Protect Main St. First, But Give Away As Little As Possible to Wall St.

This argues that the "Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street":

How Main Street Will Profit, by William H. Gross, Commentary, Washington Post: ...Today, our seemingly guaranteed living standard is threatened.... Finance has run amok because of oversecuritization, poor regulation and the excessively exuberant spirits of investors... [P]roduction, and with it jobs and our national standard of living, is declining.

If this were a textbook recession, policy prescriptions would recommend two aspirin and bed rest -- a healthy dose of interest rate cuts and a fiscal package that mildly expanded the deficit. That, of course, has been the attempted remedy over the past 12 months. But recent events have made it apparent that this downturn differs from recessions past. ...

And so, instead of mild medication and rest, it became apparent that quadruple bypass surgery is necessary. The extreme measures are extended government guarantees and the formation of an RTC-like holding company housed within the Treasury.

Critics call this a bailout of Wall Street; in fact, it is anything but. I estimate the average price of distressed mortgages that pass from "troubled financial institutions" to the Treasury at auction will be 65 cents on the dollar, representing a loss of one-third of the original purchase price to the seller, and a prospective yield of 10 to 15 percent to the Treasury. Financed at 3 to 4 percent via the sale of Treasury bonds, the Treasury will therefore be in a position to earn a positive carry or yield spread of at least 7 to 8 percent.

Calls for appropriate oversight of this auction process are more than justified. There are disinterested firms, some not even based on Wall Street, with the expertise to evaluate these complicated pools of mortgages and other assets to assure taxpayers that their money is being wisely invested. My estimate of double-digit returns assumes lengthy ownership of the assets and is in turn dependent on the level of home foreclosures, but this program is, in fact, directed to prevent just that.

In effect, the Treasury will have the fate of the American taxpayer in its hands. The ... purchase of junk mortgages, securitized credit card receivables and even student loans will be bought at prices significantly below "par" or cost, and prospectively at levels allowing for capital gains.

This is a Wall Street-friendly package only to the extent that it frees up funds for future loans and economic growth. Politicians afraid of parallels to legislation that enabled the Iraq war are raising concerns about a rush to judgment, but the need for speed is clear. In this case, there really are weapons of mass destruction -- financial derivatives -- that threaten to destroy our system from within. Move quickly, Washington, with appropriate safeguards.

The Treasury proposal will not be a bailout of Wall Street but a rescue of Main Street... Democratic Party earmarks mandating forbearance on home mortgage foreclosures will be critical as well. If this program is successful, however, it is obvious that the free market and Wild West capitalism of recent decades will be forever changed. Future economic textbooks are likely to teach that while capitalism is the most dynamic and productive system ever conceived, it is most efficient over the long term when there is another delicate balance -- between private incentive and government oversight.

Experts of all political persuasions are saying the same thing, something has to be done (which makes it different from Iraq). They could all be wrong, that is true, but nevertheless, they are almost all on the same page.

Maybe we can absorb such a shock with our vaunted flexibility, some people want to find out and teach the financial industry a lesson, but me, I'm not taking that chance. People's livelihoods are at stake. A massive credit meltdown is nothing to mess around with. Period. I want action that protects people from the consequences of credit drying up, and we were perilously close to that in the wake of the Lehman (LEH) failure.

We need to make sure this doesn't turn into a massive giveaway to financial institutions, no doubt about that, but I am not about to risk the jobs of so many people through inaction, and I'm convinced there are scenarios where the downturn could be very, very painful for the typical household.

So this isn't a question of if we should act, it's a question of how we avoid a giveaway. On that front, I'm not as convinced as Gross is that the plan, as I understand it, will lead to the gains he predicts. That is part of what the current objection to the plan is about, addressing these sorts of concerns.

The plan doesn't have to be completed tomorrow, there's time to get the details right, but we can't waste time either. Tensions are building and they explode without warning. Nobody knows for sure how much time we have until the next implosion, and what kind of chain reaction might result.

