Virtually everyone (even the "experts" cited in Washington Post articles) acknowledges that the banks are facing large losses and will need much more money from the government. The trillions of dollars that have been lent thus far through the TARP and the Fed amount to a subsidy from the taxpayers to the shareholders of the banks and their highly paid executives. Since most people think that there is a limit to how much taxpayers should have to subsidize these people, there have been serious debates in policy circles about just nationalizing the banks. However, this policy option did not make the list in an article in the Washington Post discussing the issue. The only options discussed in the article involved given even more taxpayer dollars to the banks. The article also seriously represents the mechanics of plans to "help" homeowners facing foreclosure. The article notes the views of "some of the nation's top economists" that a the rescue efforts being discussed could cost $250 billion. It then quotes Senator Kent Conrad as saying that the $350 billion remaining in the TARP fund is not enough to both help homeowners and rescue the banks. The Post should have pointed out the absurdity of Mr. Conrad's statement to readers. The money to "help" homeowners in these programs in fact is money that goes to the banks. It involves paying above market prices for mortgages held by banks in exchange for allowing homeowners to remain in homes in which they will have little or no equity. The more money that is spent helping homeowners in this way, the better will be the condition of the banks. This money is part of a rescue of the banks, not a subtraction from it. (It is probably also worth noting in this context, that while Senator Conrad has been anxious to give taxpayer dollars to banks, he is one of the Democrats most eager to cut Social Security benefits.) The article also expresses surprise at what should have long been obvious to any serious economist analyst, telling readers that: "home prices are plummeting and are projected by some financial analysts to lose a third of their peak value before the market recovers." This should not be news. There was an enormous housing bubble, with inflation-adjusted house prices exceeding their trend levels by more than 70 percent. Of course bubbles burst. This means that we should expect inflation-adjusted house prices to decline by more than a third of their value from peak levels. And contrary to the bizarre assertion in the Post article, they will not recover any more than the NASDAQ recovered to its 2000 peak levels.
--Dean Baker