Reforming-Fannie-and-Freddie-a-6-Trillion-Dollar-Problem

Reforming-Fannie-and-Freddie-a-6-Trillion-Dollar-Problem

The missing issue in this discussion is bankruptcy reform. Unless something is done to provide for the 25% of mortgages that are under water currently, going forward is almost impossible. Without some mechanism to force the write down of these loans, other than foreclosure, the housing bubble will reinflate to values that bear no relation to the income of the borrower. The mortgage industry promising to be good is not nearly enough of a reform.

Any recapitalization of the private mortgage market must sell the underlying securities at the market value of the underlying properties. Anything else would be to create a toxic asset that is doomed to fail.

The Fed needs to buy Freddie and Fannie from the Treasury, detranche the loans and adjust the mortgages to reflect market value and then repackage them on a regional basis, establishing a Freddie and a Fannie for each Federal Reserve Bank region. The proceeds from the IPO for these would cover their losses in writing down the MBS portfolios that they already hold and that they acquire from Freddie and Fannie. Any profit over that would be returned to the Treasury.

Administration Split over Fannie-Freddie Strategy - TheFiscalTimes.com

Administration Split over Fannie-Freddie Strategy - TheFiscalTimes.com by Katherine Reynolds Lewis

My proposal:

The resolution of what to do with Freddie and Fannie should be tied to doing something about the problem of underwater mortgages, if only to correctly value them so that they can be recapitalized in the private market. They cannot be recapitalized at book, but if they are recapitalized at the market value of their holdings, those with underwater mortgages should benefit as well.

Much of these holdings are likely held by the Federal Reserve, which should be the agency of transition, and which hold another large chunk of mortgage paper.

The Federal Reserve should buy Freddie and Fannie from the United States at the value of the underlying assets, and also buy other securities backing underwater mortgages for market value as well. It can then detraunch these mortgages and adjust their value at the consumer level so that borrowers can sell if they need to, with clawback provisions if they make a profit. This will also improve their liquidity and lift the economy out of recession rather quickly.

The Fed can then break up and sell Freddie and Fannie as regional entities, with one spinoff of each containing the loan portfolios held in each Regional Federal Reserve Bank. This will help the Fed recover some of its losses, with any profit turned back to the Treasury.

With Larry Summers gone, this plan has a much better chance of success, provided it gets a thorough look. Something like this is essential to defuse the mortgage crisis in time for the 2012 election. There is not nearly enough time to let the market readjust in time for Obama to benefit if noting else is done. Bold action, however, will earn Obama a second term.

Are There Alternatives to the Individual Mandate in the Health Reform Law?

Are There Alternatives to the Individual Mandate in the Health Reform Law? by Howard Gleckman

My response:

If mandates go, pre-existing condition reforms must also be repealed unless the goal really is some form of single-payer insurance – which it may be. Such a scheme would still utilize insurance companies as claim processors, but without the requirement for a sales force of agents or loss prevention specialists (who would become fraud investigators instead). These activities would also mean a gauranteed profit, so the companies may be crying all the way to the bank.

I suspect that instead mandates and pre-existing rules will be repealed and replaced with a fairly robust public option available to anyone who can’t afford private insurance or who can’t get it due to a pre-existing condition. It would be low cost on the premium and copay side, but would be subsidized by a non-avoidable payroll, VAT or VAT-like business income tax.

The other alternative is Single-Payer Catastrophic insurance, however I don’t think the vast majority of voters would support any effort to deprive them of the comprehensive insurance they have grown to rely upon, even though that approach is largely, but not solely, responsible for increased cost.

The real projected problem is demographic – so the solution must be as well. You need to broaden the base of whatever levy covers health care and ideally you should consolidate them into a single tax rather than dividing funding between income taxes, premiums and payroll taxes. Options for this include getting more taxpayers by either immigration or childbirth (or a combination of both of these), extending the levy on non-wage income in the HI payroll tax to all wage earners, not just the rich, or converting the whole payroll tax to a straight up consumption tax on either consumers (a VAT) or employers (a VAT like business income tax on all employers and all value added, including wages). Even with a broader base, rates must go up – although increasing the payroll tax by 65% is only making it 5% of income – up from 2.9%.

