Re-Invigorate Main Street, Instead of Bailing Out Wall Street

Needless to say, Messrs. Paulson and Bernanke's $700 billion rescue package has ruffled a few feathers on Wall Street, Main Street, and the Legislative and Executive branches of the U.S. Government. Some say "Do it now or else we'll have financial calamity." Others say "$700 billion to bail out Wall Street? They're the ones that got us into this mess in the first place." Emotions are running high and, I'm afraid, many people are losing sight of the main point: frozen credit markets inhibit small and large businesses from borrowing money, people of all economic strata from buying apartments and houses, and those in financial distress owing to inappropriate mortgages from refinancing.

Commerce has slowed due to massive uncertainty and the ripple effects of the credit crisis throughout the U.S. economy. This is not (or, more properly stated, SHOULD not be) about Wall Street, it is about Main Street, and the average, hard-working citizen's ability to live their life without economic fear not of their own doing.

"Bailout" is clearly a pejorative term and has been bandied about when referencing the "recommended" solution to the current crisis. What I have in mind is not a bailout, per se, because its effects aren't bailing out those institutions and executives that screwed up. It is a loan. A loan with interest that gets repaid over time. With equity kickers. The U.S. taxpayers will own a loan plus warrants, and in exchange will get a credit system that can once again function and support both business and personal economic growth. But the key is in the design. A design, as I've stated previously, that takes troubled securities from troubled institutions at market value, buys senior convertible securities (senior to existing debt and common stockholders) to bring capital ratios up to compliant levels, works to restructure and simplify personal mortgage loans that enable credit-worthy borrowers to remain in their homes and works out the securities purchased over time. My vision is not a transfer payment to Wall Street, but a vehicle for re-energizing and re-invigorating Main Street.

A very bright and thoughtful man, Tom Evslin, wrote a post where he has changed his position on the bailout concept. I've read Tom for quite some time and he is very cerebral and intelligent, and if he has something to say I listen. That said, I disagree with his post and his reasoning, because I think he's missed the gravity of the current situation and its close linkage with Main Street. There are elements of his plan, however, with which I passionately agree, though don't believe they can be dealt with at the current time. I've copied the text of his post here and I've made my own comments in bold.

I've been wrong to advocate hedging the bailout bill with conditions; we should just say "NO".

We can take a fraction of the $700 billion dollars we save and use it for specific anti-recession measures. Let's start rebuilding our power grid; fix some bridges; maybe even help some homeowners with their mortgages where warranted. But no bailout for Wall Street; none.

The plan, well-structured, wouldn't be a bailout of Wall Street as discussed above. The mortgage assistance piece is part and parcel of a sensible package in any event. I fully agree with the infrastructure spend; I've written about it at length. I just think we shouldn't be bundling this until we've fixed our current financial plight.

If we say "yes" to the bailout bill, the Dow will go up. Great time to sell your stocks because we will have damaged the economy and our competitiveness for a long time to come.

Stocks going up is neither here nor there to the logic of the plan. Credit markets need to unlock. Commerce needs to take place. Mortgages and business loans need to be issued. This may, in fact, cause the market to go up. But it may not. The short-term uncertainty about prospects for the dollar, the possible rise in oil and other commodity prices might place a damper on the euphoria. But bottom line, it isn't the point.

If we say "no" to the bailout bill, the Dow will plummet – for a while. Big deal; that's what the Dow does; it'll create a buying opportunity.

Maybe, maybe not. There are too many degrees of freedom to confidently project the intermediate-term prospects for U.S. equities.

If we say "yes" to the bailout bill, the dollar will plummet. That $700 billion to bailout the world's financial institutions comes from printing more dollars and devaluing every dollar already in existence. A plummeting dollar means higher imported energy costs. That really hurts Main Street, the real economy, and national security.

This may happen. But, as with the uncertainty surrounding equities, it may not. A poorly-designed plan that looks and smells like a Wall Street bailout will invariably cause the dollar to tank and Tom's worst fears to play out. But if designed well, where the U.S. taxpayer is monetizing the liquidity option and holding an attractive ROI piece of paper, and the credit markets do once again begin to operate as they should, the dollar could potentially go up as expectations of future growth outweigh the near-term creation of dollars.

