Today In The Greatest Transfer Of Wealth In World History

Lots of talk about a deal today in Washington, perhaps with bankruptcy relief, perhaps not, perhaps with less money parceled out in stages, perhaps not, perhaps with executive compensation limits, perhaps not. The big White House photo-op is happening as we speak. I do want to direct you to the very sharp Peter Orzsag, who says that, despite the claims of those involved, this plan won't work:

The director of the Congressional Budget Office said yesterday that the proposed Wall Street bailout could actually worsen the current financial crisis.

During testimony before the House Budget Committee, Peter R. Orszag -- Congress's top bookkeeper -- said the bailout could expose the way companies are stowing toxic assets on their books, leading to greater problems.

"Ironically, the intervention could even trigger additional failures of large institutions, because some institutions may be carrying troubled assets on their books at inflated values," Orszag said in his testimony. "Establishing clearer prices might reveal those institutions to be insolvent."

Yes, that's the whole point. This isn't a liquidity crisis, it's an insolvency crisis. While nobody knows what this toxic paper is worth, that's actually keeping the market afloat in a way. Unless the Treasury wildly overpays for the paper, a scenario like Orzsag's could absolutely play out.

Meanwhile, I have to clear up yet another effort by conservatives to muddy this issue and find a scapegoat. Conservatives keep shooting their mouth off about Fannie Mae and Freddie Mac like they somehow created all these bad loans. They are not responsible for this mess, and are being used as a scapegoat and a stand-in for "shiftless black people getting home loans."

But here's the thing: Fannie and Freddie had nothing to do with the explosion of high-risk lending a few years ago, an explosion that dwarfed the S&L fiasco. In fact, Fannie and Freddie, after growing rapidly in the 1990s, largely faded from the scene during the height of the housing bubble.

Partly that's because regulators, responding to accounting scandals at the companies, placed temporary restraints on both Fannie and Freddie that curtailed their lending just as housing prices were really taking off. Also, they didn't do any subprime lending, because they can't: The definition of a subprime loan is precisely a loan that doesn't meet the requirement, imposed by law, that Fannie and Freddie buy only mortgages issued to borrowers who made substantial down payments and carefully documented their income.

Mark Thoma expands on this today. Fannie and Freddie had capitalization problems, but they were dragged down with the rest of the housing market from the bubble bursting. They didn't cause the problem.

But that's besides the point. American taxpayers are going to be on the hook for a bailout (and the foreign lenders aren't coming to the rescue) and they ought to be seriously pissed off about it. I'm pessimistic about the deal we're going to end up getting.

...Just saw Sen. Dodd and Bennett announce an "agreement in principle" on the bailout, but Bennett is not the ranking member, Richard Shelby is. If this gets pushed through without Congressional conservatives we're toast, maybe not now but in the near future.