Fly for free with Gadling and Southwest Airlines

AOL Money & Finance

Cramer on BloggingStocks: Fed needs to follow the Pennsylvania plan

TheStreet.com's Jim Cramer says Pennsylvania's foreclosures are declining, thanks to a plan that can be applied nationally.

We keep hearing how the AAA paper is unfairly being marked down because of the "need" to sell. We hear that if the paper, particularly the mortgage paper, were allowed to be held, there would be no problem, that, for example, the Thornburg (NYSE: TMA) (Cramer's Take) paper, which is most likely not going to default, or the paper that AIG (NYSE: AIG) (Cramer's Take) is insuring, the so-called super senior, which is also most likely not going to default. We keep believing that the real issue is the markings, and how the markings reflect unrealistically depressed valuations.

Obviously the Fed believes this, too or it wouldn't have been so complacent. So why doesn't the Fed puts its money where its mouth is, and do something, non-bailoutish, that exploits the market's imperfection. Why doesn't it issue $50 billion of two-year notes at 1.60% and take the money and buy high quality mortgages and other collateralized obligations, the very stuff that everyone says will pay off over time. Then the Fed can make money holding the stuff, the banks get more liquid, which takes the pressure off their balance sheets, and no bailout occurs?

If you are worried that the Fed will get snookered, or if the Fed is worried, more accurately, it can hire someone -- yes, moral hazard, someone makes money -- like a Pimco to evaluate what it buys if it lacks the expertise, although I don't think it does.

This is a quick and dirty way to get out of this mess and it might be worth a try.

Ultimately I favor an FHA guarantee plan not unlike the Pennsylvania state equivalent that is making it so Pennsylvania's foreclosures are declining. Pennsylvania put it in place under Governor Rendell, because there was a terrible boom-bust cycle in the Poconos a few years before all of this madness.

It worked there, it could work nationally.

I know that Pennsylvania didn't have the radical price appreciation as we had in Florida, but it is no better than Michigan or Ohio. Either way, the two-year plan does not need the Fed to keep cutting rates, and if it really was in a jam it could do this plan yesterday!

No bail out, no Treasury, no Congress, what's not to like?

--------------------------------------------------------------------------------
RELATED LINKS:
Two Bargains in Banking Stocks
Stocks of the Week
--------------------------------------------------------------------------------
Jim Cramer is a director and co-founder of TheStreet.com. He contributes daily market commentary for TheStreet.com's sites and serves as an adviser to the company's CEO. At the time of publication, Cramer had no positions in stocks mentioned.

Related Posts

Reader Comments (Page 1 of 1)

Add your comments

Please keep your comments relevant to this blog entry. Email addresses are never displayed, but they are required to confirm your comments.

When you enter your name and email address, you'll be sent a link to confirm your comment, and a password. To leave another comment, just use that password.

To create a live link, simply type the URL (including http://) or email address and we will make it a live link for you. You can put up to 3 URLs in your comments. Line breaks and paragraphs are automatically converted — no need to use <p> or <br> tags.

New Users

Current Users

Symbol Lookup
IndexesChangePrice
DJIA-120.9012,745.88
NASDAQ-5.722,445.52
S&P 500-9.401,388.28

Last updated: May 10, 2008: 06:38 PM

BloggingStocks Exclusives

Hot Stocks

BloggingStocks Featured Video

TheFlyOnTheWall.com Headlines

WalletPop Headlines

AOL Business News

Latest from BloggingBuyouts

Sponsored Links

My Portfolios

Track your stocks here!

Find out why more people track their portfolios on AOL Money & Finance then anywhere else.

Weblogs, Inc. Network