People's lives are nothing to be toyed with, and if a bailout is the only way to avoid the chance of massive meltdown and widespread job loss, so be it. Protect Main Street first and foremost, but give away as little as possible to Wall Street in the process.

Disclosure: None

Comments

[Another View:]

Bill Gross may be correct, but he is also obviously looking for Pimco to get a piece of the business of overseeing this massive pool of mortgages.

2008 Sep 24 07:14 AM

[Dan Walker:]

Your theory is fine until you hit the part where Hank values the garbage he is offered..... He is asking us to trust him about what it is worth except he has no allegiance to us taxpayers he is asking to tax.

2008 Sep 24 08:12 AM

[rdr4:]

Oh, the same buffoons who created this mess can fix it? Sure!

2008 Sep 24 08:15 AM

[Jason Rines...:]

Why not spread $700 B to regional banks to lend to innovators in energy and other upward mobility projects? Main St. cannot get loans now (in general) unless you have abundant collateral. The bailout will not change the fact that banks will not lend to the consumer until there own balance sheets are fixed and Main St. does not deal with Central Banks that now are forced to deal with an entirely broken economic model.

We're at the point where we cannot choose to service foreign debts or our own citizens but if I had to choose, I choose US citizens and promisary notes for sovereign nations.

They cut off oil, fine we have deep depression for three years and are forced to create our own resources. I don't wish anarchy I am simply stating what it appears the two main choices we have as a nation have and that is either force the American consumer to service foreign debts on a broken economic model until they are run into the ground and revolt, or restructure soverign debt which also cause our economy much pain. Soverign nations took risks with us, they share the windfalls and they share the pain. That is simply the way I look at, of course there will be geopolitical fallout.

The economy has changed for a good long time in reference to credit and the lack thereof for Main St. Hence, monies must be spent on upward mobility and selling the globe more of what it needs as general staples and solving our own energy concerns first. That creates jobs and the income for the consumer to retrench and begin spending.

But this will not likely happen although it should. Therefore, a depression will not be avoided only delayed if continue down this slippery slope of backstoping CDS on a global scale.

I am saying we should all be thinking past using taxpayer money to pay off bad debts off Wall St. American taxpayers servicing this debt have nothing to increase wages or create opportunity, productivity will definately dip. I can see that in my business, can't get people excited or motivated without opportunity to earn increased wages for increased productivity. Small businesses are 70% of the entire US market and they are crumbling under the strain. Main St is the legs of the platform holding up Wall St. No Main St, no Wall St. This simple fact has been ignored these last few short years, specifically skilled job creation. This was the problem last year as well. Main St. did enjoy some of the windfall during the supercredit bubble and is sharing there portion of pain already in terms of inflation. Keep inflating without wage increase, small business throws up there hands and goes away as does the larger portion of the US economy.

2008 Sep 24 11:55 AM

[TinyTim:]

Maybe we can absorb such a shock with our vaunted flexibility, some people want to find out and teach the financial industry a lesson, but me, I'm not taking that chance. People's livelihoods are at stake. A massive credit meltdown is nothing to mess around with. Period. I want action that protects people from the consequences of credit drying up


I'm willing to take the chance and I have a lot at stake.

2008 Sep 24 04:43 PM

[henarl:]

"The average price to the Treasury will be 65 cents on the dollar so there will be a profitable spread of 7 to 8%" First of all, who will be willing to buy those Tbonds at 3 to 4% with hyper-inflation right around the corner. Secondly, who gets to determine the true value of those toxic assets the Treasury will be buying. I certainly hope it wont be Paulson as he is a Wall Streeter first, last and always and will want his friends there to get top dollar.
Yes, we need to save the financial industry but we shouldn't save the individual executives whose greed and mismanagement created this mess. They should be fired, fined, and maybe even jailed as an example to future managers not to just repeat their behavior in the future.

2008 Sep 24 11:44 PM