Transcript
Martin Neil Baily: One thing I would say to President-elect Obama is that I think that 700 billion and maybe even more is needed to recapitalize the banking system. There’s a lot of pressure now to use that money as direct help for homeowners. Now, as I’ll say in a minute, I think there’s a good case for helping homeowners, but the 700 billion is needed I think in – to bail out the banks, if that’s the right phrase, or to recapitalize the banking system. Unless we get the banking system recapitalized, we’re not going to hope they decline the economy or get back on track.
This is not a question of fairness, it’s not a question of, gee, it’s nice to spend 700 billion bailing out the banks, it’s just that it’s an essential part of the solution.
Let me turn now to the mortgage problem. And we’re going to get some further discussion of that, which I’ll be interested to hear about. My perception is that the plans to help mortgages directly have turned out to be very difficult to do. Sheila Bair is either a hero, a heroine, or a villain depending on who you talk to. I give her a lot of credit for being out front and trying to find a way of resolving some of these homeowner problems. But it doesn’t seem like her plan, the Bair Plan, has worked that well. As you know, the Wall Street Journal has been after her and others in terms of the fact that the IndyMac Plan, first of all, didn’t resolve all that many mortgages, and the ones that it did resolve maybe seem to have redefaulted, so that plan doesn’t seem to have worked that well. As we know, there was a plan out of Congress, the Frank Bill some time back, again, it doesn’t seem to have been on a very substantial scale.
So my view on this, and I think it’s now moving towards where Treasury and the Fed, is to try to get mortgage interest rates down. Glenn Hubbard, former CEA Chair, wrote an – with a colleague that I’m forgetting suggesting this was an essential part of stabilizing housing market, I think he was right about that. The question is, how do you do it. At the moment, the Fed is buying assets, buying some of the mortgage assets.
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