a hearty, quarter cheer for Sec. Paulson

The lead editorial (paid link) in the WSJ today has a funny, self deprecating lede:

The next time we suggest that the government give advice to the private sector, tie us down until the fever passes. A couple months ago, we endorsed the idea of mortgage service companies voluntarily negotiating with subprime borrowers and investors to avoid a wave of defaults next year. Now come the politicians to wrap their arms around the idea, and maybe give the U.S. a reputation for forcibly rewriting financial contracts. Don't cry for us, Argentina?

They then get a little more serious, and question just how "voluntary" a plan is when it is negotiated by the US Treasury Department.

We wonder what these parties really think. Offering free advice is one thing. But when the feds sit down as a negotiating partner, the line between moral suasion and coercion starts to blur. Companies begin to think they're hearing an offer they can't refuse. So perhaps we should call it the Not Paulson bailout.

This plan seems to have it all: moral hazard, tax subsidies (States can issue tax free bonds to facilitate refinancing), and plenty of blood in the water to attract the tort bar:

The U.S. economic and legal systems are built on the sanctity of contract, and even the hint that government is compelling investors who now own these mortgages (the banks having sold them as bundled securities) to take less money puts the U.S. on a very dangerous road. At a minimum, it will raise the future risk premium that investors will demand for investing in U.S. real estate, which means it will be costlier to get a mortgage in the future.

What's so good about this plan? The Democratic House has one that is much worse, as does Senator Clinton:

Many in the Bush Administration and mortgage industry privately agree that this is dubious policy, but they plead that it's better than the alternatives being offered on Capitol Hill. These include "antipredatory lending" laws and new bankruptcy provisions that are punitive and would delay any recovery in the mortgage market. Right on time, Hillary Clinton weighed in with the truly awful idea of freezing subprime mortgage rates for five years -- presumably, through the end of her re-election campaign in 2012. She'd combine price controls and contract repudiation -- an Argentina double.

Doing nothing is proudly suggested by my wingnut friends at the WSJ Ed Page, but everybody knows it is not an option. In a choice between the lame "Not Paulson Bailout" and a new SarbOx for lenders, it's easy to choose sides:

go president bush, go secretary paulson. yaay.

Second Bush Administration Posted by John Kranz at December 6, 2007 11:26 AM