Krugman Argues Against Big-Governement Bailout for Wall Streeters Losing $ in the Mortgage Crisis

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We know most of you are strongly opposed to any direct government aid to borrowers or lenders. Lou Barnes has a name for people like you: ‘market solution hard-heads.’ Still, this is a discussion that is just beginning, so we want your thoughts on two columns. Sorry, both are behind pay walls.

Paul Krugman, the left-leaning New York Times columnist, writes today we need ‘Workouts, Not Bailouts.’ Krugman says bailing out hedge funds and other investors in mortgage-backed securities would be like saving Enron -- it would be ‘saving bad actors.’ However, Krugman argues the government should intervene to help borrowers re-structure their mortgage loans: ‘My guess is that it would involve federal agencies buying mortgages — not the securities conjured up from these mortgages, but the original loans — at a steep discount, then renegotiating the terms.’

Krugman is considered a real hotshot in liberal circles, but he does not know this story as well as Lou Barnes at Inman News. Barnes’ column this week is informative and scary. Highlights:

--He writes the Fed’s move this morning ‘firewalled the mortgage panic from the rest of the banking system,’ but does nothing to solve the mortgage crisis.
--He defines the mortgage crisis: roughly $4 trillion in mortgages outstanding are frozen -- nobody wants to buy them, nobody can sell them. (These are the sub-primes, the Alt-A’s, the second mortgages, the 100% no doc ‘liar loans’, etc.)
--Real estate markets and entire economies in ‘bubble zones’ (that’s us, folks) are freezing up: ‘They will not survive this degree of credit starvation. They have a month, maybe two; and this time the economy will not be spared the consequences.’
--Now comes the Barnes bailout: ‘The solution is going to require federal intervention, and that’s going to require a victory of prudence over market-solution hard-heads.’
--He floats two ideas: Re-underwite the $4 trilllion, or create a new version of the Resolution Trust Corp. to buy and re-market the illiquid loans.

We know most of you won’t like the Barnes idea; that’s OK. But at least play along with his logic -- If California’s mortgage market freezes -- it doesn’t matter what a house costs because nobody can get a loan. Then what?