The Wonk Room

Bernanke Acts While Paulson Dithers

Today, in yet another transformation of the ever-changing Troubled Assets Relief Program (TARP), Treasury Secretary Henry Paulson announced that he will commit $20 billion of TARP funds to a plan being implemented by the New York Fed that is aimed at easing the current credit crunch. The NY Fed’s program is “meant to ensure that banks and other institutions remain willing to lend to creditworthy consumers,” by extending relief to holders of “auto loans, student loans, credit card loans, or small business loans.”

Meanwhile, Federal Reserve Board Chairman Ben Bernanke is finally taking a step that Paulson won’t, and spending $600 billion to revive the U.S. housing market. $100 billion will be designated to buy the debt of Fannie Mae and Freddie Mac and another $500 billion to buy mortgage-backed securities that are guaranteed by Fannie, Freddie and Ginnie Mae. According to the Fed, the program will be conducted “through a series of competitive auctions,” thereby establishing a price for some of the unpriced toxic assets kicking around those institutions alongside their more credit-worthy holdings.

Paulson, remarkably, still seems to be unwilling to do anything with TARP funds that might aid homeowners. And while Bernanke’s step is a start, akin to other actions by Fannie and Freddie, it still does not effect mortgages held outside of the GSE’s.

As Andrew Jakabovics pointed out, the Center for American Progress has for some time advocated shifting toxic mortgages “into the hands of an entity able and willing to make the necessary modifications to provide benefits to homeowners and investors alike“:

The discount at which mortgage-backed securities are currently valued in the secondary market by institutional investors provides ample room for modifications to be made while still offering Treasury — and by extension the taxpayers — a reasonable return on these investments.

Matthew Yglesias noted that, “despite the infuriatingly bad implementation and continuing dire situation, the passage of the $700 billion rescue package did in fact help avert a greater disaster.” Indeed, the consequences of doing nothing would likely have made the current situation an enviable one. Still, Paulson’s “ready, fire, aim” approach to addressing the financial crisis has left the Fed and the Federal Deposit Insurance Corp. (FDIC) to do the best that they can with their more limited tools.