Before you can fix any problem, you first have to recognize a problem exists, exactly what the problem is, and who was responsible. With that in mind, let’s flashback to March 5th 2008 when the Fed Admits Missteps on Banks.

A top Federal Reserve official said the central bank failed to fully appreciate risks that financial institutions were taking before the recent credit problems, and it is reviewing its regulations.

During a sometimes-contentious Senate hearing, Fed Vice Chairman Donald Kohn said the central bank is likely to become “more forceful” with the financial institutions it supervises. Mr. Kohn didn’t explain what new actions the Fed might take, but he did warn banks to rely less on the assessments of credit-rating agencies.

That’s an interesting admission of guilt, and certainly the Fed is to blame. However, the Fed failed to find the root cause of this mess. It was not inaction, it is the very existence of the Fed itself.

When one fail to correctly identify the problem, strange and unfortunate things happen such more unwarranted intervention and an alphabet soup of new lending facilities such as the TAF, TSLF, and PDCF. I talked about this in the Fed Uncertainty Principle and the Fed Defends The Indefensible and Big Brother Monitors Investment Activity.

Tax Breaks For Homebuilders

And now, before correctly identifying the problem, still more ill conceived legislation is pending in Congress including complete silliness such as Tax Breaks For Homebuilders.

Homebuilders and the mortgage industry are emerging as big victors in a bipartisan agreement reached by Senate leaders on legislation designed to limit the housing crisis.

The $15 billion Foreclosure Prevention Act of 2008, expected to be debated Thursday afternoon on the Senate floor, is drawing fire from critics who say it would do little to actually prevent foreclosures. The bill contains a $6 billion emergency tax break that would let companies use losses from 2008 and 2009 to offset profits earned over the previous four years, instead of the usual two-year timeframe.

That’s good news for big homebuilders such as KB Home and Pulte Homes Inc., which have been saddled with massive losses over the past year.

Jerry Howard, chief executive of the National Association of Home Builders, said in an interview that the tax break is “very important to the building community.” It will keep many small homebuilders out of bankruptcy, he said, and will prevent large builders from having to liquidate assets.

Other big beneficiaries would be Wall Street banks such as Citigroup Inc., Merrill Lynch & Co. and Morgan Stanley. In fact, any company now struggling after years of healthy profits that pumped up their tax bills could benefit.

The absence of bankruptcy intervention was criticized by 15 civil rights, labor and consumer groups — including the Center for Responsible Lending and the Consumer Federation of America. In a joint statement, they called lawmakers’ actions “a win for the financial services industry that brought us this mess.”

Sen. Richard Durbin, D-Ill. was expected Thursday to try to get the bankruptcy provision back in the bill.

Two Wrongs Make A Wrong

And there you have it. Instead of scrapping this absurd bill in entirety, more handouts will be added to it to make everyone happy.

Bernanke Displeased With Paulson’s Plan

On April 2nd, testifying before Congress Bernanke Nods at Possibility of a Recession while hinting he was not quite pleased with Paulson’s plan. Let’s take a look:

Even without additional authority from Congress, Mr. Bernanke said the Fed had already established “on-site” teams of monitors for investment banks to make sure that they adhered to sound practices, and he urged Congress not to dilute the Fed’s authority on such matters.

By the end of his comments, it was also clear that he and the Fed were not entirely pleased with the “blueprint” for regulatory changes issued on Monday by the Treasury secretary, Henry M. Paulson Jr.

That proposal called for an overhaul and consolidation of the financial regulatory system. The Fed chief, in an almost classic case of damning with faint praise, said Mr. Paulson’s blueprint was “a very interesting and useful first step” for Congress to consider.

Paulson Plan vs. Bernanke Plan

In an exclusive report, and with a big tip of the hat to Keith Taylor, I have obtained a graphical representation of both the Paulson Plan and the alternative Bernanke Plan.

Paulson’s Economic Plan

Bernanke’s Economic Plan

These are just the kinds of plans that emerge when one never bothers to figure out exactly what the problem is.

Mike “Mish” Shedlock
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