If we say "no" to the bailout bill, investors like Warren Buffet and Bank of America will continue to pick up assets from distressed banks cheaply. More power to them; they can deal with the problem of overpaid executives. They are showing us the right way out of this mess.

This really hasn't happened. The kinds of assets causing the greatest problems simply aren't moving, and haven't moved for months. This is the whole point of putting this plan together in the first place. In fact, here is the extract of a comment I wrote tonight about a recent post:

Chip, that is one awesome comment. You raise a great point. But here is my retort. if, in fact, these mortgage securities are so terrific, or at least appreciably better than the current bid, and there is hundreds of billions of liquidity sloshing around SWFs, Berkshire Hathaway, private equity firms, distressed hedge funds, etc., then why aren't they buying these securities up by the truckload? The system should be self-equilibrating if the securities get too cheap, yet somehow there just isn't a bid. This can't fully be explained by firm capital structure, which means something else is at play. Like the securities really are CRAP. Lone Star only took these off Merrill's hands at $.22 on the dollar, and required Merrill to provide $5 billion of seller financing. Something is amiss, and it happens to be on both sides of the balance sheet. A highly leveraged, short-duration capital structure supporting illiquid, crappy assets means only one thing: you're going bust.

Normally The Wall Street Journal would have been against the bailout on economic terms and The New York Times against it on populist terms. Apparently our two great national newspapers are too much the hometown newspapers of New York City to see straight. When you look out the windows of their editorial offices, you're more likely to see out-of-work bankers and empty restaurants than people struggling to pay for gas and home heating oil – or to keep their small businesses running or stay in their homes. So we have to do without their leadership on this issue.

Yikes! You're looking for leadership from them? Come on, Tom. It's not about being populist, it's about being political. I think they see both sides of the coin, for what it's worth. Not that it matters, however.

Fortunately three out of the four candidates in the Presidential sweepstakes are senators; they have to vote on the bill (unless it dies in committee). My vote for President is up for grabs. If there were contested house or senate races in Vermont, my vote for them would be up for grabs as well.

Bottom line, I think the system would remain too jammed for too long simply letting things play out on their own. Now I am a free markets guy. I grew up in the markets. Love the markets. Believe in the markets. But this market is badly broken, and it needs a bridge loan to begin the healing process. And this can and must be structured in a manner that achieves the objectives without unfair and inappropriate bailouts. The devil is in the details. But to toss aside the call for action is, in my opinion, playing a dangerous and unnecessary game.

NB: My friend and sharp financial thinker Paul Kedrosky has raised many good issues on this topic. Please do check out his thread on the topic.

Comments

[SA Guest]

What's the aggregate value of mortgages in default since 2007?

2008 Sep 25 07:20 AM

[AlexS]

Some people seem to think that by avoiding the "bailout" that they can avoid spending to correct the damage that's been done. Sorry, the damage has already been done. People blame it on Wall Street, but Wall Street was just supplying the product that was requested. Cheap mortgages. You look back through the stories of the times and find that whenever conservative businessmen questioned whether Fannie Mae was getting too big, they were told shut up, you'll ruin everything. Do you want the boom to fail? Home builders especially, and liberal politicians who wanted their pals and the poor to have expensive homes with no money down. That was the party. This is the hangover.

2008 Sep 25 07:44 AM

[Jersey]

Regardless of what Sen. Obama would like people to believe, the issue is not what Main St. can get if Sec. Paulson's plan is approved but in fact what Main St. can lose if it isn't.

2008 Sep 25 08:14 AM

[ain't no fortunate son]

At least people are talking about Obama's plans.

The other guy, and the nitwit who hides in the closet because her party's leaders are terrified she might blow the election as soon as she opens her mouth, they have said nothing about the economy, because they know nothing about the economy and McCant has admitted he knows nothing about the economy (and hasn't since he graduated at the bottom of the class from college).

