise capital to make loans. Right now no one is willing to buy them because there is the perception that because banks have complex pricing models they have access to better information than do potential buyers about which securities are worth more and which are worthless, so there's the fear that if anyone tries to buy mortgage-backed securities that the banks will only sell the low value, highest risk ones. Because of this no one is willing to buy the securities off the banks for fear of getting worthless securities packages for prices much higher than they would be fairly valued. So there are two ways to address the problem. One is to authorize the government to buy securities, in which case the bank will sell the low-value ones to the government, giving the banks some money to loan and reassuring buyers that the securities the banks still hold are worth more. This is the plan that everyone has been focusing on and the one the government is likely to do. The other is the plan McCain mentioned last night, to authorize the government to buy and renegotiate mortgages so that people can start paying again and the highest-risk securities packages become worth more so that people are more comfortable buying securities from the banks. This idea hasn't gotten a lot of play in Washington, but a lot of business school professors and economists think that it would work better. So hopefully McCain's proposal to take that route will give it some traction in Washington.