What is Wrong with Government Thinking

I enjoy the way Economists attempt to utilize set formulas to argue away a Problem; here is a prime example. I tend to agree with Paul Krugman, considering this a highly-leveraged wrap of bad Paper. The Hedge Fund managers designated as Project Managers will get 17% of the Profits if the Toxic Assets finally pay out, and get back their $30 billion if the Paper goes predictably bad. It has several things wrong with it: the Assets in question have been reviewed by Banks through several months of struggle, and their Chance of failure is not the adorned percentage so commonly used, but Banks have already determined which are the Good and the Toxic, separating the Good into their own portfolios; the Toxic Assets have a real Risk of failure of around 80%. The Good Assets, by the way, have a probable 80%+ Chance of completion as stipulated by the loan contracts. The Toxic Assets could be better described as rotting Corpses. American Taxpayers are being asked to buy a Product which has lost its Nutrient, and at a highly-expensive leveraged Price, which can only become higher with Age.

Mark Thoma provides Insight into the Thinking behind the Government policy. It has an intrinsic Short-Coming. It is the Government allegation that one cannot determine the level of Toxicity of the assets in question. The Banks have already done so, else they would not be up for Sale; the Banks keeping the Assets which will realistically pay according to terms. They know the exact debtors, and their ability to pay, which policy-makers do not. The Banks also know their own level of Risk, and the level of Risk for their preferred Clients and Stockholders; their Intent is solely in elimination of that Risk, not in providing liquidity to the economy. The Banks are also playing the Government, denying certain types of loans not because of lack of Cash, but as pressure on the Government to take over the Risk of the very toxic assets. Bankers adopted a loan policy of extreme Risk to benefit themselves; now, they want the American Taxpayers to absorb the losses of the failed policy.

There is the Argument of asymmetrical Income, where the loans are basically sound, but loan Terms will need to be altered for a Profit to be made. This would be a sensible argument, except for the magnitude of the loans; a number of Government and Private Economists and Officials mention that Mortgage payments should not exceed 30% of yearly Income. The Thinking goes that 30% of Income goes for Taxes, and 30% should go for Mortgage payments, with People somehow living on the 40% that is left for all other Expenses. The trouble arose because Banks were extending Mortgages whose payments exceeded 50% of Income, even when the Individuals were paying 30% of their Income in Taxes, and 30% of their Income in Consumer Debt payments; can Anyone see some tragedy here? This Crisis appeared simply because of Bank abandonment of sound Banking principles in search of quick Profits, and Banks should be held responsible for the disaster. It wounds me deeply that so few Banking officials have been fired. lgl