If the Business Income Tax covers all federal social spending, including education, housing, TANF and health it will be considerably higher than 5%. It will be more like 28% before raising it high enough to also include an expanded the Child Tax Credit (of $6000 per year so that it includes enough for housing) and the Health Insurance Exclusion, in which case the rate is closer to 34%.

Handicapping the Debt Ceiling Debate

Handicapping the Debt Ceiling Debate by Donald Marron of TaxVox.

This could be the issue that creates a pool of reliable gypsy moth Republicans in the House. In the 90s, there were 75 Republicans that Clinton could count on to vote with the Democrats and roll the leadership on fiscal issue. I suspect that this vote will create a similar group, since not raising the limit is unthinkable.

Luckly, there are only 25 votes needed, not 75 – and there are 62 Republicans from districts Obama won in 2008.

I suspect that there will be some kind of deficit reduction or the promise of it. Maybe an earmark free omnibus with cuts to both defense and civil spending for the current fiscal year might give the GOP its face saving deficit reduction vote. Another possibility is that the Fiscal Commission could be reconstituted, with more Republican votes and an up and down vote on the end product as a condition of debt limit extension. Moodys and the Chinese will like that one. It is time to move the process from recommendations to legislation and a gimmick the the Commission seems like just the ticket.

Why the Rich Are Getting Richer | Foreign Affairs

Why the Rich Are Getting Richer Foreign Affairs is one of those items which has the right-wing view the CFR with suspicion. This makes it recommended reading.

Eugene Steuerle on Medicare

Eugene Steuerle of Urban published an interesting piece on Medicare funding at http://taxpolicycenter.org/publications/url.cfm?ID=901397 . I will share my comments to him below:

This is one of those circumstances where fundamental tax reform is an advantage. If social services (health, education, welfare, child tax subsidies, housing tax and direct subsidies) were funded by a single, VAT like, employer income tax to replace the Corporate Income Tax, individual income tax filing of business and farm income, certain payroll taxes (dealing with OASI60+ separately) and low rate income taxes not otherwise shifted to a VAT (which would cover discretionary spending). If you build in tax benefits, like retaining the Health Insurance exclusion and the Child Tax Credit, the rate would be about 33%. It would certainly capture everything.

It is not entirely inappropriate to make workers pay this, rather than having it be a savings plan. In absence of any plan, parents would likely be covered under the policies of their grown children. There is no rational reason for children with dead parents or from large families to get an undeserved windfall or for single-children to be required to cover their parents (and if widowed from another single-child) their in-laws as well.

The advantage of using an indirect employer paid tax is that individuals don't have to see it in their pay (minimizing pressure to make spending pusilanimous) and because it can be used to facilitate privatization - with employers providing services instead of the government - either employee health or even retiree health (provided their is some form of beneficiary-market so that the last employer is not stuck with the costs of someone who worked most of their career for another employer).

On the local level, employers could cover charter schools or private schools rather than the public system - either at the option of the employees as donors or by funding tuition directly.

Younger employee training could be covered by the employer rather than the taxpayer and the parents (incentivizing childbirth so that no-one need limit family size because of feared college costs).

You could even have donation to non-public adult education providers for either employees, potential employees or to satisfy donor preference - and pay the trainees for their attendance - rather than having a TANF program.

All these offsets could reduce the business income tax levy to zero, but make sure services are provided - likely by a better provider with a less leaky bucket.

The real meaning of the House vote to repeal Obamacare

The House Republican vote on repealing Obamacare is essentially Animal House government. It is the kind of futiel and stupid gesture one expects from Bluto Buttarski, Otter and the boys from Delta House. http://videosift.com/video/Animal-House-Bluto-s-speech