Obama Administration and Treasury Announce New Mortgage Strategy

Treasury Secretary Timothy Geithner finally made his long awaited announcement regarding TARP bank and mortgage bailout plans. But his outline was so vague that it only seemed to exacerbate the financial crisis by making the stock market plummet.

When the new head of Treasury held his big press conference to unveil a mortgaged crisis rescue scheme, everyone expected positive news. Instead, they got murky, incomplete answers about TARP, the mortgage crisis, and the administration's strategy to stop foreclosures and fix a broken banking system. Geithner's vague revelations were a total flop. Rather than provide the crucial reassurance that financial markets and investors needed, the lack of a coherent solution or plan of attack further eroded confidence and incited fear.

TARP pains

It seems that the Treasury really hasn't yet settled on a concrete approach to the banking and mortgage crisis. Every day that goes by without action makes matters even worse.  Months have already been wasted because the Bush administration failed to act with urgency, and the old head of the Treasury doled out hundreds of billions of dollars to incompetent bankers with no oversight and no strings attached.

Elizabeth Warren, the head of the congressional TARP oversight team, told NPR news that the initial TARP funds were supposed to be exchanged for an ownership stake via stocks and warrants, but taxpayers got a bad deal. Secretary Paulson promised that taxpayers would get about a dollar of investment for every dollar of Treasury mortgage bailout TARP funds, but the oversight committee reports that taxpayers lost some $80 billion in the transaction by getting only about 60 cents on the dollar. Meanwhile, banks failed to lend, the economy contracted even more, and businesses responded to the lack of credit by cutting millions of jobs.

Mortgage crisis paradox

Under Geithner, the Treasury is considering either buying up the toxic assets of banks, or recapitalizing them with fresh cash. Which path he chooses remains to be seen, leaving us with the major paradox of two completely different possible approaches. He also told reporters that the solution to the problems would involve both TARP style contributions of Treasury cash, plus investment capital from the private sector. But he didn't explain how that would work, or why private investors might agree to throw good money after bad. The plummeting of the stock market following his announcement indicated that private money wants to run the other way, another apparent contradiction of the Treasury Secretary's statement.

The government also wants more aggressive steps to refinance homeowners out of the mortgage crisis, and a mortgage bailout package could include plans to force banks to cut principal, interest, and monthly payments while the IRS gives homebuyers a tax incentive. But unless and until the Treasury comes up with a way to fix our banking system-and share some good ideas with jittery and skeptical investors-nothing else will be able to save the overall economy from further deterioration.