THE BLOG
of John Gelles
February 25, 2008
THE MILSTEIN FEDERAL GUARANTEES—OFFERED TO BANKS TO PREVENT EVICTIONS—WILL IT EVER CATCH ON WITH THE POWERS THAT BE?
My friend Terry agrees with Alfred DelliBovi, president and chief executive of the Federal Home Loan Bank of New York, who penned the comment at the bottom of the page. My friend CP, does not.
CP writes: "Are you figuring there won't be a depression?
Each and every time we add to [direct and indirect federal financial obligations,] now, in the 100 trillion dollar plus range, we just prolong the length and depth of the current depression."
I disagree with CP.
The current crisis will pass if and when evictions stop, people already evicted are OK, i.e., they've got decent work and are back in a home of their own, and Milstein's objectives are achieved.
DelliBovi reckons the Milstein proposal is the best he's aware of. I agree that it's the best I know.
The reason the proposal would work is because a federal guarantee meets all current tests for banks to value a debt at par.
CP does not accept the fact that government can always monetize debt. It does this by paying debt off with paper (or accounting entry) "money".
CP can only be right if lenders have the military power to confiscate real wealth as payment for debt owed to them. And we never bargained for war when we paid for imports in dollars. Neither did the export nations who now hold our paper.
In my view, the sellers we bought from will agree they have no intention to collect gold from us at the point of a gun. And even if they will not agree—who's to say how much gold we would owe on all the dollars involved?
I do not mean to be stubborn or dogmatic, but all of American history tells us we live by paper money—not gold—whenever our back is against the wall.
Washington paid in continentals; Lincoln in greenbacks; Wilson and Roosevelt in war bonds; lately in guarantees and fiat money as necessary.
For the life of me CP, I do not see any alternative. Please tell me what you predict for life after the worst scenario you fear: do you see a repeat of the great depression? WW II proved the depression was a mistake that it can never happen again.
UPDATE [via Google] : Alfred DelliBovi says Yes to
Howard Milstein's Proposed Federal Guarantee
Of Certain Mortgages to Prevent EvictionThe New York Times has fielded a diverse set of letters from readers. Some like his idea. Others don’t.
This one is telling:
Howard P. Milstein is right on target when he proposes that the government guarantee the principal of subprime mortgages for 15 years in exchange for the banks keeping their teaser interest rates in place during that time.
This financial circuit breaker would stop the downward self-reinforcing spiral in the real estate market, and it would, at the same time, help provide much needed capital to the banking industry.
Calm would be restored, liquidity would be provided, people would keep their homes, and whole communities would be saved.
Alfred DelliBovi
New York, Feb. 7, 2008The writer is president and chief executive of the Federal Home Loan Bank of New York.