Most of the criticism against the Treasury Department's bailout proposal for Fannie Mae and Freddie Mac has come from conservatives.They are concerned that the Bush administration and Congress are abandoning the country's supposed free-market principles.
Now, Nobel laureate Joseph Stiglitz, an economics professor at Columbia University and an avowed liberal, is expressing outrage about the support plan, too.
And many of his complaints match those of his more conservative brethren.
"The proposed bailout of Fannie Mae and Freddie Mac entails the socialization of risk, with all the long-term adverse implications for moral hazard, from an administration supposedly committed to free-market principles," Stiglitz writes in the Financial Times.
"Defenders of the bailout argue that these institutions are too big to be allowed to fail," he notes. "If that is the case, the government had a responsibility to regulate them so that they would not fail."
The two government-sponsored enterprises, which guarantee about half the United States's $12 trillion of mortgages, need to be reorganized, Stiglitz argues.
"In effect, the administration is indeed proposing a form of financial reorganization," he writes, "but one that does not meet the basic tenets of what should constitute such a publicly sponsored scheme."
And how should the reorganization of Fannie and Freddie proceed?
Stiglitz recommends three steps:Transparency: It should be fully transparent, he says, "with taxpayers knowing the risks they have assumed and how much has been given to the shareholders and bondholders being bailed out."Accountability: There should be full accountability. Those who are responsible for the mistakes — management, shareholders and bondholders — should all bear the consequences, he says
Taxpayers should not suffer, Stiglitz says. "They should not be asked to pony up a penny while shareholders are being protected." Compensation: Taxpayers should be compensated for the risks they face, and, "the greater the risks, the greater the compensation."
Stiglitz says that all these principles were abandoned in the Bear Stearns bailout.
"But the proposed bailout of Fannie Mae and Freddie Mac makes that of Bear Stearns look like a model of good governance," Stiglitz fumes.
"It sets an example for other countries of what not to do. The same administration that failed to regulate, then seemed enthusiastic about the Bear Stearns bailout, is now asking the American people to write a blank check."
Stiglitz clearly isn't too fond of the Bush administration's approach. "They say: 'trust us,'" he writes. "Yes, we can trust the administration — to give the taxpayers another raw deal."
What's needed most, Stiglitz argues, is to assist struggling homeowners.
"We should begin with the core of the problem, the fact that millions of Americans were made loans beyond their ability to pay," he writes
"We need to help them stay in their homes, including by converting the home mortgage deduction into a cashable tax credit and creating a homeowners' Chapter 11, an expedited way to restructure their liabilities."
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