USD's Partnoy Says Government Should Buy Actual Mortgage Loans, not Derivatives
University of San Diego law professor Frank Partnoy, whose 1997 book, F.I.A.S.C.O., originally exposed the danger of derivatives, this morning (Sept. 27) offers a practical and equitable solution to the current mess in an op-ed in the New York Times. Partnoy says that under the present plan, the government would spend much or all of the $700 billion it seeks to buy deliberately-complex mortgage-based derivatives, thus bailing out financial institutions, and thus roiling Americans who can't see rescuing speculators with taxpayer funds. What Congress should do is to limit the definition of troubled assets it will buy to actual mortgage loans. Such a move "will indirectly support the mortgage-based derivatives that have caused widespread losses at banks. But it will do so without favoring banks at the expense of homeowners," writes Partnoy. In pushing a plan to buy the derivatives, politicians "are aiming at the wrong target. Buying derivatives whose value is linked to home mortgage loans will save banks some money, but it won't resolve the underlying difficulties in the mortgage markets." If the government bought only mortgage loans, "the rest of the market will follow." Why don't the politicians take such a sensible path? Partnoy does not address the reason. I will give my opinion. The politicians of both parties are owned by lobbyists from the financial services industry.
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