His knowledge about building wealth is to dump his first wife who was crippled in a car accident and marry one of the richest heiresses in America.

The only thing he does now is suspend his campaign and make a big show about returning to Washington to save us from the crisis.

His poll rating are plummeting, so he pulls a cheap political stunt and comes running back to Washington to beat his chest and say nothing, because that's all he knows.

Thanks, John, that's really gonna help Main Street.

2008 Sep 25 09:02 AM

[joefromnyc]

Our bridges cave in, the air traffic controllers work with equipment from the 50's, rural hospitals are worse than third world standarts and we have the debt holders pushing their house n!@@&%s, namely wall street, to fund the equity of their portfolios; all that with taxpayer money; yes it will be painful, but if you want your kids to have the same standard of living you enjoy, let them drop; what has capital growth generated by wall street done for our infrastructure??????? Strategically essentially nothing...............

2008 Sep 25 09:06 AM

[Smalltownbanker]

There are no buyers for these securities because they are not whole loans but carved up high risk (now totally worthless) investment pieces of morggage pools which were worthless from the day they were created and went unsold. I repeat. They were worthless on day one when a buyer could not be found but they are still being declared as assets with a value. If we buy them with tax dollars it will be an almost dollar for dollar transfer to the national debt with no opportunity for return. I say force the holders of these "assets" to write them off and take the consequences. If the market crashes at least it will happen now and we can start over.

Every other alternative simply prolongs this eventuality and perhaps makes it worse.

2008 Sep 25 09:18 AM

[spooky2th]

$700 billion to reward the criminals??? The bailout will only make the dollar fall faster. Debase the whole economy. Probably what they want, so they can usher in the Amero like they did the Euro in Europe. Send a message to the NWO elite and don't vote neodem or neocon. Vote for your favorite 3rd party. Break the Repub/Demorat stranglehold!

2008 Sep 25 09:50 AM

[wcrxlp editorial collective]

There are three thousand community banks that are capital starved or near capital starved.

When Wall Street absorbs the $700 billion, Main Street banks will pay dearly to maintain their capital ratios.

It makes more sense to distribute the $700 billion to American community banks so they can lend for local transactions or use it to recapitalize Wall Street.

2008 Sep 25 08:07 PM

[JCC]

It is obvious to most that when you arteries are clogged, the blood doesn't flow. When you have blocked arteries it is an emergency, and to avoid a heart attack it is critical to get the blood flowing, which implies the use of a stent or open heart surgery. A complete blockage will result in a heart attack or worse. Time is critical, and the required correction is an emergency.

Analogous to your vascular system, the financial markets are the arteries of the economy. Analogous to your arteries, when the financial markets are frozen, the monetary supply does not flow. This creates an emergency situation where it is imperative that we restore the monetary flow.

In today's environment it is critical that we on an emergency basis thaw the financial markets thereby enabling the required monetary flow. There is not a lot of time to react. Waiting too long will create a severe recession or a depression.

2008 Sep 25 11:55 PM

[Steven Hansen]

the attempt to only fix wall street because it helps main street has a logic error. while i believe wall street must have a fix to jump start, main street is in a world of hurt and cannot jump start without their own little fix also.

trickle up, trickle down. the consumer is 70% of the economy. we need to get money flowing at all levels.

2008 Sep 26 12:42 AM

[messy]

What i am thinking is very simple....which party needs the most bailout money, the Republicans or the Democrats? Hillary takes government things out of White House and is warned about it. Geo Bush spends billions per month in Iraq,,,and "no one warns him"....what a difference and I really wonder why. It seems both parties are so dishonest.

2008 Sep 27 07:02 AM

[Average Jane]

I agree with wcrxlp editorial collective's comment. If we want to improve credit to Main St, make the $ available to community banks.

Though I have money in the stock market (like anyone who has saved for retirement), I feel that the drop in the market is just a correction to what it really should have been. So the bubble profits disappear -- they were gained from greed and foolishness.

2008 Sep 30 05:58 PM